Opinion ID: 660686
Heading Depth: 2
Heading Rank: 2

Heading: Farouki's Entitlement to Discharge

Text: 25 Turning to the merits of Nasser Farouki's request for discharge, Sec. 727 of the Bankruptcy Code allows debtors to receive a general discharge of their obligations in keeping with the primary purpose of bankruptcy law, to give honest debtors a fresh start unhampered by the pressure and discouragement of preexisting debt. Lines v. Frederick, 400 U.S. 18, 19, 91 S.Ct. 113, 114, 27 L.Ed.2d 124 (1970). However, certain provisions of Sec. 727 prohibit discharge for those who play fast and loose with their assets or with the reality of their affairs. In re Tully, 818 F.2d 106, 110 (1st Cir.1987). The Bank has objected to Farouki's discharge on several grounds. The bankruptcy court denied his discharge under Secs. 727(a)(2), (a)(3), (a)(4)(A), and (a)(5) of the Bankruptcy Code. 26 The Bank had to assume the burden of proving its objection to the discharge under Bankruptcy Rule 4005. Although the burden may shift to the debtor to provide satisfactory, explanatory evidence once the creditor has established a prima facie case, the ultimate burden rests with the creditor. 16 See In re Brooks, 58 B.R. 462, 464 (Bankr.W.D.Pa.1986). Under Combs v. Richardson, 838 F.2d 112, 116 (4th Cir.1988), the standard of proof in a discharge action is the preponderance of the evidence. 17 The bankruptcy court's findings of fact should not be set aside unless they are clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses. Bankruptcy Rule 8013; accord Williamson v. Fireman's Fund Ins. Co., 828 F.2d 249, 251 (4th Cir.1987). 27 Involved is an application for general discharge. A party objecting to discharge need prove only one of the grounds for non-dischargeability under Sec. 727(a) because the provisions of Sec. 727(a) are phrased in the disjunctive. Proof of conduct satisfying any one of the sub-sections is enough to justify a denial of a debtor's request for a discharge. In In re Shumate, 55 B.R. 489, 495 (Bankr.W.D.Va.1985), the court denied discharge based on Sec. 727(a)(2) and stated that it did not need to address the issues implicated by the creditor's remaining allegations under eight other sub-paragraphs of Sec. 727. In In re Moore, 89 B.R. 935, 937 (Bankr.M.D.Fla.1988), the court denied a debtors' discharge pursuant to Sec. 727(a)(5) and stated that it was unnecessary to rule on the other claims set forth in the creditor's complaint including Sec. 727(a)(4) and (a)(2). Accord, In re Reed, 700 F.2d 986, 989 (5th Cir.1983) (either Sec. 727(a)(2) or Sec. 727(a)(5) would suffice for denial of discharge). Hence, of the four items contained in the general discharge claim, denial of discharge for any one will eliminate the need for consideration of the other three. 28 Considering the largest of the four, the Bank has argued that Farouki was a shareholder in Dina prior to the time he filed for bankruptcy. In support of that argument, the Bank has offered both the original Guaranty Agreement in which each brother represented himself as a principal shareholder in Dina and the First Amendment to the loan agreement which Nasser Farouki read and signed. The schedule of assets which Nasser Farouki filed in connection with his bankruptcy petition indicated that he was not a shareholder of Dina at the time he filed. He has denied that he ever owned stock in Dina, but the only proof offered has been his own uncorroborated testimony. The bankruptcy judge did not find him to be a credible witness. Nasser Farouki testified that his brother Fawaz has always been the sole shareholder of Dina, but he did not produce his brother to testify, nor did he produce any records from the company to resolve the issue of stock ownership. While Nasser Farouki did not bear the ultimate burden of proof on the issue, the Bank established a prima facie case with regard to the stock, and, thereupon, the burden shifted to Farouki to provide explanatory evidence, to the satisfaction of the court, rebutting the presumption raised by the plaintiff's prima facie case. 29 11 U.S.C. Sec. 727(a)(4)(A) provides: The court shall grant the debtor a discharge, unless--the debtor knowingly and fraudulently, in or in connection with the case--made a false oath or account. 11 U.S.C. Sec. 727(a)(5) reads: The court shall grant the debtor a discharge, unless--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. 18 Nasser Farouki's actions justified the bankruptcy court's finding that both of those provisions foreclosed discharge. The bankruptcy court found, inter alia: 30 1. In March of 1984, Fawaz and Bassim Farouki represented to Dubai Bank that they, along with Nasser, were the principal shareholders of Dina. 31 2. The Guaranty Agreement that Nasser allowed Bassim to sign on his behalf contained the statement that each of the Guarantors is a principal shareholder of the capital stock of Dina. 32 3. A draft of the Agreement was sent to Debtor and his counsel before it was executed, and neither the Debtor nor his counsel requested a deletion or alteration of the document. 33 4. After the first default on the loan, the brothers sent a combined personal financial statement to the Bank indicating that the three of them owned 100% of Dina, a company worth approximately 10 million dollars at the time.5. The debtor signed an amendment to the loan agreement with the assistance of three attorneys in May 1985. The amendment was accompanied by an affidavit with a copy of the original Guaranty Agreement attached to it. The debtor reviewed and signed these documents personally. 34 6. The debtor did not call his brother to testify as to Fawaz' sole ownership of the stock. 35 7. The debtor did not produce any documentation susceptible of authentication that would support his testimony that he never owned stock in Dina. 36 Based on all of the evidence and taking into account the credibility of the witnesses, including the debtor, the bankruptcy court found that the debtor owned stock in Dina prior to his bankruptcy filing, and that the Bank presented a prima facie case under Sec. 727(a)(5). The Bank established that Farouki represented himself as a shareholder in Dina and suggested that he had failed to account for the loss of that stock. At that point, the burden shifted to Farouki as the debtor satisfactorily to explain the loss of his Dina stock or to prove that, contrary to the evidence submitted by the Bank, he never owned any Dina stock. The question of whether a debtor satisfactorily explains a loss of assets is a question of fact. In re Chalik, 748 F.2d 616, 619 (11th Cir.1984). The findings of the bankruptcy court must be accepted unless clearly erroneous, particularly when they have been affirmed by the district court. Id. Nasser Farouki offered only his own uncorroborated testimony which the bankruptcy court did not find credible. The findings were not clearly erroneous. 37 The court denied Farouki's discharge under both Sec. 727(a)(4)(A) and (a)(5). Nasser Farouki has claimed that the ruling was inconsistent, and that such inconsistency constitutes reversible error. However, the findings are not in conflict with one another. The bankruptcy court did not find that Nasser Farouki owned and did not own the stock simultaneously. Rather, the bankruptcy court found that the Bank met its burden of establishing that Nasser Farouki owned the stock. If he owned the stock prior to the filing, he must have either sold or otherwise disposed of that stock or else retained ownership of it. Under Sec. 727(a)(5), Nasser Farouki did not explain what happened to the asset, nor did he convince the court that he had never been in possession of the Dina stock. As for Sec. 727(a)(4)(A), the court found that Farouki owned stock in Dina. Farouki did not rebut that finding adequately. The court found that his failure to disclose such ownership in Dina was made with fraudulent intent. The omission was material because it was relevant to the debtor's business transactions, estate and assets. 19 38 The district court did not err in affirming the bankruptcy court's denial of Farouki's request for discharge under Sec. 727(a)(5). Because Nasser Farouki sought a general discharge, we need not and should not address the separate issues raised under Secs. 727(a)(2), (a)(3), and (a)(4)(A). 39 The judgment is, accordingly, 40 AFFIRMED.