Court Opinion

ID: 4016309
Source: CourtListenerOpinion
Date Created: 2016-07-16 00:01:27.523718+00
Date Added: 2024-06-11T14:31:16.354353
License: Public Domain

FILED
                                                                   JUL 12 2016
 1                         NOT FOR PUBLICATION                 SUSAN M. SPRAUL, CLERK
                                                                 U.S. BKCY. APP. PANEL
 2                                                               OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.    EC-15-1173-TaJuD
                                   )
 6   ARVIND KAUR SETHI,            )      Bk. No.    2:10-bk-40553
                                   )
 7                  Debtor.        )      Adv. No.   2:11-ap-2273
     ______________________________)
 8                                 )
     ARVIND KAUR SETHI,            )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      MEMORANDUM*
11                                 )
     WELLS FARGO BANK, NATIONAL    )
12   ASSOCIATION,                  )
                                   )
13                  Appellee.      )
     ______________________________)
14
                     Argued and Submitted on June 23, 2016
15                         at Sacramento, California
16                           Filed – July 12, 2016
17             Appeal from the United States Bankruptcy Court
                   for the Eastern District of California
18
         Honorable David E. Russell, Bankruptcy Judge, Presiding
19
20   Appearances:     Michael R. Totaro of Totaro & Shanahan for
                      Appellant; Amanda Nicole Griffith of Ellis Law
21                    Group, LLP for Appellee.
22
     Before:   TAYLOR, JURY, and DUNN, Bankruptcy Judges.
23
24
25
26        *
             This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1(c)(2).
 1                               INTRODUCTION
 2        Appellant Arvind Sethi appeals from a judgment, following
 3   remand from this Panel, sustaining Wells Fargo Bank, N.A.’s
 4   objections to discharge pursuant to various provisions of
 5   § 727(a).1
 6        We REVERSE.
 7                                  FACTS
 8        This appeal follows a remand to the bankruptcy court for
 9   findings sufficient to support its discharge denial under
10   § 727(a).    See Sethi v. Wells Fargo Bank, N.A. (In re Sethi),
11   BAP No. EC–13–1312–KuJuTa, 2014 WL 2938276 (9th Cir. BAP
12   June 30, 2015) (“Sethi I”).    The bankruptcy court had entered a
13   judgment after trial in favor of Wells Fargo Bank on its claims
14   under § 727(a)(2), (a)(4)(A), and (a)(5).      Sethi I details
15   extensively the factual background of the case and, thus, we
16   recount only those facts relevant to this appeal.
17        This is the Debtor’s second bankruptcy case.      At some
18   point, she and her two corporations began experiencing financial
19   difficulties, and, thus, she filed a chapter 13 case; her
20   corporations did not follow suit.      Prior to the first case,
21   certain medical equipment owned by one or both of the
22   corporations was moved to a storage facility owned by a friend.
23   The Debtor later claimed at the § 341(a) meeting of creditors in
24   her first case that she did not know where the equipment was;
25   this later proved to be false.
26
27        1
             Unless otherwise indicated, all chapter and section
28   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                      2
 1        The first case was unsuccessful and dismissed on the
 2   trustee’s motion.    The Debtor then commenced the second
 3   chapter 13 case, culminating in the discharge denial on appeal
 4   for the second time.
 5        On remand, the bankruptcy court attempted to clarify its
 6   factual findings on the record at a continued hearing.      See Hr’g
 7   Tr. (Mar. 12, 2015).    For the purposes of § 727(a)(2) and, by
 8   extension, § 727(a)(5), it determined that the equipment
 9   transferred prepetition was property of the estate because the
10   Debtor was the sole shareholder of the medical corporation and
11   controlled the assets; the bankruptcy court, thus, reasoned that
12   any assets owned by the medical corporation came into the
13   bankruptcy estate.    Even if the equipment was not property of
14   the estate, the bankruptcy court found that the Debtor concealed
15   the equipment in her first bankruptcy case and continued the
16   concealment in this second case.     It found that this supported
17   discharge denial.
18        The bankruptcy court further clarified that, for purposes
19   of § 727(a)(4)(A), it had relied on two false statements: the
20   Debtor’s false statement at the § 341(a) meeting in the first
21   bankruptcy case and the Debtor’s October 2010 declaration filed
22   in the second bankruptcy case.    Counsel for Wells Fargo pressed
23   the bankruptcy court for additional clarity on the issue of
24   intent.   The bankruptcy court then reiterated that the Debtor
25   harbored an intent to hinder or delay Wells Fargo when she
26   concealed and lied about the whereabouts of the equipment in the
27   first bankruptcy case.
28        After the bankruptcy court issued a civil minute order

                                      3
 1   denying discharge as supported by the findings made on the
 2   record, the Debtor timely appealed.
 3                               JURISDICTION
 4        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 5   §§ 1334 and 157(b)(2)(J).   We have jurisdiction under 28 U.S.C.
 6   § 158.
 7                                  ISSUE
 8        Whether the bankruptcy court erred in denying the Debtor’s
 9   discharge following remand by the Panel for sufficient fact
10   finding.
11                           STANDARDS OF REVIEW
12        We review the denial of discharge as follows:
13   (1) determinations of the historical facts are reviewed for
14   clear error; (2) selection of the applicable legal rules under
15   § 727 are reviewed de novo; and (3) application of the facts to
16   those rules requiring the exercise of judgments about values
17   animating the rules are reviewed de novo.     Retz v. Samson
18   (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).     A factual
19   finding is clearly erroneous if it is illogical, implausible, or
20   without support in inferences that may be drawn from the facts
21   in the record.   Id.
22                                DISCUSSION
23        The Debtor argues that the bankruptcy court abused its
24   discretion by disregarding the law of the case as established by
25   Sethi I and by considering matters beyond the scope of the
26   remand.    She also argues that the bankruptcy court erred in its
27   application of the standards for denial of discharge.
28        Based on our review of the record, we agree that the

                                      4
 1   bankruptcy court considered matters beyond the scope of the
 2   remand in Sethi I and, thus, that it exceeded the Panel’s
 3   mandate.   This error was not harmless.
 4         Discharge denial under § 727(a)(2) is warranted where the
 5   debtor, with the “intent to hinder, delay, or defraud a creditor
 6   . . . transferred, removed, destroyed, mutilated, or concealed”
 7   either property of the debtor (within one year before the date
 8   of petition) or property of the estate (after case
 9   commencement).   Section 727(a)(5), in turn, provides for
10   discharge denial where “the debtor has failed to explain
11   satisfactorily, before determination of denial of discharge
12   under this paragraph, any loss of assets or deficiency of assets
13   to meet the debtor’s liabilities.”
14         In Sethi I, the Panel recognized that “[t]he plain language
15   of the statute support[ed] [the Debtor’s] legal proposition that
16   the assets disposed of must have been her assets, rather than
17   property of one of her corporations.”     2014 WL 2938276, at *6.
18   It found that the bankruptcy court had not made any alter ego
19   findings and, in fact, that Wells Fargo had raised the issue for
20   the first time on appeal.    The Panel, thus, concluded that
21   “Wells Fargo was entitled to prevail on its § 727(a)(2) claim
22   only if it proved that the property [the Debtor] concealed was
23   her own property and not property of one of her corporations.”
24   Id.   It explicitly remanded for findings on whether the
25   concealed equipment was owned by the Debtor personally or by one
26   of her two corporations.    In doing so, the Panel expressly
27   advised that “if the bankruptcy court on remand based on the
28   evidence presented [did] not find that [the Debtor] personally

                                      5
 1   owned some of the concealed equipment, then it should rule
 2   against Wells Fargo on its § 727(a)(2) claim.”    Id. at *9.
 3        On remand, the bankruptcy court effectively dismissed this
 4   instruction.    It rejected the applicability of alter ego theory
 5   based on its determination that the Debtor was the sole
 6   shareholder of the medical corporation and, thus, that the
 7   corporation’s assets were property of the Debtor’s individual
 8   bankruptcy estate.   This was error.
 9        As we explained in Sethi I, “California law recognizes the
10   separateness of corporate assets and liabilities.”    2014 WL
11   2938276, at *6 (citing Sonora Diamond Corp. v. Superior Court,
12   83 Cal. App. 4th 523, 538 (2000)).     And, moreover, “so have the
13   better-reasoned federal cases interpreting the scope of
14   § 727(a)(2).”   Id. (collecting cases).   The bankruptcy court’s
15   refusal to acknowledge the separateness of asset ownership
16   between the Debtor and her corporations is troublesome.    That
17   the Debtor personally guaranteed the loans to purchase the
18   equipment is irrelevant, as is the fact that the Debtor was the
19   sole shareholder of the medical corporation.    While that may
20   have meant that the corporate stock was estate property, the
21   reach of § 541(a) in an individual bankruptcy case did not
22   automatically extend to corporate assets.
23        The record further reveals that the bankruptcy court
24   improperly conflated the concept of property of the debtor under
25   § 727(a)(2)(A) with property of the estate under § 727(a)(2)(B).
26   To the extent that this error formed the basis of its analysis
27   as to the equipment, it was also error.    There is no dispute
28   that the equipment was transferred prior to commencement of the

                                      6
 1   first case.    Thus, as a matter of law, the equipment could not
 2   constitute property of the estate in the second case.     Such an
 3   interpretation would render § 727(a)(2)(A) superfluous.
 4        In sum, the bankruptcy court erred in determining that the
 5   equipment was property of the Debtor’s estate.   As a result, it
 6   erred in denying discharge under § 727(a)(2).    By extension, the
 7   bankruptcy court also erred in determining discharge denial
 8   under § 727(a)(5).   Given that the equipment was owned by one or
 9   both of the Debtor’s corporations and not the Debtor personally,
10   the equipment was not an asset of the Debtor within the scope of
11   § 727(a)(5).
12        The bankruptcy court did not fare better on remand as to
13   Wells Fargo’s § 727(a)(4)(A) claim.   That section provides for
14   discharge denial where “the debtor knowingly and fraudulently,
15   in or in connection with the case[,] made a false oath or
16   account.”   A false oath includes false statements in a
17   declaration signed by the debtor under penalty of perjury and
18   submitted to the bankruptcy court.    Abbey v. Retz (In re Retz),
19   438 B.R. 237, 301 (Bankr. D. Mont. 2007), aff’d, 2008 WL 8448824
20   (9th Cir. BAP 2008), aff’d, 606 F.3d 1189 (9th Cir. 2010).    “The
21   fundamental purpose of § 727(a)(4)(A) is to insure that the
22   trustee and creditors have accurate information without having
23   to conduct costly investigations.”    Khalil v. Developers Sur. &
24   Indem. Co. (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007)
25   (internal quotation marks and citation omitted), aff’d, 578 F.3d
26   1167 (9th Cir. 2009).
27        The objector to discharge must show, by a preponderance of
28   the evidence, that: “(1) the debtor made a false oath in

                                      7
 1   connection with the case; (2) the oath related to a material
 2   fact; (3) the oath was made knowingly; and (4) the oath was made
 3   fraudulently.”       In re Retz, 606 F.3d at 1196-97 (quoting Roberts
 4   v. Erhard (In re Roberts), 331 B.R. 876, 882 (9th Cir. BAP
 5   2005)).       Objections to discharge are liberally construed in
 6   favor of the debtor and against the objector.       In re Khalil,
 7 379 B.R. at 172.       For that reason, the objector bears the burden
 8   to prove by a preponderance of the evidence that the debtor’s
 9   discharge should be denied.       Id.
10          The Sethi I Panel’s remand for findings was limited2 to
11   just two areas: first, whether the bankruptcy court relied on
12   the Debtor’s statements in the first bankruptcy case; to the
13   extent it did so, the Panel advised that such reliance was
14   improper as a false oath in the second bankruptcy case.       Id. at
15   *10.       And, second, whether the Debtor made the statements in the
16   October 2010 declaration fraudulently.       Id.
17          The false oath.     Once again, despite the Panel’s
18   instructions, the bankruptcy court affirmed that it had relied
19   on both the Debtor’s statements at the § 341(a) meeting in the
20   first bankruptcy case and her October 2010 declaration filed in
21   the second case.       As the Panel previously pointed out, however,
22   the Debtor’s statements in the first bankruptcy case could not
23
24          2
             The Panel determined that the Debtor’s October 2010
25   declaration and subsequent admissions constituted a false oath.
     2014 WL 2938276, at *10. In doing so, it determined that the
26   record established that the Debtor made the false statements
27   knowingly and that they were material. Id. at *9. We deem
     these determinations law of the case and, thus, we do not review
28   the second and third elements on appeal.

                                         8
 1   serve as a false oath in the second bankruptcy case.   2014 WL
2   2938276, at *10.   Thus, the bankruptcy court’s reliance on this
 3   statement was erroneous.   As the Sethi I Panel determined,
 4   however, the bankruptcy court appropriately relied on the
 5   October 2010 declaration as a false oath.
 6        Fraudulent intent.    To demonstrate fraudulent intent, the
 7   objector bears the burden of showing that the debtor: (1) made
 8   the false oath; (2) at the time he knew it was false; and
 9   (3) with the intent and purpose of deceiving creditors.    In re
10   Retz, 606 F.3d at 1198-99 (internal quotation marks and citation
11   omitted).   Intent is typically shown by circumstantial evidence
12   or by inferences drawn from the debtor’s conduct.    Id. at 1199.
13   “Reckless indifference or disregard for the truth may be
14   circumstantial evidence of intent, but is not sufficient, alone,
15   to constitute fraudulent intent.”    Id. (internal quotation marks
16   and citation omitted).
17        On remand, the bankruptcy court repeatedly discussed the
18   state of mind necessary for discharge denial under § 727(a)(2)
19   in relation to the § 727(a)(4)(A) claim.    As stated, counsel for
20   Wells Fargo requested clarification on this point.   Nonetheless,
21   in response, the bankruptcy court continued to focus on
22   § 727(a)(2):
23        I’m referring specifically to the language of
          727(a)(2) which talks about hinder, delay, or defraud.
24        Well, hinder and delaying is basically the same in my
          view as defraud. In other words, hiding the assets;
25        that’s an attempt to defraud the creditor of the
          creditor’s rights, so I don’t think there needs to be
26        a distinction, but if that is what the BAP requires,
          then deception is certainly part of -- I think my
27        finding that she was lying is sufficient for the
          finding that she was defrauding. The whole purpose of
28        lying is to defraud, so anyway, I don't think I need

                                      9
 1        to go any further than that.
 2   Hr’g Tr. (Mar. 12, 2015) at 29:15-25.
 3        This was error.   Contrary to the bankruptcy court’s
 4   conclusions, an intent to hinder or delay a creditor for the
 5   purposes of § 727(a)(2) is not synonymous to or interchangeable
 6   with an intent to deceive a creditor within the meaning of
 7   § 727(a)(4)(A).
 8        We also note that the only false oath appropriately at
 9   issue was the Debtor’s October 2010 declaration.   That
10   declaration, however, was filed in connection with the Debtor’s
11   motion to convert from chapter 13 to chapter 11.   Although
12   intent to deceive a creditor is typically established by
13   circumstantial evidence, here, the context of the Debtor’s
14   statements makes it impossible to assume that the bankruptcy
15   court inferred deceptive intent sufficient for discharge denial
16   based on the Debtor’s statements in her declaration.    In other
17   words, it is a stretch to infer that the Debtor intended to
18   deceive creditors when she stated in the October 2010
19   declaration that she filed the second bankruptcy case pro se,
20   when this statement is considered in the context of her motion
21   to convert and in the context of her second bankruptcy case.    It
22   is far more plausible to assume, as her attorney argued, that
23   this statement was a result of blindly signing a document
24   containing an error created by counsel.3
25        Given that the bankruptcy court erred by relying on the
26
          3
27           To be clear, this type of conduct might be sanctionable
     but it does not support cleanly a determination of intent to
28   commit fraud sufficient for discharge denial.

                                     10
 1   Debtor’s statements in the first bankruptcy case to find a false
 2   oath in the second bankruptcy case and that it failed to make
 3   findings as to the requisite state of mind on remand directly in
 4   relation to § 727(a)(4)(A) and the Debtor’s statements in the
 5   October 2010 declaration, we conclude that it erred in denying
 6   the Debtor’s discharge under § 727(a)(4)(A).
 7                              CONCLUSION
 8        Based on the foregoing, we REVERSE.
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