Court Opinion

ID: 4029368
Source: CourtListenerOpinion
Date Created: 2016-08-29 17:01:08.742476+00
Date Added: 2024-06-11T13:53:28.438308
License: Public Domain

FILED
                                                                      United States Court of Appeals
                                                                              Tenth Circuit
                       UNITED STATES COURT OF APPEALS
                                                                             August 29, 2016
                             FOR THE TENTH CIRCUIT
                                                                          Elisabeth A. Shumaker
                         _________________________________                    Clerk of Court
In re: MICHAEL FREDERICK ANTHONY,

       Debtor.

--------------------

J&R INVESTMENT,                                                No. 15-4161
                                                      (D.C. No. 2:14-CV-00647-RJS)
       Appellant,                                                (D. Utah)

v.

MICHAEL FREDERICK ANTHONY,

       Appellee.
                         _________________________________

                             ORDER AND JUDGMENT*
                         _________________________________

Before HARTZ, MURPHY, and PHILLIPS, Circuit Judges.
                 _________________________________

        Debtor Michael Anthony filed for Chapter 7 bankruptcy protection, see 11 U.S.C.

§701, et seq., in the bankruptcy court for the District of Utah, and the court granted a

general discharge of his debts. One of his creditors, J&R Investment (J&R), then filed an

*
 After examining the briefs and appellate record, this panel has determined unanimously
that oral argument would not materially assist in the determination of this appeal. See
Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore ordered submitted
without oral argument. This order and judgment is not binding precedent, except under
the doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R.
32.1.
objection to discharge and sought revocation of his discharge under 11 U.S.C. §

727(d)(1) and (2). Those sections permit a bankruptcy court to revoke a Chapter 7

discharge if the “discharge was obtained through the fraud of the debtor,” id. § 727(d)(1),

or if the debtor fraudulently failed to report acquisition of property, id. § 727(d)(2). The

bankruptcy court denied both grounds for revocation. Regarding § 727(d)(1), the court

found that “any true errors in [Debtor's] bankruptcy papers were the result of his genuine

ignorance, ineptitude, and confusion rather than any knowing fraud or even

recklessness.” Order at 12–13, Aplt. App. Vol. 2 at 534. As for § 727(d)(2), the court

found that J&R had failed to show Debtor had any property of the estate he failed to

report. Because the bankruptcy court did not clearly err in these findings, we affirm.

       I. BACKGROUND

       Debtor began leasing commercial storage space for his business, Freedom

Storage, from J&R when J&R was run by John and Rita Billinis. Following the deaths of

John and Rita in 2005, J&R was run by their three children (Katherine, Alex, and

Barbara), while a contested probate proceeding began in state court. J&R then sued

Debtor in July 2006 for unpaid rent and sought his eviction. Debtor and Katherine

Billinis married soon thereafter, in January 2007. In May 2007 the three children reached

a settlement in the probate proceedings. Under the settlement Katherine gave up her

interest in J&R and received ownership of several of J&R’s other properties, with which

she founded two companies (E.Z Storage, LLC and One Unit Investments, LLC) and

hired Debtor to be the property manager of both. Even though the couple divorced in

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2008, Debtor continued to serve as the property manager for One Unit Investments until

May 2012 and for E.Z. Storage through at least August 2014.

       J&R retained its interest in the suit against Debtor. In December 2007, J&R

obtained partial summary judgment for $169,743.24 against Debtor but failed to obtain

certification of the judgment until August 2010. After J&R obtained garnishment writs

for Debtor’s wages on both E.Z. Storage and One Unit Investments, Debtor filed a pro se

bankruptcy petition on August 31, 2011. The court granted Debtor a general discharge

on December 6, 2011. On December 4, 2012—two days before the deadline for seeking

revocation of a discharge, see id. § 727(e)—J&R filed its complaint seeking revocation of

Debtor’s discharge. Relying on inconsistencies between his tax returns and his pro se

Chapter 7 petition, it alleged that Debtor had obtained his discharge through fraud, see §

727(d)(1), and had failed to disclose or turn over property in his possession that should

have become property of the estate, see § 727(d)(2). The parties stipulated in the pretrial

order to a number of inaccuracies and inconsistencies in the bankruptcy filing. The

bankruptcy court also heard testimony from Debtor, Katherine, and others.

       The bankruptcy court issued its ruling on August 20, 2014. With regard to §

721(d)(1), the court said:

       In sum, the Court finds that any true errors in [Debtor’s] bankruptcy papers were
       the result of his genuine ignorance, ineptitude, and confusion rather than any
       knowing fraud or even recklessness. So whether viewed as J&R failing to make a
       prima facie case on any particular allegation or [Debtor’s] successful rebuttal of a
       properly made prima facie case, J&R has not met its burden to demonstrate the
       requisite fraud by a preponderance of the evidence.

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Order at 12–13, Aplt. App. Vol. 2 at 534–35. And as to § 727(d)(2), the court held (1)

that this section applies only to property acquired by the debtor after the petition is filed;

and (2) that even if it applies to both pre- and post-petition acquisitions, J&R had failed

to prove any such property was not reported. J&R appealed and the district court

affirmed. We have jurisdiction over J&R’s appeal under 28 U.S.C. § 158(d)(1) (granting

courts of appeals jurisdiction over appeals of final decisions of district courts or

bankruptcy appellate panels in bankruptcy cases).

       II. DISCUSSION

       “In an appeal from a final decision of a bankruptcy court, we independently

review the bankruptcy court's decision, applying the same standard [that] the bankruptcy

appellate panel or district court” should have applied. In re Millennium Multiple

Employer Welfare Ben. Plan, 772 F.3d 634, 638 (10th Cir. 2014) (alterations and internal

quotation marks omitted). We review the bankruptcy court’s legal conclusions de novo

and its factual findings for clear error. See id. at 639. We are especially wary of finding

clear error when the bankruptcy court’s factual findings are based on the credibility of

witness testimony. See In re Young, 237 F.3d 1168, 1176 (10th Cir. 2001) (“ [A]

credibility determination . . . is properly the province of the trier of fact—in this case the

bankruptcy court—, and we may not disturb that trier of fact’s credibility determinations

on appeal.”).

                A. Fraud of the Debtor - § 721(d)(1)

       Chapter 7 provides that “on request of . . . a creditor . . . the court shall revoke a

discharge granted under subsection (a) of this section if . . . such discharge was obtained

                                               4
through the fraud of the debtor, and the requesting party did not know of such fraud until

after the granting of such discharge.” 11 U.S.C. § 727(d)(1). The lower courts and the

parties have assumed that fraud includes making a false oath (in documents or testimony)

in the bankruptcy proceeding, so we accept that proposition for purposes of this appeal.

See Grynberg v. Total S.A., 538 F.3d 1336, 1346 (10th Cir. 2008).

       J&R essentially raises three arguments for reversal on this claim: (1) that the

bankruptcy court erred in holding that it had not met its prima facie burden because the

stipulated facts made out a prima facie case and the bankruptcy court was not permitted

to disregard those facts; (2) that the bankruptcy district court improperly placed the

burden of persuasion on J&R to prove knowing and fraudulent intent, because once it met

its prima facie burden, Debtor had the burden to prove that the falsifications were not

knowing and voluntary; and (3) that the bankruptcy district court clearly erred in finding

that Debtor’s errors were simply mistakes rather than knowing, fraudulent, or reckless

omissions. We address these arguments in turn.

                     1. Prima Facie Case

       “A plaintiff establishes a prima facie case by demonstrating that there are items

which the debtor failed to disclose in his schedules or that the debtor falsely stated

information in his schedules.” In re Matus, 303 B.R. 660, 677 (Bankr. N.D. Ga. 2004).

We agree with J&R’s first argument. The stipulated facts make out a prima facie case.

Debtor’s tax returns and his bankruptcy filings are inconsistent on several material

matters, including (1) Debtor failed to list income from Freedom Storage during 2009 and

2010, but his tax returns show he received “self-employment” income from that business

                                              5
for those years; and (2) his income from E.Z. Storage and One Unit Investments reported

in bankruptcy court is much lower than the amount listed as management fees in those

business’s tax returns. Also, Debtor admitted receiving two $2000 checks from One Unit

Investments and E.Z. Storage shortly before filing his bankruptcy petition but failed to

list them on his Payment Advices Certification. His statement that he did not receive any

evidence of payment during his previous 60 days was therefore false. These

inconsistencies and falsities are sufficient to show a prima facie case for false oath.

       We reject, however, J&R’s argument that the bankruptcy court erred in not finding

that Debtor had failed to disclose that he was a profit-sharing partner in E.Z. Storage.

After hearing testimony from Debtor and Katherine (the owner of E.Z. Storage), the

bankruptcy court found that no such partnership existed, but instead that Katherine paid

Debtor as “either a salaried employee or an independent contractor, essentially as [she]

saw fit based on the net profits for the month.” Order at 9; Aplt. App. Vol. 2 at 531. We

cannot say the court clearly erred. Both testified that Debtor would not be paid if there

was no money left over at the end of the month, but such an arrangement is consistent

with the bankruptcy court’s interpretation. A salaried employee or independent

contractor may have to defer receiving compensation because of cash-flow constraints of

the business. J&R did not present a prima facie case based on Debtor’s failure to disclose

a partnership.

                     2. Burden of Persuasion

       Under § 727(a)(4)(A), “[a] debtor will not be denied discharge if a false statement

is due to mere mistake or inadvertence. . . . Moreover, an honest error or mere inaccuracy

                                              6
is not a proper basis for denial of discharge.” In re Brown, 108 F.3d 1290, 1294–95 (10th

Cir. 1997). J&R suggests that Debtor had the burden of persuasion on this point, and that

the bankruptcy court erred in putting the burden on it. We disagree. Although a

creditor’s presentation of a prima facie case of false oath shifts the burden of production

to the debtor to provide evidence that his or her false oath was not knowing or

intentional, the ultimate burden of persuasion remains with the party seeking revocation.

See Fed. R. Bankr. P. 4005 (“At the trial on a complaint objecting to a discharge, the

plaintiff has the burden of proving the objection.”); see id. Advisory Note (“This rule

does not address the burden of going forward with the evidence. Subject to the allocation

by the rule of the initial burden of producing evidence and the ultimate burden of

persuasion, the rule leaves to the courts the formulation of rules governing the shift of the

burden of going forward with the evidence in the light of considerations such as the

difficulty of proving the nonexistence of a fact and of establishing a fact as to which the

evidence is likely to be more accessible to the debtor than to the objector.”); In re

Duncan, 562 F.3d 688, 695–96 & n.1 (5th Cir. 2009) (“Under bankruptcy law, a creditor

objecting to the debtor's discharge bears the initial burden of production to present

evidence that the debtor made false statements. . . . If the plaintiff establishes a prima

facie case, then the burden shifts to the debtor to present evidence that he is innocent of

the charged offense . . . . The objecting creditor also bears the ultimate burden of

persuasion.”); Farouki v. Emirates Bank Int’l, Ltd., 14 F.3d 244, 249 (4th Cir. 1994)

(“Although the burden may shift to the debtor to provide satisfactory, explanatory

                                              7
evidence once the creditor has established a prima facie case, the ultimate burden rests

with the creditor.”).

                        3. Court’s Findings

       J&R next contends that the evidence compelled a finding that Debtor’s

inaccuracies were a result of reckless indifference to the truth. He argues that the “mere

quantity of [Debtor's] inaccuracies and misstatements are conclusive of [his] reckless[]”

indifference to the truth, Aplt. Br. at 21, and that reckless indifference to the truth is the

“functional equivalent of fraud for purposes of § 727(a)(4)(A),” id. at 8 (quoting In re

Butler, 377 B.R. 895, 922 (Bankr. D. Utah 2006)). We agree with J&R that “fraudulent

intent . . . may be inferred from circumstantial evidence considered in its totality.” Aplt.

Br. at 21. And J&R makes a strong argument that the facts here could lead to an

inference of reckless indifference rather than mere negligence in filling out the

bankruptcy forms. But the bankruptcy court was not required to draw that inference

from the evidence here. It was free to reject such an inference if the evidence could

reasonably be viewed otherwise. And we think it could be so viewed.

       First, with regard to inconsistencies between tax returns and bankruptcy filings,

the bankruptcy court thoroughly considered the evidence—including the testimony of

Katherine, Debtor, and one of their accountants—and decided that these inconsistencies

were a result of ignorance and mistake. The court accepted Debtor’s and Katherine’s

testimony that it was their general practice to “provid[e] information to their accountants

and then basically wash[] their hands of their tax returns.” Order at 10; Aplt. App. Vol. 2

at 532. The court observed that “without his accountant to interpret his own 2009–12 tax

                                               8
return transcripts, [Debtor] was at an earnest and utter loss to explain both their form and

content.” Id. The court said it was “wary of self-serving denials and feigned ignorance

as a means of negating a finding of intent.” Id. But it ultimately credited the testimony,

saying “the Court is wholly convinced that neither [Debtor], Katherine, nor [Katherine's

accountant] are feigning anything with regard to their tax returns, tax return transcripts,

and related documents.” Id. at 11. It noted that “[Debtor] was agitated at times on the

stand, but the Court found his demeanor and testimony to be credible. The Court also

found his lack of sophistication and confusion over tax, business, and overall financial

issues to be sincere.” Id. at 6 n.19. Such credibility determinations are for the fact-

finder. The court’s finding that inconsistencies between Debtor’s bankruptcy and tax

filings were a result of inadvertence and incompetence rather than fraud was not clearly

erroneous.

       J&R argues that in addition to false oaths in the bankruptcy filing, Debtor’s failure

to report income on his tax returns was intentional and showed his fraudulent intent in the

bankruptcy as well. But the bankruptcy court credited Debtor’s description of his

practice of giving his information to a tax professional and then “washing [his] hands” of

it. Order at 10; Aplt. App. Vol. 2 at 532. This was not clearly erroneous.

       Two particular matters deserve further attention. One is an omission from the

bankruptcy filings that appeared in the tax returns: Debtor’s failure to report income from

Freedom Storage. Again, however, the court’s findings on this issue were not clearly

erroneous. It first found that Debtor genuinely believed he did not need to report the

Freedom Storage prior business income because it was no longer in operation at the time

                                              9
of filing. The court noted that Debtor did list Freedom Storage in the bankruptcy filing as

a defunct dba. This of course left the question whether Freedom Storage actually was

defunct at the time of filing. But on this point, the court said:

       J&R offered no evidence to contradict [Debtor’s] assertion that Freedom Storage
       genuinely ceased operations in 2011 before he filed for bankruptcy. And only
       once, in closing arguments, did J&R address the 2012 [tax return] transcript,
       claiming that it was evidence of Freedom Storage’s undisclosed ongoing
       operations both pre- and postpetition. But the 2012 transcript says nothing of the
       sort, and the evidence on this record just as easily or better supports the finding
       that [Debtor] started some kind of business for additional income after Katherine
       terminated him as One Unit Investments’ property manager around May 2012.

Order at 9; Aplt. App. Vol. 2 at 531. We cannot say this finding is clearly erroneous.

The 2012 tax return does not list “Freedom Storage” as the source of Debtor’s self-

employment income. The court could reasonably credit Debtor’s testimony over J&R’s

inconclusive evidence.

       The other matter is Debtor’s failure to list as payment advices a $2000 check from

E.Z. Storage dated July 8, 2011, and a second $2000 check from One Unit Investments

dated August 16, 2011. But here the court found that Debtor genuinely did not know that

the first check was a “payment advice.” It explained:

       [Debtor] credibly explained his misunderstanding and confusion based on footnote
       1 of the Payment Advices Certification, which provides that a “‘Payment Advice'
       includes, but is not limited to, pay stubs attached to your paycheck, employer's
       statement of hours and earnings, deposit notifications, etc.” Since he received
       only paper checks under Katherine’s informal payment regime, it did not occur to
       him that they would qualify as payment advices.

Order at 11; Aplt. App. Vol. 2 at 533. And for the second check, the court found that

both Katherine and Debtor credibly testified that it was a wedding gift from Katherine for

his daughter. “Since the Money was really from Katherine, [Debtor] did not think to list

                                              10
it [on the schedules as a gift].” Id. These findings, based largely on credibility

determinations, were not clearly erroneous.

       Seeing no clear error in the court’s findings we affirm the ruling that J&R was not

entitled to revocation under § 727(d)(1).

              B. Concealing Property of the Estate - § 721(d)(2)

       Section 727(d)(2) provides that the court “shall revoke a discharge granted under

subsection (a) of this section if . . . 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 to report the acquisition of or entitlement to such

property, or to deliver or surrender such property to the trustee.” J&R argues that two

items that Debtor failed to disclose or deliver were property of the estate: his interest in

and income from his business, Freedom Storage, and the two $2000 checks from his

employers. The bankruptcy court rejected the argument, holding that the section applies

only to postpetition acquisitions by the debtor. But we need not opine on that issue

because alternatively the court said:

       [E]ven if § 727(d)(2) did apply to both pre- and postpetition property that a debtor
       failed to report or turn over, and for the reasons already discussed above, J&R has
       not shown that [Debtor] had any relevant property in the form of business income,
       bank account funds, or otherwise. J&R also spent an inordinate amount of time
       trying to demonstrate that [Debtor] had a modest amount of outstanding wages due
       as of the petition date, but the evidence does not support that assertion either.
       Accordingly, [Debtor’s] discharge will not be revoked under§ 727(d)(2).

Order at 13; Aplt. App. Vol. 2 at 535. This alternative ground is not clearly erroneous.

We discussed above that the bankruptcy court did not commit clear error in its factual

finding that Freedom Storage had genuinely ceased operations in 2011 before the petition

                                              11
was filed. And J&R failed to present evidence before the bankruptcy court that any

portion of the two $2000 checks within Debtor’s possession was not included in the filing

or turned over. As the bankruptcy court said: “J&R also assumed but presented no

evidence in the form of testimony, bank statements, or otherwise that [Debtor] had any of

those funds in his possession or control as of the petition date, and there is no basis for a

finding that [Debtor] understated the amount of cash that he had on hand in Schedule B.”

Order at 11; Aplt. App. Vol. 2 at 533.

       III. CONCLUSION

       We AFFIRM the bankruptcy court’s decision.

                                               Entered for the Court

                                               Harris L Hartz
                                               Circuit Judge

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