United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 07-6051 SI

 

In re: *

*

Robert D. Klages, *

*

Debtor. *

*

Habbo Fokkena, U.S. Trustee, * Appeal from the United States

* Bankruptcy Court for the

Plaintiff - Appellee, * Southern District of Iowa

*

v. *

*

Robert D. Klages, *

*

Defendant - Appellant. *

 

Submitted: January 29, 2008

Filed: January 31, 2008

 

Before SCHERMER, MAHONEY and MCDONALD, Bankruptcy Judges

SCHERMER, Bankruptcy Judge
1

The Honorable William L. Edmonds, Chief United States Bankruptcy Judge

for the Northern District of Iowa.

2

Robert D. Klages (“Debtor”) appeals the bankruptcy court’s1 judgment

revoking his discharge for knowingly and fraudulently failing to turn over a tax refund

to the Trustee of his Chapter 7 bankruptcy estate. We have jurisdiction over this

appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the

reasons set forth below, we affirm.

ISSUE

The issue before this court is whether the bankruptcy court erred when it

concluded that the Debtor’s failure to turn over his tax refund to the Trustee of his

Chapter 7 bankruptcy estate was done knowingly and fraudulently. We conclude that

the bankruptcy court did not err when it determined that the Debtor’s failure to turn

over the tax refund was done knowingly and fraudulently. Accordingly, we affirm the

revocation of the Debtor’s discharge.

BACKGROUND

The Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code

on October 10, 2005. The Debtor attended the meeting of creditors pursuant to

Section 341 of the Bankruptcy Code on November 15, 2005. At the meeting, Thomas

L. Flynn, the Trustee of the Debtor’s Chapter 7 bankruptcy estate (“Trustee”), advised

the Debtor not to spend any tax refund without first contacting the Trustee’s office.

The Trustee further advised the Debtor not to spend any tax refund without first

contacting the Trustee’s office even after receipt of a notice of discharge from the

bankruptcy court. The Trustee gave the Debtor a written handout that contained the

following admonition:
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WARNING: Do not spend any of your tax refunds until you have

received approval from my office, even it you have received notice

from the Bankruptcy Court that a bankruptcy discharge has been

entered. The bankruptcy discharge does not close your bankruptcy

case or eliminate your need to turn over non-exempt assets. If it is

determined that you owe non-exempt monies to your bankrupt

estate, those funds need to be turned over immediately, in full (no

payment plans will be accepted), upon notice from my office.

Failure to comply with the terms of this letter or to cooperate with

me in the administration of your bankruptcy estate may constitute

cause to revoke your bankruptcy discharge. You will receive only

one notice from my office of non-exempt monies due your

bankruptcy estate and upon non-compliance, I will seek to revoke

your bankruptcy discharge.

At the end of the meeting of creditors, the Trustee also requested the Debtor to send

the Trustee a copy of his federal and state tax returns when he filed them.

The Debtor received a discharge on January 18, 2006. In February of 2006, the

Debtor filed federal and state tax returns for calendar year 2005. The Debtor received

a federal refund in the amount of $3,445 and a state refund in the amount of $65. The

Debtor spent the tax refunds on living expenses.

On June 5, 2006, the Trustee filed a motion seeking the examination of the

Debtor pursuant to Bankruptcy Rule 2004 (“First 2004 Motion”). In the First 2004

Motion, the Trustee requested the Debtor to attend an examination and to bring a copy

of his 2005 federal and state tax returns to such examination. The Debtor provided

the Trustee with a copy of his 2005 federal and state tax returns but did not appear for

examination.

On June 21, 2006, the Trustee made demand upon the Debtor to turn over

$1,556.11 of the tax refunds as the portion belonging to the Debtor’s bankruptcy

estate. The Debtor failed to do so. On July 31, 2006, the Trustee filed a second
4

motion seeking the examination of the Debtor pursuant to Bankruptcy Rule 2004

(“Second 2004 Motion”). In the Second 2004 Motion, the Trustee requested the

Debtor to attend an examination and to bring $1,556.11 to the examination. The

Debtor failed to attend or to pay any amount to the Trustee.

The United States Trustee filed a complaint seeking the revocation of the

Debtor’s discharge for, inter alia, knowingly and fraudulently failing to deliver the

non-exempt tax refund to the Trustee. At the trial the Debtor acknowledged receiving

an oral warning from the Trustee at the meeting of creditors not to spend any tax

refund without first contacting the Trustee’s office. The Debtor also acknowledged

receipt of the written handout but stated that he did not read it. The Debtor testified

that he understood the warning to mean that he should not spend any refund without

further notice from the court. The Debtor also acknowledged the Trustee’s request

that the Debtor provide the Trustee with a copy of his tax returns when prepared. 

The Debtor testified that when he received the notice of his discharge he

believed that he did not owe anybody any money and that the Trustee was no longer

interested in his tax refund. The bankruptcy court found that the Debtor’s testimony

that he believed he could spend the refunds was not credible in light of the warnings

to the contrary that he had received. The bankruptcy court found that the Debtor

knowingly spent the money with the intent to defraud the Trustee and the bankruptcy

estate. Accordingly, the bankruptcy court revoked the Debtor’s discharge pursuant

to Section 727(d)(2) of the Bankruptcy Code. The Debtor appealed the revocation of

his discharge.

STANDARD OF REVIEW

We review the bankruptcy court’s findings of fact for clear error and its

conclusions of law de novo. Richardson v. Sugg, 448 F.3d 1046, 1052 (8th Cir. 2006);

Four B. Corp. v. Food Barn Stores, Inc. (In re Food Barn Stores, Inc.), 107 F.3d 558,
5

561 (8th Cir. 1997); Miller v. Kadsen (In re Kadsen), 209 B.R. 239, 241 (B.A.P. 8th

Cir. 1997). We will overturn a factual finding only if it is not supported by substantial

evidence in the record, if it is based on an erroneous view of the law, or if we are left

with the definite and firm conviction than an error was made. Richardson v. Sugg,

448 F.3d at 1052. We afford due regard to the bankruptcy court’s judgment of the

credibility of the witness. Fed.R. Bankr. P. 8013; Richardson v. Suggs, 448 F.3d at

1052; In re Kadsen, 209 B.R. at 241. A factual finding supported by substantial

evidence is not clearly erroneous. Richardson v. Sugg, 448 F.3d at 1052. Likewise,

a trial court’s choice between two permissible views of the evidence is not clearly

erroneous. Id.

DISCUSSION

The discharge of a Chapter 7 debtor shall be revoked if the debtor acquired

property that is property of the estate and knowingly and fraudulently failed to report

the acquisition of such property or to deliver such property to the trustee. 11 U.S.C.

§ 727(d)(2). The parties do not dispute that the non-exempt tax refund of $1,556.11

is property of the Debtor’s bankruptcy estate; nor do they dispute that the Debtor

failed to deliver such property to the Trustee. The sole issue in dispute is whether the

Debtor knowingly and fraudulently failed to turn over the non-exempt tax refund. The

Debtor asserts that his failure to turn over the non-exempt tax refund was the result

of mistake but that his actions do not rise to the level of fraud. The United States

Trustee agrees with the bankruptcy court’s conclusion that the Debtor’s actions in

failing to deliver the non-exempt tax refund after express instructions to do so from

the Trustee amount to fraud.

A discharge will be revoked only if the debtor’s failure to deliver property of

the estate is done both knowingly and fraudulently. The Debtor admitted that he

received the Trustee’s oral warning at the meeting of creditors not to spend any tax

refund without first contacting the Trustee even if the Debtor received an order of
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discharge. The Debtor also admitted receiving the written warning to that effect. The

Debtor acknowledged the Trustee’s request for a copy of his tax returns when

prepared. The Debtor clearly knew he had a duty to provide a copy of his tax returns

to the Trustee and that he may have a duty to deliver tax refunds to the Trustee. The

Debtor’s failure to do so was thus done knowingly.

In order to support revocation of the discharge, the Debtor’s failure to deliver

the non-exempt tax refund must also have been done fraudulently. Fraudulent intent

may be established by showing that the debtor knowingly made an omission that

misleads the trustee or that the debtor engaged in a fraudulent course of conduct. In re

Kasden, 209 B.R. at 244. A debtor’s intent may be inferred from all the surrounding

circumstances where the debtor’s pattern of conduct supports a finding of fraudulent

intent. Id. The focus is on whether the debtor’s actions appear so inconsistent with

his self-serving statement of intent that the proof leads the court to disbelieve the

debtor. Id. Fraudulent intent may also be established by showing that the debtor acted

so recklessly that fraud can be implied. Id. at 244-45. 

Fraud is rarely established by admission. Instead, the trial court must look at

the circumstantial evidence and the events that occurred to try to determine intent. In

re Kadsen, 209 B.R. at 245. Here the trial court looked at the circumstances and

determined that the Debtor knew he had a duty to turn over copies of his tax returns

to the Trustee and that he knew that he should not spend any tax refund without first

contacting the Trustee’s office. The court determined that the Debtor knew his

obligations regarding the tax returns and tax refunds continued even if he received a

discharge. The Trustee told the Debtor this and gave him a written admonition to this

effect. The Debtor’s assertion that he did not read the handout is irrelevant. A debtor

cannot ignore information given to him and then claim ignorance. Such behavior is

so reckless that fraud can be implied. Id.
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The bankruptcy court determined that the Debtor’s explanation that he thought

he could spend the tax refund because of his discharge was not credible. The

bankruptcy court made this determination after carefully observing the Debtor’s

demeanor while he testified. We afford due deference to the bankruptcy court’s

determination regarding credibility and find nothing in the record to reverse that

determination. Fed.R. Bankr. P. 8013; Richardson v. Suggs, 448 F.3d at 1052; In re

Kadsen, 209 B.R. at 241. The bankruptcy court’s factual findings are supported by

the evidence. Richardson v. Sugg, 448 F.3d at 1052. The bankruptcy court correctly

applied the law. Richardson v. Sugg, 448 F.3d at 1052. Accordingly, we affirm.

CONCLUSION

The bankruptcy court found that the Debtor knowingly and fraudulently failed

to deliver his non-exempt tax refund to the Trustee. Based on these findings, the court

revoked the Debtor’s discharge pursuant to Section 727(d)(2) of the Bankruptcy Code.

The evidence supports the bankruptcy court’s findings of fact and conclusions of law.

Accordingly we affirm the bankruptcy court’s judgment revoking the Debtor’s

discharge.