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Bankruptcy Court Denies Chapter 7 Debtor's Discharge

Wednesday, February 15, 2012
Dena Kaufman | Bloomberg LawMarchand v. Friedman (In re Friedman), No. 09-25781, 2012 BL 28899 (Bankr. D.N.J. Feb. 2, 2012) The U.S. Bankruptcy Court for the District of New Jersey held that a debtor was not entitled to a discharge of his debts in his chapter 7 case because he transferred and concealed property with the intent to hinder, delay, or defraud creditors or the chapter 7 trustee. The Court also held that the debtor knowingly and fraudulently made a false oath in his bankruptcy case. In so ruling, the Court rejected debtor's assertions that the errors and omissions in his disclosures were merely inadvertent.

The Bankruptcy Filings and the Section 341 Meeting

Raymond S. Friedman (Debtor) used to own a store named Bonanza Army Navy Store and, thereafter, became the owner of the business Army Navy Now Inc. Pursuant to certain stipulations in his decree of divorce from his ex-wife, he was required to maintain $500,000 in life insurance naming his ex-wife as the trustee and his children as the beneficiaries. Despite the prohibitions against making withdrawals from or hypothecations against the life insurance, Debtor obtained several loans against the cash surrender value of the life insurance, both prior to and subsequent to filing his chapter 7 bankruptcy petition on June 18, 2009. Further, Debtor executed two promissory notes for the purpose of repaying the debt he owed to his ex-wife, one pre-petition and one postpetition. In addition to the loans and the notes, Debtor also made certain transfers from "Raymond S. Friedman d/b/a Bonanza Army Navy Store" to the Army Navy Now, Inc. store. The loans, the notes, and the pre-petition transfers were not disclosed by Debtor in his schedules or statement of financial affairs, nor did Debtor disclose the cash surrender value of his life insurance. On July 27, 2009, Debtor answered the chapter 7 trustee's questions under oath at the section 341 meeting and certified the truth and accuracy of the information contained in his bankruptcy petition, schedules, and statements. On December 16, 2010, the trustee initiated an adversary proceeding alleging that Debtor, "with an intent to hinder delay or defraud, transferred or concealed property of the estate after the filing of the petition, transferred or concealed property of the debtor within one year before the date of the filing of the petition, and made a knowing or fraudulent false oath or account in connection with the bankruptcy case." The trustee recited the pre and postpetition loans and notes and the transfer to Army Navy Now, Inc. as the facts in support of his claims. The trustee filed a motion for summary judgment, which the Court denied. At a one day trial, Debtor, appearing pro se, did not dispute that his schedules and statement of financial affairs contained the alleged errors and omissions but denied the allegation that he acted with the intent to hinder, delay, or defraud. Instead, Debtor claimed that he thought he had no interest in the life insurance based on his divorce decree and, thus, he believed that it was unnecessary to include anything relating to the insurance in his bankruptcy case.

Denial of Discharge Under 11 U.S.C. § 727(a)(2)

The Court explained that a denial of discharge under section 727(a)(2)(A) is warranted when the following elements are established by a preponderance of the evidence: (1) a transfer, concealment or other disposition of property; (2) a subjective intent on the part of the debtor to hinder, delay, or defraud a creditor or the trustee through such disposition of property; and (3) the occurrence of (1) and (2) above within one year before the petition date. The same elements are required to warrant a denial of discharge under section 727(a)(2)(B), except that the disposition and intent must be shown to have occurred postpetition. The Court explained that intent may be found through circumstantial evidence or presumed based on a course of conduct, as a debtor is unlikely to admit fraudulent intent. Focusing on the facts before it, the Court found that the only possible conclusion was that Debtor intended to hinder, delay, or defraud creditors or the trustee. The Court found Debtor's position that he did not believe he had any interest in the life insurance to be unbelievable and untenable in light of the fact that within days of the petition date and the section 341 meeting he borrowed against the insurance policies without any assistance from his ex-wife. Further, the Court found the terms of the divorce decree were clear and did not divest Debtor of any interest in the life insurance. The Court found further support for Debtor's lack of credibility in the fact that, despite executing the notes in favor of his ex-wife and children, Debtor failed to list any of them as creditors in his schedules. With respect to the transfers to Army Navy Now, Inc., the Court rejected Debtor's assertion that such transfers were loans, noting that Debtor was unable to provide any documentary evidence of such characterization. Instead, it found the lack of disclosure of the transfers to support further the conclusion that Debtor acted with intent. Accordingly, the Court held that the elements of section 727(a)(2) had been established and denial of Debtor's discharge was warranted.

Denial of Discharge Under 11 U.S.C. § 727(a)(4)

Continuing its analysis, the Court explained that the elements that must be established to justify a denial of a discharge under section 727(a)(4)(A) are: (1) a statement made under oath; (2) the statement was false; (3) the debtor knew the statement to be false; (4) the statement was made with fraudulent intent; and (5) the statement was materially related to the bankruptcy case. The Court found that the first two elements were satisfied based on Debtor's failure to disclose the various loans, promissory notes, and transfers in his petition. With respect to the third element, the Court held that, at a minimum, Debtor's false oaths showed a reckless disregard for the truth, as he knew of at least some of the assets and transactions at the time of filing the petition. The Court also found the declaration and the omissions in the petition, together with his testimony at the section 341 meeting, to evidence Debtor's strong reluctance to be truthful about his assets and liabilities. Further, the Court found Debtor's assertion that he mistakenly believed that the insurance policies at issue were his ex-wife's and not his to be implausible given the clear language of the divorce decree, and Debtor's ability to borrow from them without her assistance. The Court further suggested that, even if Debtor's assertion was true, Debtor was grossly reckless in failing to bring the transfers and transactions to his attorney's attention prior to the filing of his bankruptcy petition, schedules, and statements. Lastly, the Court explained that a false oath is "material" if it "bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the bankrupt's property." Finding that Debtor's omissions and false oaths related to both the discovery of assets and the disposition of the Debtor's property, the Court held that they were materially related to the bankruptcy case.

Discharge Denied

Finding that all of the requisite elements of sections 727(a)(2) and 727(a)(4) had been clearly established, the Court denied Debtor's discharge. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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