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Failure to Maintain Records for Hundreds of Thousands of Dollars of Timepieces And Knowing Failure to Disclose Transfers for the Benefit of the Debtors’ Children Results in Denial of Discharge Under § 727

By Karl Johnson posted 04-26-2018 09:05 AM

  
BANKRUPTCY BULLETIN
Editors-in-Chief
Karl J. Johnson, Hellmuth & Johnson, PLLC
Jeffrey D. Klobucar, Bassford Remele, P.A.

 Contributing Editor: Charles E. Nelson, Ballard Spahr, LLP
Judge_Sanberg___Snyder_v__Dykes.pdf

In Snyder v. Dykes (In re Dykes), Adv. No. 17-4022-KHS (Bankr. D. Minn. Feb. 26, 2018), the Court denied the debtors’ discharge because the debtors failed to maintain records related to purchasing, selling, and trading valuable, collectable watches; could not account for the disposition of at least four of those watches valued at over $145,000; and knowingly failed to disclose transfers made for the benefit of the debtors' children.

The debtors filed a statement of financial affairs (“SOFA”) that failed to disclose transfers for the benefit of the debtors’ children made within the year prior to filing totaling $108,473.77. When the U.S. Trustee began investigating the debtors’ financial affairs, the debtors amended the SOFA to include the transfers. At trial, the debtors testified that they had routinely paid their children’s college expenses, felt it was their obligation to do so, and that their children’s financial aid was based on the parent’s income.

Also, the debtor, an avid watch collector, lacked documentation to support purchases, sales, or other disposition of at least 22 watches ranging in value from $4,350 to $107,000 per watch. The debtor testified that he didn’t always receive or maintain the paperwork for his collectable watches. The court did not find his testimony credible because a sophisticated collector like the debtor, and a reputable jeweler, could be expected to exchange and maintain the paperwork necessary to substantiate a collection of such valuable timepieces. The Court further found that at least some of the paperwork was in a storage unit for which the debtors stopped making payments, and the storage unit company disposed of all of the units’ contents, including some of the watch documentation.

The court rejected the U.S. Trustee’s argument that discharge should be denied pursuant to § 727(a)(2)(A) because the U.S. Trustee failed to prove the requisite intent to hinder, delay, or defraud creditors through the transfer of property. The Court denied the debtors discharge, however, on three separate grounds: (1) under § 727(a)(3), the debtors failed to justify their lack of records for the watch collection, making it impossible to ascertain the debtors’ true financial condition; (2) under § 727(a)(5), the debtors failed to satisfactorily explain what happened to four missing watches with a retail value of at least $145,000 and failed to account for assets lost when the debtors’ storage units were emptied; and (3) under § 727(a)(4)(A), the debtors initial SOFA, which omitted $108,473.77 of transfers in the year preceding filing of the petition and omitted a ¾ carat loose diamond in the debtors’ possession, was a false statement made with reckless indifference to the truth and therefore a knowingly false statement. 

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