Stamat v. Neary

• Decision Date: 24 March 2011
• Docket Number: No. 09–3448.,09–3448.
• Citation: 635 F.3d 974
• Parties: Nicholas STAMAT and Penny Stamat, Debtors–Appellants,v.William T. NEARY, United States Trustee, Trustee–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

635 F.3d 974

Nicholas STAMAT and Penny Stamat, Debtors–Appellants,

v.William T. NEARY, United States Trustee, Trustee–Appellee.

No. 09–3448.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 27, 2010.Decided March 24, 2011.

David R. Herzog (argued), Attorney, Herzog & Schwartz, P.C., Chicago, IL, for Debtors–Appellants.Wendy Cox (argued), Attorney, Executive Office for United States Trustees, Office of General Counsel, Washington, DC, for Trustee–Appellee.

Before ROVNER, EVANS, and WILLIAMS, Circuit Judges.

WILLIAMS, Circuit Judge.

Nicholas and Penny Stamat filed for bankruptcy under Chapter 7 of the Bankruptcy Code on July 26, 2007. The Trustee alleged that the Stamats omitted numerous assets and transactions from their filings and accompanying documentation, including past business interests, two limited partnerships, a $10,000 settlement payment, and $90,000 obtained through a refinancing of a second home, and misreported their 2006 income. The Trustee filed a complaint objecting to the discharge of the Stamats' debt under 11 U.S.C. §§ 727(a)(2), (4), and (5), arguing that the Stamats concealed estate assets with the intent to defraud their creditors, fraudulently made false statements under oath, and failed to satisfactorily explain the loss of assets. The bankruptcy court denied discharge under all three grounds. The Stamats appealed that ruling to the district court, which affirmed the denial of discharge under section 727(a)(4) for fraudulently making a false oath. We also find that the Stamats made numerous omissions, that these omissions displayed a reckless disregard for the truth, and were material to the Stamats' bankruptcy case. Therefore, we affirm the denial of discharge under section 727(a)(4).

I. BACKGROUND

Nicholas Stamat is a medical doctor who operates Stamat Pediatrics. Penny Stamat has a bachelor's degree in math and accounting, owns and operates a billing company, On Time Billing, and handles billing for her husband's medical practice. The Stamats filed a joint voluntary Chapter 7 Bankruptcy Petition on July 26, 2007, requesting the discharge of over $1.5 million in secured and unsecured debt. They also filed the required official bankruptcy Schedules and Statement of Financial Affairs (“SOFA”). See 11 U.S.C. § 521(a)(1)(B); Fed. R. Bankr. P. Official Form 6; Fed. R. Bankr. P. Official Form 7. On December 21, 2007, the United States Trustee filed his complaint objecting to the discharge of the Stamats' debts on three statutory grounds: concealing property with the intent to defraud creditors, making false oaths with fraudulent intent, and failing to satisfactorily explain the loss of substantial assets or deficiency of assets to meet their liabilities. See 11 U.S.C. §§ 727(a)(2), (4), and (5). The Trustee argued that the bankruptcy petition and accompanying SOFA and Schedules included a number of misstatements and omissions.

In response to Question 1 of their original SOFA, the Stamats listed the gross income they received from their businesses in 2006 as $53,309. That number was incorrect, since the Stamats' 2006 tax return showed that the gross income of Stamat Pediatrics in 2006 was $265,012, that the gross income of On Time Billing in 2006 was $22,188, and that after the deduction of expenses, the Stamats' personal income was $20,559 for the tax year.

Other inaccuracies also surfaced. On November 14, 2007, the Trustee conducted the First Meeting of Creditors (“ § 341 meeting”).¹ At this meeting, the Stamats disclosed past investment or business interests in various entities, including: (a) Meyer Medical Physicians Group, (b) 4425 E. 63rd Medical Center, and (c) Hoffman/Elk Grove Physician Group. Dr. Stamat practiced with Meyer Medical Physicians Group from 1986 until it filed for bankruptcy and ceased to exist in 2001. Dr. Stamat owned an interest in 4425 E. 63rd Medical Center, an investment entity that held title to the building out of which Meyer Medical operated one of its offices. The investment was sold in 2003, and Dr. Stamat received a small profit. Hoffman/Elk Grove was bought before Meyer Medical's existence, and Dr. Stamat never received any monies back from this investment. These interests were not initially disclosed in response to Question 18 of the SOFA,² and the Stamats amended Question 18 on May 8, 2008 to reflect their interest in these three entities. ³

At the § 341 meeting, the Stamats also disclosed ownership interests in the following limited partnerships during the six years before their bankruptcy filing: (a) Trailhead Land Investment, L.P. and (b) Eagle Crest Golf Club, Ltd. Partnership. These interests were not disclosed in response to Question 18 of the SOFA.

Dr. Stamat also testified that he worked as a part-time police officer for the Thornton Police Department. Dr. Stamat's position with the police department was not reported in the Stamats' original Schedules or SOFA, but Dr. Stamat's income of approximately $80 a month from his position with the police department was included in the business income listed on Schedule I. On May 8, 2008, the Stamats amended Schedule I and Question 1 of the SOFA to reflect Dr. Stamat's employment and income as a part-time police officer separately from his business income. Dr. Stamat also testified that he owned two guns, which were not disclosed in the Stamats' original schedules. One month after the § 341 meeting, on December 7, 2007, the Stamats amended their Schedule B to include the two guns.

Finally, Dr. Stamat stated at the § 341 meeting that in September of 2005, he paid $10,000 to Oak Brook Financial to settle pending litigation against the Stamats. Mrs. Stamat later testified that this payment was made to settle an outstanding judgment for nonpayment of a loan. The settlement payment was also not listed in the original schedules or Question 10 of the SOFA.⁴ The Stamats amended Question 10 of the SOFA on May 8, 2008 to reflect this settlement payment.

On April 16, 2008, the Stamats appeared for a Rule 2004 Examination (“2004 Examination”) at the Office of the U.S. Trustee, at which they produced numerous documents, including tax returns, pursuant to a subpoena for documents issued by the Trustee. At this examination, Mrs. Stamat admitted that she and her husband had refinanced their Michigan home twice in the two years before filing their bankruptcy petition, receiving in excess of $90,000 in cash. The loan proceeds were deposited into the Stamats' personal account and the monies were used to run Dr. Stamat's medical practice and for personal living expenses. After disclosing the two transactions, the Stamats submitted all related records in their possession to the United States Trustee.

The bankruptcy court held a bench trial, during which the Stamats testified regarding the above omissions. Mrs. Stamat also testified about a 2001 lawsuit involving Standard Bank regarding property liens. Mrs. Stamat was questioned regarding the existence of a counterclaim pending against Standard Bank, and stated, “I don't know who sued who.” When asked if she was aware of whether or not “you and Dr. Stamat have asked the court to find their mortgage invalid,” she answered, “[w]ell, we were suing them since 2001, so I guess in there we were trying to do that.” The Trustee argued that a counterclaim existed against Standard Bank, which was not disclosed in their original or amended schedules. The record does not include court documents from the Standard Bank litigation.

After the bench trial, the bankruptcy court found that the Stamats' debt was not dischargeable under 11 U.S.C. §§ 727(a)(2), (4), and (5). The bankruptcy court determined that the Stamats concealed estate assets with the intent to defraud their creditors, made fraudulent false statements under oath, and failed to satisfactorily explain the loss of assets. The Stamats appealed that ruling to the district court, which affirmed the bankruptcy court's decision to deny discharge pursuant to section 727(a)(4) for fraudulently making a false oath, without reaching the grounds under sections 727(a)(2) and (5). This appeal followed.

II. ANALYSIS

The primary benefit of filing for bankruptcy under Chapter 7 is that the financial discharge gives the debtor a “fresh start.” In re Chambers, 348 F.3d 650, 653 (7th Cir.2003). However, this privilege is reserved for the “honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (internal quotation marks and citation omitted); see Peterson v. Scott (In re Scott), 172 F.3d 959, 966 (7th Cir.1999). The Bankruptcy Code provides that a bankruptcy court “shall grant the debtor a discharge,” but then lists several exceptions that deny the privilege of discharge to dishonest debtors. 11 U.S.C. § 727(a).

One of those exceptions, found in section 727(a)(4), provides in relevant part that the court shall grant the debtor a discharge, unless “the debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account....” 11 U.S.C. § 727(a)(4)(A). We have stated that the Trustee must establish grounds for denial of discharge under 11 U.S.C. § 727(a) by a preponderance of the evidence. In re Scott, 172 F.3d at 966–67. Other circuits and bankruptcy courts in this circuit have specified that to prevail on a claim under this subsection, the Trustee must prove by a preponderance of the evidence that: (1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case. The Cadle Company v. Duncan (In re Duncan), 562 F.3d 688, 695 (5th Cir.2009) (citing Sholdra v. Chilmark Fin. LLP (In re Sholdra), 249 F.3d 380, 382 (5th Cir.2001)); Keeney v. Smith (In re Keeney), 227 F.3d 679, 685 (6th Cir.2000); In re Self, 325 B.R. 224, 245 (Bankr.N.D.Ill.2005); In re Olbur, ...