Carter-Jones Lumber Co. v. Beatty (In re Beatty)

Citation: 583 B.R. 128Docket: Case No.: 16–31836; Adv. Pro. No. 16–03140

Court: United States Bankruptcy Court, N.D. Ohio; January 5, 2018; Us Bankruptcy; United States Bankruptcy Court

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John P. Gustafson, United States Bankruptcy Judge, is adjudicating a Motion for Summary Judgment filed by Plaintiff Carter-Jones Lumber Co., a creditor in the Chapter 7 bankruptcy case of Defendant Jeffrey Scott Beatty, also referred to as Defendant-Debtor. The Plaintiff's Motion seeks to deny Defendant-Debtor's discharge under 11 U.S.C. § 727(a)(2), (a)(4)(A), and (a)(5). The court has jurisdiction over the case and related proceedings as core matters under 28 U.S.C. § 157(b)(1) and (b)(2)(J). 

The facts are undisputed: Defendant-Debtor filed for Chapter 7 relief on June 2, 2016. During a 341 hearing on August 16, 2016, he admitted to failing to disclose several assets, including a vehicle (initially claimed to belong to a friend) and various personal items (iPhone, Wii console, iPad) not listed in his bankruptcy schedules. Additionally, at a Rule 2004 examination on April 28, 2017, he revealed ownership of two televisions, a sound bar system, and a laptop, none of which were included in his original filings. 

Defendant-Debtor partially disclosed his business interests and real estate transactions in his bankruptcy schedules but omitted significant details. He acknowledged interests in multiple companies but failed to include his membership in Beatty Enterprises, LLC, and did not report real estate transfers made within two years prior to filing, specifically the transfer of two properties in Sandusky to his brother in January 2015. These omissions are critical to the Plaintiff's Motion, which is set to be granted based on the undisputed facts presented.

Plaintiff alleges a significant inconsistency between Defendant-Debtor's reported minimal assets and substantial income from 2014 and 2015. Defendant-Debtor's Schedule A/B lists only $25 in cash, $400 in a checking account, and personal items valued at $4,525, while he withdrew $264,130 from Broadview Construction LLC and Broadview Builders, Ltd. during the same period. Defendant-Debtor, who owns 100% of these entities, reported $302,408 in income on his tax returns for 2014 and 2015. During a Rule 2004 examination, he could not explain the discrepancy between his withdrawals and reported income. 

The Plaintiff contends that these discrepancies warrant denial of discharge under 11 U.S.C. § 727, citing intentional omissions regarding a Ford Mustang owned by Defendant-Debtor, which he falsely claimed belonged to a friend (violating § 727(a)(2)), and that such omissions constitute a false oath (violating § 727(a)(4)(A)). Additionally, they argue that Defendant-Debtor's inability to account for significant withdrawals from his businesses justifies denial under § 727(a)(5). In response, Defendant-Debtor attributes his listing errors to recent changes in bankruptcy forms and claims that the transfers of over-encumbered real estate should not lead to discharge denial. He also argues that his business records are comparably sufficient within his industry. Notably, Defendant-Debtor has not amended his Petition or supporting documents to address the omissions highlighted by the Plaintiff.

Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure when there is no genuine dispute over material facts, and the moving party is entitled to judgment as a matter of law. The court must view all inferences in favor of the opposing party. The moving party bears the initial burden to show the absence of a genuine issue of material fact by providing evidence or demonstrating a lack of evidence from the non-moving party. The non-moving party cannot rely solely on allegations or denials but must present specific facts indicating a genuine issue for trial.

Denial or revocation of a debtor's discharge is considered an extraordinary remedy that contradicts the Bankruptcy Code's "fresh start" policy, which views bankruptcy discharge as fundamental to this principle. Statutory exceptions to discharge are to be strictly construed in favor of the debtor. However, provisions like 11 U.S.C. 727(a)(4)(A) exist to prevent debtors from misrepresenting their financial situations. Full disclosure and honesty are essential for the bankruptcy process to function effectively, relieving creditors and trustees from the burden of uncovering the truth.

The burden of proof for denying a debtor's discharge rests with the plaintiff, who must demonstrate their case by a preponderance of the evidence.

Plaintiff requests the denial of Defendant-Debtor's discharge under 11 U.S.C. § 727(a)(2), (a)(4)(A), and (a)(5). Under § 727(a)(2), the court must grant a discharge unless the debtor, with intent to hinder, delay, or defraud a creditor, has concealed property within one year before or after filing the petition. The plaintiff must demonstrate two elements: 1) a disposition of property (e.g., concealment) and 2) the debtor's subjective intent to defraud. "Transfer" is broadly defined to include any disposition of possession or control. Concealment can involve overt acts or failing to disclose assets.

In this case, Defendant-Debtor failed to disclose a Ford Mustang in his Statement of Financial Affairs or Schedule A/B, suggesting concealment. He misrepresented the vehicle as belonging to a friend during a 341 meeting, further obscuring his ownership. This failure to list the Mustang and the false testimony demonstrate improper concealment from the trustee and creditors. The debtor has a duty to provide accurate and complete information in these documents. 

The second element of fraudulent intent is satisfied by Defendant-Debtor’s false statements regarding the Mustang, with intent assessed based on the totality of the circumstances. Fraudulent intent may be inferred from knowing falsehoods or omissions that mislead others. Reckless disregard for the truth also indicates fraudulent intent. Subjective intent is essential but can be inferred from the context of the debtor's actions.

Plaintiff has presented compelling evidence indicating that Defendant-Debtor intentionally deceived the court regarding the ownership of a Ford Mustang, initially claiming it belonged to a friend before admitting ownership. This admission, along with multiple omissions in Defendant-Debtor's bankruptcy Petition, suggests a pattern of deliberate misstatements or reckless disregard for full disclosure. The court notes that fraudulent intent can be inferred from such conduct, supporting Plaintiff's burden to establish the absence of genuine material fact issues regarding Defendant-Debtor's case. 

Defendant-Debtor failed to provide any record evidence or affidavits to counter Plaintiff's claims, which is insufficient to oppose a properly supported motion for summary judgment. The court reiterates that issues of state of mind can be resolved at the summary judgment stage if the evidence overwhelmingly supports one conclusion. In this case, the consistent pattern of concealment regarding the Mustang, along with other omissions, undermines any claim of mistake. As a result, the court grants summary judgment on Plaintiff's claim under 11 U.S.C. 727(a)(2). 

Additionally, under 11 U.S.C. 727(a)(4)(A), a debtor may be denied discharge for knowingly making false statements under oath. To succeed, Plaintiff must demonstrate: 1) the debtor made a statement under oath; 2) the statement was false; 3) the debtor knew it was false; 4) the statement was made with fraudulent intent; and 5) it materially related to the bankruptcy case.

Fraudulent intent in bankruptcy, as defined by the Sixth Circuit, includes knowingly making false representations or omissions that create misleading impressions. Reckless disregard for the truth also satisfies this intent requirement. Courts may infer fraudulent intent from the overall circumstances. However, if false information arises from mistake or inadvertence, a debtor may still obtain discharge. A false oath is considered material if it relates to the debtor's business transactions or asset discovery, with a low threshold for materiality.

The purpose of 727(a)(4)(A) is to provide trustees and creditors with accurate information without requiring extensive investigations, emphasizing the need for accurate initial disclosures in bankruptcy proceedings. Statements made during bankruptcy schedules and meetings are under penalty of perjury, and any false statements can lead to denial of discharge if the necessary elements are established.

The distinction between sections 727(a)(4)(A) and 727(a)(2) lies in one requiring a false oath and the other a failure to disclose property. In both cases, the plaintiff must demonstrate a failure to disclose stemming from fraudulent intent. If plaintiffs can show that debtors omitted material assets, undervalued disclosed assets, or failed to report material pre-petition transfers, discharge may be denied under either statute.

In this case, the court determined that the plaintiff met all necessary elements: the debtor omitted a Mustang from schedules filed under penalty of perjury, falsely testified about its ownership, and acknowledged ownership shortly after claiming it belonged to a friend.

Defendant-Debtor has been found to exhibit fraudulent intent under 11 U.S.C. § 727(a)(2) and § 727(a)(4)(A), with both standards being nearly identical, as established by case law from Ohio. The court highlighted that Defendant-Debtor's false testimony regarding a Mustang and multiple omissions in the bankruptcy petition indicate an intent to defraud creditors. Plaintiff successfully demonstrated all five elements of the Keeney test by a preponderance of the evidence, leading to the conclusion that Defendant-Debtor's discharge will be denied under § 727(a)(4)(A).

Under § 727(a)(5), the Bankruptcy Code requires that a debtor adequately explain any significant loss of assets before a discharge determination. The failure to satisfactorily account for withdrawals from business accounts can justify a denial of discharge. The plaintiff only needs to identify assets previously owned by the debtor that are no longer accounted for, without needing to prove wrongful intent. Here, Plaintiff proved that Defendant-Debtor withdrew $264,130.00 from business entities Broadview Construction, LLC and Broadview Builders, Ltd. within two years post-filing, indicating an inability to provide a satisfactory explanation for these asset losses.

Defendant-Debtor reported an income of $302,408.00 in 2014 and 2015 but failed to provide documentation or explanation for significant personal withdrawals from his business accounts, raising concerns about asset divestiture from Broadview Construction, LLC and Broadview Builders, Ltd. Despite Defendant-Debtor's claim that his financial records align with similar businesses, the lack of any explanation about asset disposition undermines this argument. The absence of a satisfactory explanation violates 11 U.S.C. 727(a)(5). The court finds that Plaintiff has proven that Defendant-Debtor attempted to conceal ownership of a Ford Mustang (11 U.S.C. 727(a)(2)), made a false oath regarding the Mustang's ownership (11 U.S.C. 727(a)(4)(A)), and did not adequately explain $264,130.00 withdrawn from business accounts (11 U.S.C. 727(a)(5)). Consequently, the court granted Plaintiff's Motion for Summary Judgment. The court also takes judicial notice of its case docket and the Debtor's schedules, affirming that this is not a case involving Fifth Amendment claims from the Debtor-Defendant.