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Exemption to Discharge for Fraud Requires Finding of Intent

By Alexander Beeby posted 09-26-2021 14:38

Contributing Editor: Nauni J. Manty, Manty & Associates, P.A.

In Snyder v. Kohout, (In re Kohout), 2021 WL 3195811, slip op. (Bankr. D. Minn. July 28, 2021) (Sanberg, J.), discharge was not denied, rejecting objections under 11 U.S.C. §§ 727(a)(2)(B) and (a)(4)(A).

The United States Trustee commenced an adversary proceeding for a denial of the discharge of one of the debtors, under 11 U.S.C. §§ 727(a)((2)(B) and (a)(4)(A).  The trustee met all of the elements, but one—the trustee failed to prove “by a preponderance of the evidence” that the debtor “acted with the requisite intent necessary for a denial of discharge”.  According to the court, it was a “close case.”

The trustee must prove four elements under 11 U.S.C. §§ 727(a)((2)(B): 

1) the act complained of occurred post-petition; 2) the debtor committed the act; 3) the act consisted of a transfer, removal, destruction, or concealment of estate property; and 4) the act was done with an intent to hinder, delay, or defraud a creditor or an officer of the estate.

In re Korte, 262 B.R. 464, 472 (B.A.P. 8th Cir. 2001).  The trustee must show that the defendant acted with “actual intent”, which is difficult to prove “so it may be inferred from the facts and circumstances of the debtor’s conduct.” 

The debtors’ attorney asked his clients several times prior to filing if they were holding cash.  They only disclosed $84.00 on the schedules.  The defendant failed to disclose she was holding $10,000 in cash for back child support.  The trustee focused on the failure to disclose. 

The debtors did not respond to a trustee letter, raising homestead valuation concerns.  Rather, the defendant received a new job, so the debtor’s attorney advised that they would be converting the case to a chapter 13.  The trustee found this to be suspicious.  The debtors did not attend the chapter 7 meeting of creditors due to the fact that they intended to convert their case.  After discussions with her attorney’s office, the defendant finally realized that she needed to disclose the $10,000 back child support payment.  The chapter 13 amended schedules disclosed the cash. The chapter 13 case was subsequently converted back to a chapter 7 case because the defendant’s job came to an “unexpected and abrupt end.” 

After conversion, the debtors amended their schedule C to reflect the value of the cash as $8,400, exempting it under section 522(d)(5).  At the chapter 7 meeting of creditors, the defendant referred to the payment from her ex-husband as “back child support” which was supported by underlying divorce proceedings.  The defendant testified that he thought the payment was off the table.  The defendant was consistent in her belief that the back child support payment was not property of the estate.  The court found the defendant’s testimony credible and that various stressors in her personal life triggered her Lupus symptoms, impacting her ability to recall and keep tract of information, all while raising two children and attempting to find a job during the holiday season. As such, the defendant lacked the requisite intent.

As to the section 727(a)(4)(A) count, the court “shall grant a discharge unless the debtor knowingly and fraudulently made a false oath or account.”  Five elements must be proven: 

the [d]ebtor made a statement under oath; (2) the statement was false; (3) the [d]ebtor knew the statement was false; (4) the [d]ebtor made the statement with fraudulent intent; and (5) the statement related materially to the [d]ebtor’s bankruptcy case.

In re Charles, 474 B.R. at 684 (quoting Lincoln Sav. Bank v. Freese (In re Freese), 460 B.R. 733, 738 (B.A.P. 8th Cir. 2011).  Again, the decision came down to “whether Defendant made the statements with fraudulent intent,” as elements 1, 2, 3 and 5 had been met by the trustee.  To prove the final element, the debtor must have acted knowingly, deliberately and consciously. 

The trustee alleged that the defendant had made false statements and testimony at the meeting of creditors.  She knew that she had more than $84.00, in cash, at the time of filing, knowingly omitting the $10,000 cash she was holding.  The court did not condone the defendant’s failure to disclose the payment.  The court noted that the bankruptcy code “requires full and complete disclosure of any and all interests of any kind.”  The court also noted that the chapter 7 trustee did collect approximately $10,000 to administer to creditors, excluding the non-exempt homestead equity.  However, the court felt that the defendant’s initial omission did not rise to the level of other reported decisions wherein there were several material omissions and concealment.  Once the defendant realized her error, the schedules were amended.  The defendant was consistent in her belief that, prior to the amendment, the cash did not require disclosure because it was child support.  She never wavered in her position or testimony on that issue.  As such, the court concluded that the trustee failed to meet his burden as to fraudulent intent.  The court noted that “denial of discharge is a harsh and severe result” and the court “strictly and narrowly construes the provisions of section 727 in the defendant’s favor.”

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman
Kesha Tanabe, Tanabe Law