Discharge Revoked for Fraud, Failing to Disclose Assets and Business Interests, Concealing and Transferring and Failing to Report Property of the Estate
BANKRUPTCY BULLETIN
Contributing Authors: Amanda Schlitz and Connor Meinke
In In re Bebeau, 2022 WL 17661134 (Bankr. D. Minn. Dec. 12, 2022) the court revoked the chapter 7 debtor’s discharge at the request of the U.S. Trustee for fraud, false statements and material omissions, and concealing and transferring property of the estate with fraudulent intent.
Jason Bebeau, the debtor, had interests in multiple business entities that were involved in construction and property development. Through those businesses, Bebeau worked with his friend and “finance guy” on various projects. Bebeau’s friend would provide funding for those projects, without documentation, and to Bebeau personally.
Just before filing bankruptcy, Bebeau met with his friend and his fiancé and orchestrated several transfers of his assets to his fiancé in a deliberate effort to conceal business interests and assets from the court. No consideration was received by Bebeau in exchange for the transfers to his fiancé. A backdated transfer document was used, which appeared to legitimize the transfer by incorrectly stating it was in resolution of one entity’s claims against the other (though there was never any such indebtedness).
Bebeau continued to purchase properties and engage in development projects through the use of those undisclosed business entities. He continued to use the business accounts for his ongoing, daily personal expenses, transferring large amounts but not disclosing any of the transfers. And at the same time, maintaining he was unemployed and his interest in the businesses was “worth zero.” He then created another business account to assist in the transfer of funds because, as Bebeau told another business partner, he “needed it not to be traceable.” Immediately after discharge was entered, his fiancé transferred the previously transferred business interests back to Bebeau.
Bebeau’s Discharge Revoked as it was Obtained through Fraud
Discharge may be revoked under 11 U.S.C. § 727(d)(1) if it was obtained through Bebeau’s fraud and the U.S. Trustee did not have knowledge of the fraud until after discharge was granted.
The court first looked to 11 U.S.C. § 727(a)(4)(A) to determine whether Bebeau knowingly and fraudulently made a false oath, and considered:
(1) Whether Bebeau made a statement under oath? Bebeau was required to verify his bankruptcy filings under penalty of perjury, and his signature has the force and effect of an oath.
(2) Whether the statement was false? Bebeau failed to disclose certain business interests, his employment with one of those entities, his pre- and post-petition (personal) use of the business account, and significantly misstated (undervalued) the assets of at least one of those entities.
(3) Whether Bebeau knew the statement was false? Bebeau continued to work on development projects and had full access to the bank accounts of various business entities. His use of those undisclosed accounts and business interests throughout the case evidenced his awareness that his statements and omissions were false.
(4) Whether Bebeau made the statement with fraudulent intent? Statements made with reckless indifference to the truth are regarded as intentionally false.
(5) Whether the statement related materially to the bankruptcy case? The false statement must be “material” in order to support denial of discharge. However, the threshold to materiality is “fairly low” and established when it bears any relationship to the bankruptcy estate, discovery of assets, business dealings or the existence or disposition of the debtor’s property. Here, the undisclosed assets belonged to the bankruptcy estate.
The court also looked to 11 U.S.C. § 727(a)(2), which allows a discharge to be denied if the debtor, within a year prior to the bankruptcy filing, transfers, destroys or conceals property of the estate with the intent to hinder, delay, or defraud. A presumption of fraud arises when a debtor transfers valuable property without consideration, and the twelve badges of fraud can then be used to determine if a debtor acted with the requisite intent. It is not necessary to prove fraudulent intent – a finding that the debtor had actual intent to hinder or delay creditors is sufficient.
Weighing the credibility of witnesses and applying the badges of fraud – most notably that Bebeau made the transfer to his fiancé just prior to filing bankruptcy for no consideration while retaining possession and control – the court found that Bebeau concealed and transferred property with the express intent to keep assets out of his bankruptcy case.
Bebeau’s Discharge Revoked for Knowingly and Fraudulently Failing to Report Post-Petition Property of the Estate
Revocation of discharge is also allowed under 11 U.S.C. § 727(d)(2) when a debtor knowingly and fraudulently failed to disclose, deliver, or surrender an acquisition or interest in property of the bankruptcy estate. The ongoing duty of disclosure requires a debtor to promptly update schedules upon becoming aware of any inaccuracies or omissions. Bebeau did not do so.
Bebeau received regular checks of thousands of dollars, routinely moved money through various accounts to make transfers “not traceable,” purchased multiple properties during bankruptcy and had significant access to cash. Bebeau did not disclose any of this.
Therefore, the court held that the U.S. Trustee established sufficient grounds to revoke Bebeau’s discharge and did so under 11 U.S.C. §§ 727(d)(1) and 727(d)(2).
To read the full opinion, click here.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.