Opinion ID: 169233
Heading Depth: 2
Heading Rank: 2

Heading: Bad Faith or Prejudice

Text: Debtors may amend bankruptcy schedules as a matter of course. But an amendment may be denied, however, if there is bad faith by the debtor or prejudice to creditors. In re Calder, 973 F.2d 862, 867-68 (10th Cir.1992); see generally Fed. R. Bankr.P. 1009(a). The bankruptcy court found that Ford sought to amend her schedules to claim an exemption for her settlement proceeds in bad faith, and that the concealment prejudiced creditors. We agree. Under both state and federal rules, Ford was required to disclose the settlement as an asset of her estate  contingent or otherwise  and then seek an exemption. These rules allow the trustee to investigate whether the claimed exemption is valid and ensure the debtor's estate is complete. [8] The Bankruptcy Code does not define bad faith. Like most questions of motive and intent, bad faith is a question of fact. In re Vincent J. Fasano, Inc., 55 B.R. 409 (Bankr.N.D.N.Y.1985). Bad faith may be established by circumstantial evidence, or by inferences drawn from a course of conduct. Farmers Coop. Ass'n of Talmage v. Strunk, 671 F.2d 391, 395 (10th Cir.1982). In exemption proceedings, the burden to establish bad faith rests on the party challenging the amended schedule. Jenkins v. Hodes ( In re Hodes ), 402 F.3d 1005, 1010 (10th Cir. 2005); Fed. R. Bankr.P. 4003(c). We also recognize that an inadvertent omission may be an affirmative defense to a debtor's failure to disclose an asset in bankruptcy. Inadvertence can be established by showing, among other things, either (1) the debtor had no knowledge of the undisclosed asset, or (2) the debtor had no motive to conceal it. In re Grogan, 300 B.R. 804, 809 (Bankr.D.Utah 2003) (citing In re Coastal Plains, Inc., 179 F.3d 197, 210 (5th Cir.1999)). The burden of establishing inadvertence lies with the debtor. Id. The bankruptcy court concluded Ford met neither one of these safe havens. The court found that Ford intentionally concealed her potential litigation interest and that the concealment prejudiced the Trustee's administration of the estate. For several reasons, we conclude these findings are not clearly erroneous. Primarily, Ford's shifting explanations of why she failed to disclose the asset suggests bad faith. She first testified at her deposition (which became a trial exhibit) that she knew the litigation proceeds would be exempt based on her training at paralegal school. Aplt.App. at 34-35. This might be true, although it would not excuse her duty to list the asset and then claim an exemption. Ford further claimed she thought she was under no obligation to disclose the litigation interest because it did not involve a lawsuit brought against her. She added yet another twist to her rationale for nondisclosure in her testimony before the bankruptcy court: [W]e had [not] gone to trial on this case or any mediation or anything. Id. at 130. Finally, even though she was told the lawsuit should be disclosed before her settlement, she took no steps to do so until well after the settlement had been reached. Id. at 116, 7-12. Ford's explanations thus tend to support an inference that (1) she was uncertain about the scope and application of the personal injury exemption and how it might affect her litigation at the time she prepared her schedules; (2) she intentionally concealed the asset to prevent scrutiny of it as part of the bankruptcy proceedings; and (3) she only disclosed the asset when she learned that the settlement proceeds could not be disbursed without reopening the bankruptcy case. While the evidence may also support a more benign explanation of her state of mind, the bankruptcy court had some evidence that Ford was not entirely candid about her reasons for concealing the asset and thus acted in bad faith in preparing her asset schedules. In addition, the record suggests Ford's accident settlement could have included recovery for non-exempt property damages (e.g., damage to her car). Ford testified that she became aware of her duty to disclose the asset in August, but failed to amend her schedules until after she participated in a settlement conference in September that directed all proceeds to be characterized as compensation for Ford's personal injuries. As the Trustee argued at the hearing below, that meant Ford would be entitled to all of the settlement proceeds under Utah's exemption laws. But had the Trustee been afforded timely notice he may have participated in or helped structure the litigation settlement to include a property allocation for the benefit of creditors. See In re Grogan, 300 B.R. at 809-10. [9] This evidence, in sum, tends to support the bankruptcy court's conclusion that Ford hinder[ed] the Trustee's administration of the estate to the prejudice of creditors. Bankr.Ct. Order, Aplt.App. at 154. In its review, the BAP discounted this testimony in concluding Ford had neither the expertise in bankruptcy law nor the motive to conceal. We agree with much of the BAP's analysis, and would have had little trouble affirming a bankruptcy court decision going the other way, given our standard of review. This is a close case. But as we discussed above, the evidence as a whole allows a different interpretation of the facts. In the end, while the bankruptcy court's order could have provided more detail in support of its conclusions, we are satisfied it meets the minimal standard for clear error review. The court's conclusions were based on the exhibits and testimony presented in adversarial proceedings. It had an opportunity to consider and assess Ford's demeanor and candor. When findings are based on determinations regarding the credibility of witnesses, Rule 52(a) demands even greater deference to the trial court's findings. Dalton v. IRS, 77 F.3d at 1302 (quoting Anderson v. Bessemer City, 470 U.S. 564, 575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)). And, as is typical in these types of proceedings, The problem in ascertaining whether a debtor acted with fraudulent intent is difficult because, ordinarily, the debtor will be the only person able to testify directly concerning his intent and he is unlikely to state that his intent was fraudulent. Therefore, fraudulent intent may be deduced from the facts and circumstances of a case. In re Calder, 907 F.2d at 955-956. In short, the bankruptcy court's conclusions satisfy the clear error standard  they are not completely devoid of minimum evidentiary support and bear a rational relationship to the supportive evidentiary data. Gillman, 55 F.3d at 555. On the whole, we are satisfied that the bankruptcy court's finding of bad faith is supported by some credible evidence, and therefore find no clear error. The bankruptcy court likewise did not abuse its discretion in denying the exemption.