The Honorable Robert J. Kressel, United States Bankruptcy

1

Judge, District of Minnesota.

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 97-6018

 

In re: *

*

Kenneth L. Kasden, *

*

Debtor. *

*

* Appeal from the United

Thomas F. Miller, Trustee * States Bankruptcy Court

of the Bankruptcy Estate of * for the District of 

Kenneth L. Kasden, * Minnesota

*

Plaintiff-Appellee, *

v. *

*

Kenneth L. Kasden, *

*

Defendant-Appellant. *

 

 Submitted: May 16, 1997

 Filed: June 20, 1997 

 

Before HILL, KOGER and SCOTT, Bankruptcy Judges

 

KOGER, Chief Bankruptcy Judge

Kenneth L. Kasden, pro se, (hereafter “Debtor”) has appealed the

order entered by the bankruptcy court for the District of Minnesota,

revoking his discharge pursuant to 11 U.S.C. § 727(d)(2)and ordering Debtor

to turn over to the estate certain funds Kasden has obtained. The

1

judgment of the bankruptcy court is affirmed.
 Unless otherwise indicated, all statutory references are to 2

the United States Bankruptcy Code, 11 U.S.C. §§ 101 - 1330 (1994).

2

 STANDARD OF REVIEW

In reviewing a judgment following a trial, we review the bankruptcy

court’s findings of fact for clear error and its legal conclusions de novo.

Four B. Corp. v. Food Barn Stores, Inc. (In re Food Barn Stores, Inc.), 107

F.3d 558, 561 (8th Cir. 1997). Findings of fact shall not be set aside

unless clearly erroneous, and due regard shall be given to the opportunity

of the bankruptcy court to judge the credibility of the witnesses. Fed.

R. Bankr. P. 8013.

REVOCATION OF DISCHARGE

The purpose of a discharge in bankruptcy is to relieve an honest

debtor from his financial burdens and to facilitate the debtor’s

unencumbered “fresh start.” See Local Loan Co. v. Hunt, 292 U.S. 234, 244,

54 S. Ct. 695, 699 (1934). In limited circumstances, however, the debtor’s

discharge may be revoked; but revocation is an extraordinary remedy. See

Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 924 (B.A.P. 9th

Cir. 1994). The grounds for revocation of a debtor’s discharge are set

forth in § 727(d), which provides: 2

 On request of the trustee, a creditor, or the United States

trustee, and after notice and a hearing, the court shall revoke

a discharge granted under subsection (a) of this section if--

* * *

 (2) the 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 
3

to report the acquisition of or entitlement to such property,

or to deliver or surrender such property to the trustee. . . .

11 U.S.C. § 727(d)(2). 

After conducting a trial on the trustee’s complaint to revoke the

debtor’s discharge under § 727(d)(2), the bankruptcy court found the

following sequence of events, all performed by the debtor in the few days

before and in contemplation of his filing a petition for bankruptcy:

July 27, 1994 - Debtor received a check from Indian River Distr

ibuti

o n

Compa

ny in

t h e

amoun

t of

$7,50

0.00.

August 1, 1994 - Debtor cashed the $7,500.00 check from Indian

River.

August 1, 1994 - Debtor made a $2,500.00 payment to All American

Recreation toward the purchase of a $6,000 hot tub.

He had already made a $1,000.00 payment to All

American toward the hot tub on July 21.

August 1, 1994 - Debtor paid Knox Lumber $1,384.50 as prepayment

for roof trusses which he did not pick up until

after he filed bankruptcy.

August 2, 1994 - Debtor paid $2,000.00 cash to Jay Roshay as

prepayment for labor to be provided at Debtor’s

home.

August 3, 1994 - Debtor received another check from Indian River

Distribution Company in the amount of $2,700.00

from the sale of a skidloader. That same day,

Debtor endorsed that check over to the Fire Place

Center as well as paying an additional $853.13 in

cash, for a total payment of $3,553.13, as

prepayment for fireplace equipment. The check

showed a deposit date of August 5, 1994, one day

after Debtor filed his bankruptcy petition.

August 3, 1994 - Debtor paid $1,800.00 in cash as an advance 
4

payment for 600 feet of marble tile which he did

not pick until after filing bankruptcy.

August 3, 1994 - Debtor purchased paint from Knox Lumber for

$777.02.

August 4, 1994 - Debtor filed his petition in bankruptcy.

Neither the payments to the debtor from Indian River nor the payments

made by Debtor for the home improvement materials and services were

reported on any of Debtor’s bankruptcy schedules. In fact, while several

other prepetition transfers were disclosed in the schedules, these were

not. The debtor openly admits he performed all of these transactions with

the intent of preventing his creditors from receiving the proceeds of the

checks from Indian River. He maintains he did so on the advice of his

attorney and under the belief that he was properly and legally protecting

that money from his creditors by investing it into his homestead which he

thought would be exempt.

The bankruptcy court concluded that had the trustee found out about

these transfers within the applicable limitations period, they would have

constituted the making of a false oath and the concealing of transfers,

providing grounds for the denial of discharge under §§ 727(a)(4)(A) and

727(a)(2). The court also declared that the assets purchased (the hot tub,

the prepaid lumber and tile, etc.) were all assets of the estate which the

debtor did not list on his Schedule B, thereby providing further grounds

for denial of discharge under §§ 727(a)(2) or 727(a)(4). Additionally, the

debtor falsely stated to the court that he was unemployed, that he had no

income, and did not reveal the two payments from Indian River, all

providing grounds for denial of discharge for making a false oath.

The trustee did not discover these omissions until after the 
 The trustee filed this adversary complaint to revoke the

3

debtor’s discharge pursuant to § 727(d)(2) on June 6, 1996. The

case had not yet been closed, so the time requirements of §

727(e)(2)(B) for bringing an action to revoke discharge are met.

5

time had passed for objecting to discharge, which under Fed. R. Bankr. P.

4004(a), is not later than 60 days following the first date set for the

first meeting of creditors. In fact, the trustee did not discover the

omissions until after the debtor received his discharge on January 24,

1995.3

After the discharge was entered, and during his investigation, the

trustee discovered the sale of the skidloader to Indian River Distribution

Company, leading him to make inquiries of Jon Heidinger, a former officer

of Indian River Distribution Company who was, at the time of the inquiry,

winding up Indian River’s affairs. The trustee asked Heidinger to provide

him with a copy of the check which reflected the payment by Indian River

Distribution Company to Debtor for the purchase of the skidloader.

Heidinger, a friend of the debtor, notified the debtor of the trustee’s

inquiry regarding the check. Debtor met with Heidinger and altered the

check to remove the debtor’s endorsement of the check to the Fire Place

Center as well as the deposit stamp indicating it had been deposited into

the Fire Place Center’s bank account. Heidinger submitted a copy of the

check to the trustee in the altered form. The bankruptcy court found that

“[t]he purpose of this alteration was to prevent the [trustee] from

discovering the transfer to the Fire Place Center which the [debtor]

rightly feared would lead the [trustee] to uncover the series of

prepetition transfers.” 

The trustee, however, was able to obtain another copy of the check

from Indian River’s bank which contained the endorsement, thus leading the

trustee to discover the alteration of the check and the other transfers.

According to Heidinger’s testimony, when 
 The bankruptcy court also awarded to the trustee the costs 4

of bringing the adversary, $120.00.

6

Debtor heard that the trustee was inquiring about the check, Debtor became

“panicked” or “agitated.” Debtor testified he feared that if the trustee

saw the endorsement to the Fire Place Center, the trustee would start

making inquiries into the other transfers and that would cause new

litigation over those transfers. As a result, he testified he altered the

check to prevent the trustee from instituting more litigation and incurring

more fees for himself.

The trustee not only discovered the series of transfers to the Fire

Place Center and other home improvement businesses, but also discovered

that on January 26, 1995, and February, 22, 1995, the debtor returned some

of the fireplace equipment to the Fire Place Center and obtained refunds

in the amounts of $1,402.15 and $660.83, totaling $2,062.98. The debtor

also did not report these refunds to the bankruptcy court or the trustee.

The trustee brought an adversary complaint seeking to have the

debtor’s discharge revoked pursuant to § 727(d)(2) because the debtor

acquired property that was property of the estate and knowingly and

fraudulently failed to report the acquisition of the property and to

deliver or surrender such property to the trustee. 

The bankruptcy court entered an order revoking the debtor’s

discharge, also ordering the debtor to turn over to the trustee $2,062.98

representing the fire equipment refunds. The bankruptcy court ordered the 4

debtor to turn over only those refunds because in another adversary

proceeding, the trustee was able to obtain a refund for the hot tub from

All American Recreation. Also, the rest of the home improvement items

obtained by the debtor as a result of the prepetition transfers went to

improve the debtor’s home which was found to be non-exempt. In re Kasden,

186 B.R. 667 
7

(D. Minn. 1995), aff’d 84 F.3d 1104 (8th Cir. 1996). Consequently, the

improvements that the debtor made to the home actually went to improve the

property of the estate which the trustee subsequently sold. Thus, the

only property of the estate that the debtor still possessed was the

$2,062.98 in refunds from the Fire Place Center. 

Clearly, both the prepayments on the fireplace equipment and the cash

refunds for the equipment were property of the estate under § 541(a). That

section provides a very broad definition of property of the estate, namely

all legal or equitable interests of the debtor in property as of the

commencement of the case, wherever located and by whomever held. Debtor

does not dispute his acquisition of the fireplace equipment or the refunds,

and he does not dispute his failure to report them. It follows, then, as

the bankruptcy court stated, the only remaining question is whether or not

the debtor knowingly and fraudulently failed to report his acquisition of

the funds.

Debtor declares that he did not know that the refunds were property

of the estate or that he had any obligation to report them to the trustee.

Debtor asserts he was acting on the advice of counsel and under a mistaken

belief that his prepetition expenditures were legitimate investments in his

homestead, but the subsequent events, as the bankruptcy court noted, do not

support that contention. First, none of the transfers were reported on his

original schedules or his amended schedules, despite the fact that other

prepetition transfers and payments were listed. Debtor’s assertion that

he did not think he had to list them in his schedules does not excuse the

omission. To the contrary, “[d]ebtors have an absolute duty to report

whatever interests they hold in property, even if they believe their assets

are worthless or are unavailable to the bankruptcy estate.” In re Yonikus,

974 F.2d 901, 904 (7th Cir. 1992); see also Mertz v. Rott, 955 F.2d 596,

598 (8th Cir. 1992) (holding that where a debtor believes an 
8

asset is exemptible, he cannot simply omit it from his schedule; rather,

he must list the asset on his schedules and then claim the exemption).

At 11 U.S.C. § 522, the Bankruptcy Code permits debtors to

claim certain property as exempt from the bankruptcy estate.

However, Bankruptcy Rule 4003 and § 522(l) of the Bankruptcy

Code dictates that debtors who claim exemptions must list such

exempt property on the required schedule of assets. All

property the debtor owns at the time the bankruptcy petition is

filed becomes property of the bankruptcy estate. Rather than

withholding property from the estate, the debtor actually seeks

a return of the property from the estate by filing the claim

for exemption. The bankruptcy court, not the debtor, decides

what property is exempt from the bankruptcy estate.

In re Yonikus, 974 F.2d at 905 (citations and footnote omitted).

Moreover, and very significantly, immediately upon learning that the

trustee was investigating the skidloader check, the debtor intentionally

set out to delete the endorsement which would lead the trustee to discover

the other transactions, particularly the dealings with the Fire Place

Center and the refunds he had received. The trial court properly found

this to be very strong evidence that the debtor purposely failed to report

the refunds and then took deliberate steps to prevent the trustee from

discovering them. Debtor’s explanation for altering the check did not

convince the bankruptcy court.

Debtor testified at trial that he believed the trustee wanted to see

the check for the sole purpose of establishing ownership of the skidloader.

Although not discussed by the partes or the bankruptcy court, this

statement by the debtor to be revealing because it was the discovery of the

skidloader in Debtor’s garage after discharge that led the trustee to

inquire of Jon Heidinger about it. Debtor was still in possession of a

skidloader he allegedly sold many months prior. That he thought the

trustee only 
 Debtor held onto the cashier’s check until July 14, 1995,

5

and thereafter allegedly used the money to improve his homestead.

On July 19, 1995, however, the District Court of Minnesota held

that the Debtor’s homestead was not exempt.

9

wanted to establish ownership of it does not make sense and raises even

more questions as to the debtor’s course of conduct. 

Finally, Debtor offered in his own defense evidence that he took the

proceeds of the first refund, the check for $1,402.15, and converted the

funds into a cashier’s check which he simply retained in his possession in

that form for some five months without using the funds. He offered this

to show that he ultimately used the money represented by that cashier’s

check for other improvements to his home that all along he thought

represented legitimate investments in his homestead. The bankruptcy court

concluded that this scenario proved more than disproved his fraudulent

intent because rather than depositing the money with the trustee or into

an identifiable account, he secretly converted the money into a form

unlikely to be discovered and then held onto it for five months without

informing anyone he had it. This admission by the debtor provides further

support for the bankruptcy court’s conclusion that he knew the funds should

have gone to the estate and that he intentionally prevented the trustee

from finding out about them. 

5

Debtor’s 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. See In re Yonikus, 974

F.2d at 905; In re Walters, 176 B.R. 835, 876 (Bankr. N.D. Ind. 1994). A

debtor’s fraudulent intent may be inferred from all the surrounding

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

fraudulent intent. See In re Van Horne, 823 F.2d 1285, 1287 (8th Cir.

1987); Walters, 176 B.R. at 876. The focus is on whether the debtor’s

actions “appear 
10

so inconsistent with [his] self-serving statement of intent that the proof

leads the court to disbelieve the debtor.” Van Horne, 823 F.2d at 1287

(quoting In re Hunt, 30 B.R. 425, 441 (M.D. Tenn. 1983)). The trustee may

also prove the debtor’s fraudulent intent by showing that the debtor acted

so recklessly that fraud can be implied. See Owens v. United States, 98

F.Supp. 621, 627 (W.D. Ark. 1951), aff’d, 197 F.2d 450 (8th Cir. 1952); see

also Walters, 176 B.R. at 876.

Debtor argues that the bankruptcy court’s determination as to his

intent is error because “Judge Kressel had not walked in the [debtor’s]

shoes for the last five years, and has absolutely no idea whatsoever what

the state of mind was of the [debtor] during that period of time.” This

is the very reason, absent an admission of intent to defraud, that the

trial court must look at the circumstantial evidence and the events that

occurred to try to determine intent from that evidence. See Van Horne, 823

F.2d at 1287; Owens, 98 F.Supp. at 627.

The bankruptcy court properly applied this principle and we can find

no error in the bankruptcy court’s credibility determination and factual

findings and the conclusion that the debtor knowingly and fraudulently

failed to report and turn over property that belonged to the estate.

ORDER TO TURN OVER THE REFUNDS

Having found that the debtor was in possession of property of the

estate, it was proper for the bankruptcy court to order the debtor to turn

over those funds to the estate under § 542(a), which enables a trustee to

recover the value of property of the estate from any party holding that

property during the pendency of the 
 It was not necessary for the Court to order the debtor to 6

turn over any of the other items because they were incorporated

into the house and, after Debtor lost his homestead exemption, the

trustee sold the house with the improvements. Consequently, the

estate benefitted from those items.

 Some of these points are raised in the portion of Debtor’s 7

brief regarding the revocation of discharge argument rather than

the due process portion of the brief. Nevertheless, the Court

addresses all of the trial error arguments here.

11

case.6

DUE PROCESS

Debtor also argues he is entitled to a new trial because he was

denied due process. He points to several rulings and occurrences during

the trial which he asserts were either error or claims the bankruptcy court

should have given him special consideration because he appeared at the

trial, pro se. 

7

First, Debtor contends the bankruptcy court erred in refusing to

admit a particular letter he sought to introduce. The transcript reveals

that while Kasden was testifying on his own behalf (in ”direct examination”

of himself), he sought to introduce a letter written by his former attorney

to the trustee’s attorney. The attorney represented Debtor in this

bankruptcy case and adversary until a couple of months before trial.

Debtor contends the letter supported his belief that the property was

exempt. The trustee’s attorney objected not only on hearsay grounds, but

also because a paragraph of the letter had been redacted. The bankruptcy

court sustained both objections. 

On appeal, Debtor argues:

Judge Kressel should have informed the [debtor] that just by

stating the letter is a true and exact copy with the 
12

exception of paragraph 1, that letter would have been entered

into evidence. The [debtor] believes it was the obligation of

the Honorable Judge Kressel to assist him in his pro se

representation in order the find the truth and justice served.

By definition, a document is not a true and accurate copy if it has been

altered. The bankruptcy court correctly found the letter to be hearsay and

Debtor offers no exception to the hearsay rule which would make it

admissible, even if it had been introduced in proper form. See Fed. R.

Evid. 801 and 802.

Next, Debtor argues that the bankruptcy court erred in quashing a

subpoena Debtor served on the trustee’s attorney. The court quashed the

subpoena because it had not been signed by an attorney or officer of the

court as required by the rules. Debtor contends he was given incorrect

information by bankruptcy court personnel and that, in any event, the

trustee’s attorney should have been required to testify regardless of the

subpoena because he was in court to represent the trustee and he was listed

on the debtor’s witness list. The debtor, however, never called him to

testify at trial. So, even assuming he could have testified, the

bankruptcy court merely quashed an improper subpoena; it did not refuse to

allow the debtor to call him as a witness. The bankruptcy court’s ruling

to quash the subpoena was not error. Since the court never had a chance

to rule on whether the trustee’s attorney could testify, there can be no

error. Furthermore, Debtor offers no indication what this witness would

have testified about or how the testimony may have “vindicated” him as he

contends.

Debtor also points to another portion of his own direct testimony

where he asked the bankruptcy court for permission to leave the witness

stand to retrieve a document from the counsel table where he had been

sitting. The bankruptcy court asked his purpose and the debtor replied,

“for my notes.” The court told the 
13

debtor, “Well, you can’t read from your notes. You have to testify from

your memory.” Debtor without objection then continued with his testimony

without his notes. He now complains that he could not adequately remember

everything and thus could not conduct his complete defense, was

intimidated, and interpreted the court’s statement to mean that he could

not use notes at all. The transcript reveals otherwise. The fact that

Debtor misinterpreted the bankruptcy court’s seemingly clear statement does

not constitute error. Second, Debtor does not now offer any indication as

to what he would have testified to had he had his notes and whether or how

it would have changed the outcome.

Finally, Debtor asserts the bankruptcy court erred in refusing to

admit, on relevancy grounds, certain receipts Debtor sought to introduce.

The receipts were for additional home improvement items which the debtor

purchased post-petition. Debtor sought to introduce these receipts,

totaling some $4,500.00, to show that he used the fireplace refunds to

improve his homestead. This, he contends, would have demonstrated that he

did not intend to defraud his creditors but rather that he honestly

believed the money belonged to him as part of his homestead. 

The bankruptcy court correctly concluded that the receipts were not

relevant. If the receipts show that the debtor invested an additional

$4,500.00 into his homestead post-petition, it would make no difference.

CONCLUSION

The bankruptcy court properly found that Debtor had a duty to report

the transactions related to the home improvements and particularly the

refunds on the fireplace equipment, and that Debtor knowingly and

fraudulently failed to report his acquisition of those funds. Accordingly,

the bankruptcy court did not err in 
14

revoking the debtor’s discharge pursuant to 11 U.S.C. § 727(d)(2). Because

the refunds were property of the estate, it was proper for the bankruptcy

court to order the debtor to turn those funds over to the trustee pursuant

to 11 U.S.C. § 542. Accordingly, we affirm.

A true copy.

Attest:

CLERK, U.S. BANKRUPTCY APPELLATE PANEL

FOR THE EIGHTH CIRCUIT