Opinion ID: 763047
Heading Depth: 2
Heading Rank: 2

Heading: Misrepresentations in Disclosure Statements

Text: 24 Count III of the trustee's Adversary Complaint alleged that the Scotts intentionally concealed assets by failing to disclose the extent of their interest and the values of the various entities controlled by the Scotts. See 11 U.S.C. § 727(a)(2). 5 The bankruptcy court granted summary judgment to the Scotts on this claim, holding that representations as to the liquidation values of assets in disclosure statements cannot, as a matter of law, constitute concealment. 25 Concealment ... includes preventing discovery, fraudulently transferring or withholding knowledge or information required by law to be made known. United States v. Turner, 725 F.2d 1154, 1157 (8th Cir.1984). Cf. Black's Law Dictionary 289 (6th ed.1990) (concealment means the withholding of something which one knows and which one, in duty, is bound to reveal....). There is no question in this case that Richard Scott was aware of the $480,000 payment made to Burr Oaks Associates shortly before preparing and submitting the proposed disclosure statements. The key issue is whether he had a duty to disclose it. The bankruptcy court found that he did not, though the court candidly admitted that this approach to disclosure statements may cause some debtors to be evasive or dilatory in providing information. The district court adopted the same rationale, stating that [t]he structure of Chapter 11, then, takes into account that debtors in possession may be less than totally forthright concerning their affairs. 6 26 There is no basis for the lower courts' suggestion that the Bankruptcy Code does not place on the debtors-in-possession an obligation to candidly disclose assets. In submitting a disclosure statement, the debtors have a duty to provide adequate information, defined as information of a kind, and in sufficient detail as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor ... to make an informed judgment about the plan.... 11 U.S.C. § 1125(a)(1). As the Scotts planned to keep the seventy or so business entities for themselves, the value of these entities is clearly what an investor would need to have to decide an appropriate response to the Scotts' plans. Moreover, complete financial disclosure [is] a 'condition precedent' to the privilege of discharge. United States v. Ellis, 50 F.3d 419, 424 (7th Cir.1995). The debtor-in-possession owes a fiduciary duty to his creditors, see Fulton State Bank v. Schipper (In re Schipper), 933 F.2d 513, 515 (7th Cir.1991), and that duty requires the debtor-in-possession to furnish such information concerning the estate and the estate's administration as is requested by a party in interest. 11 U.S.C. § 704(7). 7 Given this law, and the significance of the business entities to the Scotts' bankruptcy, we conclude that the debtors had an obligation to disclose the nature and extent of the interests they held in the business entities. 27 It appears that the lower courts' rulings in this case are without precedent on this issue. The parties have cited no authority, nor have we found any, which holds that a particular type of statement cannot form the basis of an action for concealment. To the contrary, in McCormick v. Security State Bank (In re McCormick), 822 F.2d 806, 807-08 (8th Cir.1987), a debtor was denied a discharge for lying to a bank in an interview about his financial ability to make a payment on a loan owed to the bank. If an oral statement, not made under oath, can constitute concealment, then a disclosure statement propounded to all creditors with a request for bankruptcy court approval is certainly worthy of the same status. See also Smiley v. First Nat'l Bank (In re Smiley), 864 F.2d 562, 568 (7th Cir.1989) (Mr. Smiley not only failed to volunteer information, but he misrepresented the value of his assets.). 28 Both the bankruptcy court and the district court also relied heavily on the fact that in this case, the creditors and U.S. Trustee pursued the debtors to obtain more information by filing objections to the disclosure statements and appearing at court hearings. In essence, the lower courts held that because the creditors and U.S. Trustee did not ultimately rely on the representations in the disclosure statement to their detriment, no concealment was effected by the Scotts. However, we have previously held that a concealment or transfer under § 727(a)(2) may occur even if no creditors are harmed by it. Proof of harm is not a required element of a cause of action under Section 727. Smiley, 864 F.2d at 569 (7th Cir.1989); see also In re Snyder, 152 F.3d 596, 601 (7th Cir.1998). Disclosure statements are for the purpose of disclosure; the intentional withholding of relevant information is not sanctioned by the Bankruptcy Code. 29