Skip Page Banner  
Skip Navigation

Debtor's Material Fraud Discovered Later Justifies Revocation of Chapter 7 Discharge

Monday, December 9, 2013
By Diane Davis

Dec. 6 --A material fraud, which would have resulted in the denial of a debtor's Chapter 7 discharge had it been known at the time of such discharge, can justify subsequent revocation of that discharge under Bankruptcy Code Section 727(d)(1), the U.S. Court of Appeals for the Ninth Circuit held Dec. 2 (Jones v. U.S. Tr., 2013 BL 335345, 9th Cir., No. 12-35665, 12/2/13).

Affirming the judgment of the district court, Judge Milan D. Smith Jr. adopted the reasoning of the Bankruptcy Appellate Panel of the Ninth Circuit and other circuits, and rejected the debtor's argument that the concealment of his fraud, rather than the fraud itself, procured his discharge.

The BAP's reading comports with In re Nielsen, 383 F.3d 922 (9th Cir. 2004), and the text of Section 727(d)(1), the appeals court said, which requires that the discharge be obtained through the fraud of the debtor. Nielsen also established the rule that the fraud must be material, and must have been sufficient to cause the discharge to be refused if it were known at the time of discharge, the court said.

The bankruptcy court conducted such an analysis, the court said, to determine whether the discharge was procured by fraud. After conducting its In re Retz, 606 F.3d 1187 (9th Cir. 2010), analysis, the bankruptcy court properly concluded that the debtor's misstatements were material, the court said. Thus, the bankruptcy court's decision comports with Nielsen, the court concluded, because the debtor's fraud, had it been known at the time of the discharge, would have been grounds for denying the discharge.

Chapter 7 Filing, Discharge

Debtor/appellant Jerry Alan Jones filed for Chapter 7 protection and filed his schedule of assets under penalty of perjury as required by the Bankruptcy Code. During the meeting of creditors, the debtor testified under oath regarding his debts. Subsequently, the bankruptcy court granted him a discharge.

The U.S. Trustee subsequently learned that the debtor had misrepresented the value or existence of a number of assets in both the schedules and in his testimony during the creditor's meeting. The debtor claimed that the omission was due to inadvertence rather than fraud.

The bankruptcy court disagreed, finding that the debtor made false oaths in connection with his petition for discharge. 

Discharge Revoked

The trustee then moved to revoke the debtor's discharge under Section 727(d)(1).

The bankruptcy court found that the misrepresentations amounted to a violation of Section 727(a)(4)(A), and granted the trustee's motion to revoke the debtor's discharge. 

Appeals

The debtor appealed to the district court arguing that his fraud did not procure the discharge.

The district court affirmed the bankruptcy court, concluding that the bankruptcy court's findings of fact were “without clear error and supported by the extensive record.”

The debtor appealed to the Ninth Circuit, arguing that the bankruptcy court incorrectly applied the law with respect to whether the “discharge was obtained through the fraud of the debtor.” The debtor asserted that his fraud--concealing assets--did not “procure” the discharge because, had the debtor not revealed the assets, the discharge would still have been granted. According to the debtor, the concealment of his fraud, rather than the fraud itself, procured his discharge, and the trustee never provided any evidence that the fraud itself procured the discharge, the court said. 

Revoking a Discharge

Section 727(d)(1), the court said, provides that a Chapter 7 discharge may be revoked if the “discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge.” Section 727(a)(4) provides that a bankruptcy judge should deny discharge if, “the debtor knowingly and fraudulently, in or in connection with the case … made a false oath or account,” the court said.

The BAP of the Ninth Circuit has repeatedly held that a discharge may be revoked upon a showing that the debtor made false oaths that would have caused the bankruptcy court to deny the discharge under Section 727(a) had the fraud been timely known, the court said, citing In re Gilliam, Nos. CC-11-1248-MKHKi, RS 08-26743-CB, 2012 WL 1191854, at *10 (B.A.P. 9th Cir. Apr. 6, 2012). 

Material Fraud

The BAP's reading, the court said, comports both with In re Nielsen, and the text of Section 727(d)(1), which requires that the discharge be obtained through the fraud of the debtor. Under Nielsen, the fraud must be a but-for cause of the discharge, the court said. Nielsen also established the rule that the fraud must be material, the court said.

To prove a violation of Section 727(a)(4)(a), the plaintiff must show that the debtor: “(1) made a false oath in connection with the case; (2) related to a material fact; (3) knowingly and (4) fraudulently,” the court said, citing In re Retz, 2010 BL 124972, 606 F.3d 1187 (9th Cir. 2010). After conducting a Retz analysis, the bankruptcy court properly concluded that the debtor's misstatements were material, the court said. Thus, the bankruptcy court's decision comports with Nielsen, the court said, because the debtor's fraud, had it been known at the time of the discharge, would have been grounds for denying the discharge.

Judge Andrew D. Hurwitz, and Judge James C. Mahan of the U.S. District Court for the District of Nevada, sitting by designation, joined the opinion.

Keith D. Karnes of Salem, Ore., argued for the appellant/debtor. Phyllis Rebecca Kamitsuka, Trial Attorney, Office of the U.S. Trustee, Eugene, Ore., Robert Joseph Schneider, Trial Attorney, U.S. Department of Justice, Washington, D.C., argued for the appellee.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

To view additional stories from Bloomberg Law® request a demo now