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Sept. 28 — Numerous errors and omissions in bankruptcy filings don't always add up to fraud if you have a good excuse, a Utah court held Sept. 23 (J&R Inv. v. Anthony (In re Anthony), 2015 BL 310531, D. Utah, No. 2:14-cv-00647-RJS, 9/23/15).
Judge Robert J. Shelby agreed with the bankruptcy court that the debtor's various excuses for his numerous mistakes were at least good enough to prevent his discharge from being revoked.
The debtor owed over $169,000 to J&R Investments, but his relationship to the creditor was slightly complicated by a failed marriage. The debtor's ex-wife had once had an ownership interest in J&R. The debtor later worked for his wife at her two companies, but didn't receive any interests in these businesses or any real property in the divorce.
When J&R attempted to garnish his salary, the debtor filed for Chapter 7 liquidation. The debtor received a discharge in December 2011, but roughly a year later, J&R sued to have the discharge revoked. Section 727(d)(1) of the Bankruptcy Code says that a discharge can be revoked if it was obtained through fraud.
J&R pointed to several problems in the debtor's bankruptcy filings. J&R said the debtor failed to list the income from his own company, Freedom Storage, from the years 2009-2011. It also claimed the incomes listed in his filings conflicted with incomes listed in his tax returns and that he failed to disclose two $2,000 checks he received from his ex-wife's companies.
But the bankruptcy court found that these mistakes were due to “genuine ignorance, ineptitude, and confusion” rather than fraud. J&R appealed.
J&R argued that the bankruptcy court erred in finding that all the inaccuracies and omissions didn't add up to fraud. It also argued the bankruptcy court was wrong in finding that the debtor and his ex-wife didn't have a profit sharing arrangement.
“To succeed on a revocation claim, the statute requires a plaintiff to show that the debtor knowingly and fraudulently made a material false oath,” the court said. The court said that J&R had the initial burden of showing a “reasonable inference” of fraud, at which point the debtor would be required to provide a “cogent explanation” for the mistakes.
In this case, the district court disagreed with the bankruptcy court that J&R had not established a reasonable inference of fraud, but ultimately found this error was “harmless.” The bankruptcy court went on to examine the debtor's explanations for the mistakes and found them convincing. The district court agreed.
The debtor said he hadn't included the income from his business because it was defunct and he wasn't receiving any income. As to the discrepancies with the tax returns, the bankruptcy court said the debtor and ex-wife credibly testified about “their general practice of providing information to their accountants and then basically washing their hands of their tax returns.”
The bankruptcy court also believed the debtor when he claimed he didn't know the checks, one of which was a wedding gift for his daughter, were the type of income he needed to disclose. The court added that there was no evidence thedebtor possessed or controlled those funds when he filed for bankruptcy.
The bankruptcy court was similarly persuaded by the ex-wife's testimony that she had no profit sharing arrangement with the debtor. Ultimately, the district court concluded that the bankruptcy court hadn't made a clear mistake in finding thedebtor's errors were inadvertent rather than fraudulent.
The court also rejected J&R's argument under Section 727(d)(2), which says a discharge can be revoked if a debtor“acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.”
The bankruptcy court said this section only applies to property the debtor acquired after he filed for bankruptcy, whichwasn't the issue in this case. The district court said that regardless of whether the statute applies to property acquired after the bankruptcy filing, J&R still didn't have a claim because this section also requires fraud, which J&R had failed to prove.
J&R was represented by Steven W. Call and Elaine A. Monson of Ray Quinney & Nebeker, Salt Lake City.
The debtor was represented by Jay L. Kessler of the Kessler Law Office, Magna, Utah.
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