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A bankruptcy court ruled in favor of the Chapter 7 trustee in an adversary proceeding to deny a discharge. In re Clark, No. 12-00649, Adv. No. 13-06042, mem. dec. (PDF file) (Bankr. D. Id., Feb. 12, 2015). The trustee alleged multiple grounds under 11 U.S.C. § 727(a), which prohibits a discharge of debt in a Chapter 7 proceeding if a court finds that a debtor has committed any of a lengthy list of types of misconduct. A trustee or creditor may object to discharge under this provision. The court found that the trustee had met his burden of proof to establish fraudulent transfers, insufficient recordkeeping, false statements, and violations of an injunction.

The debtor filed for bankruptcy under Chapter 12 of the Bankruptcy Code, which applies to people who make a living as farmers or fishermen, in March 2012. His initial Chapter 12 petition provided very little information, according to the court, and subsequently filed schedules did not offer much more clarity. He reportedly included some assets, such as checking accounts in the name of a limited liability company (LLC), in which he claimed no ownership interest.

The bankruptcy court held a hearing in May 2013 on whether to convert the case to Chapter 7 due to fraud by the debtor under 11 U.S.C. § 1208(d). This is somewhat similar to provisions allowing a court to convert a Chapter 7 case to Chapter 11 or Chapter 13 for “abuse.” 11 U.S.C. § 707(b). The court converted the case to Chapter 7 and appointed a trustee.

The trustee commenced an adversary proceeding objecting to discharge on the grounds that the debtor (1) transferred or concealed property after filing the petition in order to “hinder, delay, or defraud” creditors or the trustee, (2) kept insufficient records, and (3) made false oaths. Clark, mem. dec. at 2-3, citing 11 U.S.C. §§ 727(a)(2)(B), (a)(3), (A)(4)(A). He later obtained leave from the court to amend the complaint to include alleged violations of an injunction, which could result in denial of discharge under § 727(a)(6)(A). The trustee had brought a separate adversary proceeding against the LLC mentioned above, and the court had entered an injunction in that case in June 2013 prohibiting transfer of any LLC assets.

The court conducted a trial, and ruled for the trustee on all four grounds for denial of discharge:
– The transfers of a pickup truck and a camper by the debtor after he filed his Chapter 12 petition, and the debtor’s failure to disclose real estate interests and other assets, were in violation of § 727(a)(2)(B);
– The omission of multiple items of property from the debtor’s bankruptcy schedules, which were made with the debtor’s knowledge, violated § 727(a)(4)(A);
– The debtor’s affairs were commingled with those of the LLC and a family trust to such an extent that “the time and expense necessary to even attempt to unscramble them eclipsed any benefit,” Clark at 33, in violation of § 727(a)(3); and
– The debtor violated the injunction by allowing third parties to use farm equipment owned by the LLC, in violation of § 727(a)(6)(A).

Since 1997, bankruptcy attorney Devin Sawdayi has guided Los Angeles individuals and families as they rebuild their finances through the Chapter 7 and Chapter 13 processes. To schedule a free and confidential consultation with a knowledgeable and skilled financial advocate, contact us today online or at (310) 475-939.

More Blog Posts:

Transfer of Real Estate by Debtor More than One Year Before Filing Chapter 7 Bankruptcy Petition Does Not Bar Discharge of Debt, According to California Appellate Court, Los Angeles Bankruptcy Lawyer Blawg, January 9, 2015

Pre-Bankruptcy Sale of Real Property Below Market Price Found to be Fraudulent by Bankruptcy Judge, Los Angeles Bankruptcy Lawyer Blawg, November 7, 2014

California Bankruptcy Court Rules on Dischargeability of Debt Allegedly Incurred through “False Pretenses”, Los Angeles Bankruptcy Lawyer Blawg, July 27, 2014