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NOTFOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. EC-15-1173-TaJuD

)

ARVIND KAUR SETHI, ) Bk. No. 2:10-bk-40553

)

Debtor. ) Adv. No. 2:11-ap-2273

______________________________)

)

ARVIND KAUR SETHI, )

)

Appellant, )

)

v. ) MEMORANDUM*

)

WELLS FARGO BANK, NATIONAL )

ASSOCIATION, )

)

Appellee. )

______________________________)

Argued and Submitted on June 23, 2016

at Sacramento, California

Filed – July 12, 2016

Appeal from the United States Bankruptcy Court

for the Eastern District of California

Honorable David E. Russell, Bankruptcy Judge, Presiding

 

Appearances: Michael R. Totaro of Totaro & Shanahan for

Appellant; Amanda Nicole Griffith of Ellis Law

Group, LLP for Appellee.

 

Before: TAYLOR, JURY, and DUNN, Bankruptcy Judges.

FILED

JUL 12 2016

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

* This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8024-1(c)(2).
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INTRODUCTION

Appellant Arvind Sethi appeals from a judgment, following

remand from this Panel, sustaining Wells Fargo Bank, N.A.’s

objections to discharge pursuant to various provisions of

§ 727(a).1

We REVERSE. 

FACTS

This appeal follows a remand to the bankruptcy court for

findings sufficient to support its discharge denial under

§ 727(a). See Sethi v. Wells Fargo Bank, N.A. (In re Sethi),

BAP No. EC–13–1312–KuJuTa, 2014 WL 2938276 (9th Cir. BAP

June 30, 2015) (“Sethi I”). The bankruptcy court had entered a

judgment after trial in favor of Wells Fargo Bank on its claims

under § 727(a)(2), (a)(4)(A), and (a)(5). Sethi I details

extensively the factual background of the case and, thus, we

recount only those facts relevant to this appeal. 

This is the Debtor’s second bankruptcy case. At some

point, she and her two corporations began experiencing financial

difficulties, and, thus, she filed a chapter 13 case; her

corporations did not follow suit. Prior to the first case,

certain medical equipment owned by one or both of the

corporations was moved to a storage facility owned by a friend. 

The Debtor later claimed at the § 341(a) meeting of creditors in

her first case that she did not know where the equipment was;

this later proved to be false.

1 Unless otherwise indicated, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

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The first case was unsuccessful and dismissed on the

trustee’s motion. The Debtor then commenced the second

chapter 13 case, culminating in the discharge denial on appeal

for the second time.

On remand, the bankruptcy court attempted to clarify its

factual findings on the record at a continued hearing. See Hr’g

Tr. (Mar. 12, 2015). For the purposes of § 727(a)(2) and, by

extension, § 727(a)(5), it determined that the equipment

transferred prepetition was property of the estate because the

Debtor was the sole shareholder of the medical corporation and

controlled the assets; the bankruptcy court, thus, reasoned that

any assets owned by the medical corporation came into the

bankruptcy estate. Even if the equipment was not property of

the estate, the bankruptcy court found that the Debtor concealed

the equipment in her first bankruptcy case and continued the

concealment in this second case. It found that this supported

discharge denial. 

The bankruptcy court further clarified that, for purposes

of § 727(a)(4)(A), it had relied on two false statements: the

Debtor’s false statement at the § 341(a) meeting in the first

bankruptcy case and the Debtor’s October 2010 declaration filed

in the second bankruptcy case. Counsel for Wells Fargo pressed

the bankruptcy court for additional clarity on the issue of

intent. The bankruptcy court then reiterated that the Debtor

harbored an intent to hinder or delay Wells Fargo when she

concealed and lied about the whereabouts of the equipment in the

first bankruptcy case.

After the bankruptcy court issued a civil minute order

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denying discharge as supported by the findings made on the

record, the Debtor timely appealed. 

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(J). We have jurisdiction under 28 U.S.C.

§ 158.

ISSUE

Whether the bankruptcy court erred in denying the Debtor’s

discharge following remand by the Panel for sufficient fact

finding.

STANDARDS OF REVIEW

We review the denial of discharge as follows:

(1) determinations of the historical facts are reviewed for

clear error; (2) selection of the applicable legal rules under

§ 727 are reviewed de novo; and (3) application of the facts to

those rules requiring the exercise of judgments about values

animating the rules are reviewed de novo. Retz v. Samson

(In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). A factual

finding is clearly erroneous if it is illogical, implausible, or

without support in inferences that may be drawn from the facts

in the record. Id.

DISCUSSION

The Debtor argues that the bankruptcy court abused its

discretion by disregarding the law of the case as established by

Sethi I and by considering matters beyond the scope of the

remand. She also argues that the bankruptcy court erred in its

application of the standards for denial of discharge. 

Based on our review of the record, we agree that the

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bankruptcy court considered matters beyond the scope of the

remand in Sethi I and, thus, that it exceeded the Panel’s

mandate. This error was not harmless.

Discharge denial under § 727(a)(2) is warranted where the

debtor, with the “intent to hinder, delay, or defraud a creditor

. . . transferred, removed, destroyed, mutilated, or concealed”

either property of the debtor (within one year before the date

of petition) or property of the estate (after case

commencement). Section 727(a)(5), in turn, provides for

discharge denial where “the debtor has failed to explain

satisfactorily, before determination of denial of discharge

under this paragraph, any loss of assets or deficiency of assets

to meet the debtor’s liabilities.”

In Sethi I, the Panel recognized that “[t]he plain language

of the statute support[ed] [the Debtor’s] legal proposition that

the assets disposed of must have been her assets, rather than

property of one of her corporations.” 2014 WL 2938276, at *6. 

It found that the bankruptcy court had not made any alter ego

findings and, in fact, that Wells Fargo had raised the issue for

the first time on appeal. The Panel, thus, concluded that

“Wells Fargo was entitled to prevail on its § 727(a)(2) claim

only if it proved that the property [the Debtor] concealed was

her own property and not property of one of her corporations.” 

Id. It explicitly remanded for findings on whether the

concealed equipment was owned by the Debtor personally or by one

of her two corporations. In doing so, the Panel expressly

advised that “if the bankruptcy court on remand based on the

evidence presented [did] not find that [the Debtor] personally

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owned some of the concealed equipment, then it should rule

against Wells Fargo on its § 727(a)(2) claim.” Id. at *9.

On remand, the bankruptcy court effectively dismissed this

instruction. It rejected the applicability of alter ego theory

based on its determination that the Debtor was the sole

shareholder of the medical corporation and, thus, that the

corporation’s assets were property of the Debtor’s individual

bankruptcy estate. This was error.

As we explained in Sethi I, “California law recognizes the

separateness of corporate assets and liabilities.” 2014 WL

2938276, at *6 (citing Sonora Diamond Corp. v. Superior Court,

83 Cal. App. 4th 523, 538 (2000)). And, moreover, “so have the

better-reasoned federal cases interpreting the scope of

§ 727(a)(2).” Id. (collecting cases). The bankruptcy court’s

refusal to acknowledge the separateness of asset ownership

between the Debtor and her corporations is troublesome. That

the Debtor personally guaranteed the loans to purchase the

equipment is irrelevant, as is the fact that the Debtor was the

sole shareholder of the medical corporation. While that may

have meant that the corporate stock was estate property, the

reach of § 541(a) in an individual bankruptcy case did not

automatically extend to corporate assets.

The record further reveals that the bankruptcy court

improperly conflated the concept of property of the debtor under

§ 727(a)(2)(A) with property of the estate under § 727(a)(2)(B). 

To the extent that this error formed the basis of its analysis

as to the equipment, it was also error. There is no dispute

that the equipment was transferred prior to commencement of the

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first case. Thus, as a matter of law, the equipment could not

constitute property of the estate in the second case. Such an

interpretation would render § 727(a)(2)(A) superfluous. 

In sum, the bankruptcy court erred in determining that the

equipment was property of the Debtor’s estate. As a result, it

erred in denying discharge under § 727(a)(2). By extension, the

bankruptcy court also erred in determining discharge denial

under § 727(a)(5). Given that the equipment was owned by one or

both of the Debtor’s corporations and not the Debtor personally,

the equipment was not an asset of the Debtor within the scope of

§ 727(a)(5).

The bankruptcy court did not fare better on remand as to

Wells Fargo’s § 727(a)(4)(A) claim. That section provides for

discharge denial where “the debtor knowingly and fraudulently,

in or in connection with the case[,] made a false oath or

account.” A false oath includes false statements in a

declaration signed by the debtor under penalty of perjury and

submitted to the bankruptcy court. Abbey v. Retz (In re Retz),

438 B.R. 237, 301 (Bankr. D. Mont. 2007), aff’d, 2008 WL 8448824

(9th Cir. BAP 2008), aff’d, 606 F.3d 1189 (9th Cir. 2010). “The

fundamental purpose of § 727(a)(4)(A) is to insure that the

trustee and creditors have accurate information without having

to conduct costly investigations.” Khalil v. Developers Sur. &

Indem. Co. (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007)

(internal quotation marks and citation omitted), aff’d, 578 F.3d

1167 (9th Cir. 2009).

The objector to discharge must show, by a preponderance of

the evidence, that: “(1) the debtor made a false oath in

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connection with the case; (2) the oath related to a material

fact; (3) the oath was made knowingly; and (4) the oath was made

fraudulently.” In re Retz, 606 F.3d at 1196-97 (quoting Roberts

v. Erhard (In re Roberts), 331 B.R. 876, 882 (9th Cir. BAP

2005)). Objections to discharge are liberally construed in

favor of the debtor and against the objector. In re Khalil,

379 B.R. at 172. For that reason, the objector bears the burden

to prove by a preponderance of the evidence that the debtor’s

discharge should be denied. Id.

The Sethi I Panel’s remand for findings was limited2 to

just two areas: first, whether the bankruptcy court relied on

the Debtor’s statements in the first bankruptcy case; to the

extent it did so, the Panel advised that such reliance was

improper as a false oath in the second bankruptcy case. Id. at

*10. And, second, whether the Debtor made the statements in the

October 2010 declaration fraudulently. Id.

The false oath. Once again, despite the Panel’s

instructions, the bankruptcy court affirmed that it had relied

on both the Debtor’s statements at the § 341(a) meeting in the

first bankruptcy case and her October 2010 declaration filed in

the second case. As the Panel previously pointed out, however,

the Debtor’s statements in the first bankruptcy case could not

2 The Panel determined that the Debtor’s October 2010

declaration and subsequent admissions constituted a false oath. 

2014 WL 2938276, at *10. In doing so, it determined that the

record established that the Debtor made the false statements

knowingly and that they were material. Id. at *9. We deem

these determinations law of the case and, thus, we do not review

the second and third elements on appeal.

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serve as a false oath in the second bankruptcy case. 2014 WL

2938276, at *10. Thus, the bankruptcy court’s reliance on this

statement was erroneous. As the Sethi I Panel determined,

however, the bankruptcy court appropriately relied on the

October 2010 declaration as a false oath. 

Fraudulent intent. To demonstrate fraudulent intent, the

objector bears the burden of showing that the debtor: (1) made

the false oath; (2) at the time he knew it was false; and

(3) with the intent and purpose of deceiving creditors. In re

Retz, 606 F.3d at 1198-99 (internal quotation marks and citation

omitted). Intent is typically shown by circumstantial evidence

or by inferences drawn from the debtor’s conduct. Id. at 1199. 

“Reckless indifference or disregard for the truth may be

circumstantial evidence of intent, but is not sufficient, alone,

to constitute fraudulent intent.” Id. (internal quotation marks

and citation omitted).

On remand, the bankruptcy court repeatedly discussed the

state of mind necessary for discharge denial under § 727(a)(2)

in relation to the § 727(a)(4)(A) claim. As stated, counsel for

Wells Fargo requested clarification on this point. Nonetheless,

in response, the bankruptcy court continued to focus on

§ 727(a)(2):

I’m referring specifically to the language of

727(a)(2) which talks about hinder, delay, or defraud. 

Well, hinder and delaying is basically the same in my

view as defraud. In other words, hiding the assets;

that’s an attempt to defraud the creditor of the

creditor’s rights, so I don’t think there needs to be

a distinction, but if that is what the BAP requires,

then deception is certainly part of -- I think my

finding that she was lying is sufficient for the

finding that she was defrauding. The whole purpose of

lying is to defraud, so anyway, I don't think I need

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to go any further than that.

Hr’g Tr. (Mar. 12, 2015) at 29:15-25. 

This was error. Contrary to the bankruptcy court’s

conclusions, an intent to hinder or delay a creditor for the

purposes of § 727(a)(2) is not synonymous to or interchangeable

with an intent to deceive a creditor within the meaning of

§ 727(a)(4)(A). 

We also note that the only false oath appropriately at

issue was the Debtor’s October 2010 declaration. That

declaration, however, was filed in connection with the Debtor’s

motion to convert from chapter 13 to chapter 11. Although

intent to deceive a creditor is typically established by

circumstantial evidence, here, the context of the Debtor’s

statements makes it impossible to assume that the bankruptcy

court inferred deceptive intent sufficient for discharge denial

based on the Debtor’s statements in her declaration. In other

words, it is a stretch to infer that the Debtor intended to

deceive creditors when she stated in the October 2010

declaration that she filed the second bankruptcy case pro se,

when this statement is considered in the context of her motion

to convert and in the context of her second bankruptcy case. It

is far more plausible to assume, as her attorney argued, that

this statement was a result of blindly signing a document

containing an error created by counsel.3 

Given that the bankruptcy court erred by relying on the

3 To be clear, this type of conduct might be sanctionable

but it does not support cleanly a determination of intent to

commit fraud sufficient for discharge denial.

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Debtor’s statements in the first bankruptcy case to find a false

oath in the second bankruptcy case and that it failed to make

findings as to the requisite state of mind on remand directly in

relation to § 727(a)(4)(A) and the Debtor’s statements in the

October 2010 declaration, we conclude that it erred in denying

the Debtor’s discharge under § 727(a)(4)(A).

CONCLUSION

Based on the foregoing, we REVERSE.

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