Court Opinion

ID: 857779
Source: CourtListenerOpinion
Date Created: 2013-04-10 20:36:09.271184+00
Date Added: 2024-06-11T12:18:43.553519
License: Public Domain

FILED
                                                              APR 10 2013
 1
                                                          SUSAN M SPRAUL, CLERK
 2                                                          U.S. BKCY. APP. PANEL
                                                            OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )        BAP No.    CC-12-1344-TaPaKi
                                   )
 6   DAVID BRUCE KLUGE,            )        Bk. No.    10-29300-BB
                                   )
 7                  Debtor.        )        Adv. No.   10-03019-BB
     ______________________________)
 8                                 )
     DAVID BRUCE KLUGE,            )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )        MEMORANDUM*
11                                 )
     RHI/10223 SEPULVEDA, LLC;     )
12   ROSENDO GONZALEZ, Chapter 7   )
     Trustee; UNITED STATES        )
13   TRUSTEE,                      )
                    Appellees.     )
14                                 )
15                   Argued and Submitted on March 22, 2013
                             at Pasadena, California
16
                             Filed - April 10, 2013
17
                 Appeal from the United States Bankruptcy Court
18                   for the Central District of California
19            Honorable Sheri Bluebond, Bankruptcy Judge, Presiding
20
     Appearances:     Benjamin M. Hill of METAL Law Group, LLP on behalf
21                    of Appellant David Bruce Kluge and Alan F. Broidy
                      of Law Office of Alan F. Broidy, APC on behalf of
22                    Appellee RHI/10223 Sepulveda, LLC.
23
     Before:    TAYLOR, PAPPAS, and KIRSCHER, Bankruptcy Judges.
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 8013-1.

                                        1
 1                                INTRODUCTION
 2        Debtor and Appellant David Bruce Kluge (“Kluge”) appeals
 3   from the bankruptcy court’s order denying him a discharge under
 4   11 U.S.C. § 727(a)(4)(A).1    We AFFIRM.
 5                                   FACTS
 6        Kluge filed a voluntary chapter 7 bankruptcy petition on
 7   May 14, 2010.   He filed his original schedules and statement of
 8   financial affairs (“SOFA”) the next day.    On his Schedule B,
 9   Kluge listed ownership of 1,000 shares in Affirm Direct, Inc.
10   (“Affirm Direct”) with an “unknown” value.   On his Schedule I, he
11   disclosed that he was President of Affirm Direct.   He, however,
12   did not disclose any income from Affirm Direct in his schedules,
13   and he listed his income for all relevant pre-petition periods as
14   $0.01 per year and his current income as -0-.   Kluge did disclose
15   that his wife, who was not a joint debtor, was employed by
16   Meggitt-USA, Inc. and earned a monthly net salary of $6,542.39.
17        Shortly after the bankruptcy filing, creditor RHI/10223
18   Sepulveda, LLC (“RHI”)2 moved for and obtained an order from the
19   bankruptcy court allowing a Rule 2004 examination of Kluge (the
20   “Rule 2004 Examination”).    RHI conducted the Rule 2004
21   Examination on September 21, 2010.
22        On November 5, 2010, RHI initiated an adversary proceeding
23
          1
24          Unless otherwise indicated, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
25   “Rule” references are to the Federal Rules of Bankruptcy
     Procedure.
26
          2
27          Kluge previously entered into a commercial lease agreement
     with RHI’s predecessor-in-interest. The deal went sour, and RHI
28   sued Kluge and Kluge’s sub-lessee in state court.

                                       2
 1   against Kluge seeking to bar his discharge under § 727(a)(4).3
 2   In its complaint, RHI alleged that Kluge’s petition and schedules
 3   contained a number of inaccuracies and omissions, including an
 4   intentional failure to list creditors and assets.   In particular,
 5   RHI alleged that Kluge failed to account for income received from
 6   Affirm Direct or to properly account for the nature and value of
 7   his shares in the corporation.   It also alleged that Kluge caused
 8   Affirm Direct to transfer money into his wife’s personal bank
 9   account and that Kluge and his wife utilized these distributions
10   for personal and household expenses.
11        The bankruptcy court scheduled a trial for May 23, 2012.
12   Prior to trial, it entered a stipulated Joint Pre-Trial Order
13   (“PTO”).   The PTO established certain admitted facts, including
14   that Kluge listed his monthly income as $0 on his Schedule I and
15   that he listed his earnings as $0.01 for the years 2008, 2009,
16   and 2010 on his SOFA.   The PTO also established that Kluge and
17   his wife owned Affirm Direct and that each held a 50% ownership
18   interest in the corporation; that at his Rule 2004 Examination,
19   Kluge testified that the transfers to his wife were income; that
20   the transfers were for household expenses; and that the amount
21   transferred each month to his wife was approximately $2,000.     In
22   addition, the PTO identified the remaining facts and legal
23   issues4 to be litigated at trial.
24        The bankruptcy court held a one-day trial on May 23, 2012.
25
          3
            RHI also objected to Kluge’s discharge under §§ 727(a)(2),
26
     727(a)(3), and 727(a)(5).
27        4
            The PTO identified §§ 727(a)(4) and (a)(5) as the sole
28   issues of law that remained to be litigated.

                                      3
 1   It began the proceeding by narrowing the disputed factual and
 2   legal issues to be tried.5    The bankruptcy court then heard
 3   testimony, primarily from Kluge, but also from Kluge’s wife.
 4        As to his scheduled valuation of Affirm Direct, Kluge
 5   testified that he discussed the value of Affirm Direct with his
 6   bankruptcy counsel6 prior to filing bankruptcy and that, based on
 7   those discussions, he was under the impression that because the
 8   corporation was unprofitable, he was not required to assign it
 9   any value on the schedules.    As to money received from Affirm
10   Direct, he gave facially inconsistent testimony.    First, he
11   denied any receipt of pre-petition salary from Affirm Direct.
12   But, he acknowledged that the corporation transferred funds to
13   his wife’s account upon his request.    Kluge during his testimony
14   discussed these payments as a return on investment.    He explained
15   that he invested working capital into Affirm Direct when he
16   started the corporation and continued to do so over the years.
17   He testified that, according to his bookkeeper, between 2003 and
18   2009, he intermittently invested approximately $280,000 into
19   Affirm Direct.   Kluge stated that his bookkeeper advised him
20
21
          5
            The bankruptcy court determined that most of the disputed
22   factual issues identified by Kluge were irrelevant to the legal
     issues before it. It then narrowed the legal issues as arising
23
     only under § 727(a)(4)(A). In doing so, the bankruptcy court
24   concluded that it would not consider the § 727(a)(5) claim,
     because it did not apply under the circumstances. Ultimately,
25   the bankruptcy court entered judgment in favor of RHI on the
     § 727(a)(4)(A) claim, and judgment in favor of Kluge on all other
26
     claims.
27        6
            Kluge was represented by different counsel in the
28   adversary proceeding.

                                       4
 1   that, after deducting the $2,000 monthly transfers to his wife
 2   from the $280,000, his net unrecovered investment was
 3   approximately $53,000.
 4        Kluge, however, also characterized the distributions as loan
 5   repayments.   He testified that Affirm Direct booked these
 6   investments as a “loan from officer,” but acknowledged that he
 7   previously (and erroneously) characterized the transactions
 8   during the bankruptcy proceedings as a “loan to officer.”    Kluge
 9   further testified that he did not consider these transfers to be
10   income, because it was his own money and because the corporation
11   booked the transfers as a loan.   But Kluge subsequently testified
12   that he omitted the loans that Affirm Direct allegedly owed him
13   on his Schedule B, because he “didn’t think about it as a loan.”
14   Trial Tr. (May 23, 2012) at 87:16.
15        At the close of argument, the bankruptcy court announced an
16   oral ruling on the record.   It discussed three potential false
17   oaths that possibly gave rise to denial of discharge, but
18   concluded that RHI had not met its burden on two of the three
19   potential misstatements.   The bankruptcy court then focused on
20   the issue of the omitted monthly distributions from Affirm Direct
21   and found that Kluge’s testimony attempting to excuse his failure
22   to disclose these payments was not credible.   The bankruptcy
23   court based this conclusion on its determination that there were
24   numerous inconsistencies in Kluge’s testimony at his Rule 2004
25   Examination7 and in his testimony at trial and on its observation
26
          7
27          At trial, the bankruptcy court read a portion of Kluge’s
     testimony into the record that it identified as testimony from
28                                                      (continued...)

                                       5
 1   of Kluge’s demeanor during his testimony.
 2        The bankruptcy court noted that at his Rule 2004
 3   Examination, Kluge acknowledged that the omitted income was
 4   income to his wife, but not income to him.   In contrast, the
 5   bankruptcy court found that Kluge’s testimony at trial was vague
 6   and inconsistent.   The bankruptcy court, therefore, determined
 7   that the omitted monthly transfers were income, that Kluge should
 8   have disclosed this income on his Schedule I and SOFA, and that
 9   his failure to disclose this income was not justified.   The
10   bankruptcy court, thus, concluded that Kluge knowingly and
11   fraudulently made a false oath in his case and that this
12   warranted denial of discharge.
13        On June 19, 2012, the bankruptcy court entered a judgment
14   denying Kluge’s discharge under § 727(a)(4)(A).   Kluge timely
15   appealed.
16                               JURISDICTION
17        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
18   §§ 1334 and 157(b)(2)(J).   We have jurisdiction under 28 U.S.C.
19   § 158.
20                                    ISSUE
21        Did the bankruptcy court err when it denied Kluge a
22   discharge under § 727(a)(4)(A)?
23                           STANDARD OF REVIEW
24        In an action for denial of discharge, we review: (1) the
25
          7
           (...continued)
26   his § 341(a) meeting. It is likely, however, that the bankruptcy
27   court meant Kluge’s Rule 2004 Examination; the parties referred
     to the Rule 2004 Examination during the trial and parts of
28   Kluge’s Rule 2004 Examination were admitted into evidence.

                                        6
 1   bankruptcy court's determinations of the historical facts for
 2   clear error; (2) its selection of the applicable legal rules
 3   under § 727 de novo; and (3) its application of the facts to
 4   those rules requiring the exercise of judgments about values
 5   animating the rules de novo.   Searles v. Riley (In re Searles),
 6   317 B.R. 368, 373 (9th Cir. BAP 2004) (citation omitted), aff'd,
 7   212 Fed.Appx. 589 (9th Cir. 2006).
 8        Factual findings are clearly erroneous if illogical,
 9   implausible, or without support in the record.   Retz v. Samson
10   (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010) (citation
11   omitted).   We give great deference to the bankruptcy court’s
12   findings when they are based on its determinations as to the
13   credibility of witnesses.   Id. (noting that as the trier of fact,
14   the bankruptcy court has “the opportunity to note variations in
15   demeanor and tone of voice that bear so heavily on the listener's
16   understanding of and belief in what is said.") (citation and
17   quotation marks omitted).
18                               DISCUSSION
19        Section 727 provides that a court must grant the debtor a
20   discharge unless, among other things, the debtor knowingly and
21   fraudulently makes a false oath or account in the bankruptcy case
22   or in connection with the case.   11 U.S.C. § 727(a)(4)(A).   It is
23   well established that a fundamental purpose of § 727(a)(4)(A) is
24   to incentivize a debtor to provide the trustee and creditors with
25   accurate information so that they do not need to conduct costly
26   investigations.   Fogal Legware of Switz., Inc. v. Wills
27   (In re Wills), 243 B.R. 58, 62 (9th Cir. BAP 1999) (citation
28   omitted).   A claim for denial of discharge under § 727(a)(4)(A),

                                       7
 1   however, is liberally construed in favor of the debtor and
 2   against the objector to discharge.      Roberts v. Erhard (In re
 3   Roberts), 331 B.R. 876, 882 (9th Cir. BAP 2005) (citation
 4   omitted).   The objector bears the burden to prove by a
 5   preponderance of the evidence that the debtor's discharge should
 6   be denied under § 727(a)(4)(A).     Khalil v. Developers Sur. and
 7   Indem. Co. (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007),
 8   aff'd, 578 F.3d 1167 (9th Cir. 2009) (citation omitted).
 9        A.     The Bankruptcy Court Did Not Err When It Denied Kluge’s
10               Discharge Pursuant to § 727(a)(4)(A).
11        To obtain a denial of discharge under § 727(a)(4)(A), the
12   objector must show that: (1) the debtor made a false oath in
13   connection with the case; (2) the oath related to a material
14   fact; (3) the oath was made knowingly; and (4) the oath was made
15   fraudulently.     In re Retz, 606 F.3d at 1197 (citation omitted).
16               1.     False Oath
17        A false statement or omission in the debtor's schedules or
18   statement of financial affairs may constitute a false oath for
19   the purposes of § 727(a)(4)(A).     In re Khalil, 379 B.R. at 172;
20   In re Wills, 243 B.R. at 62.      Here, the bankruptcy court found
21   that Kluge omitted the monthly Affirm Direct distributions to his
22   wife from his Schedule I and SOFA.      Kluge does not dispute that
23   he omitted this information.     This is sufficient to establish a
24   false oath.      See In re Searles, 317 B.R. at 377 (“A false oath is
25   complete when made.”).     Thus, the bankruptcy court did not err in
26   finding that Kluge made a false oath when he executed and filed
27   his Schedule I and SOFA.
28

                                         8
 1              2.     Materiality
 2        Kluge focuses the majority of his argument on appeal on the
 3   alleged immateriality of his omission of the Affirm Direct
 4   income.   He argues that the bankruptcy court erred when it
 5   determined that the income was material without first making
 6   other findings.    Kluge contends that, pursuant to In re Wills,
 7   the bankruptcy court was required first to determine whether the
 8   income was property of the estate or whether his omission of the
 9   income detrimentally affected the administration of the estate.
10        At oral argument, Kluge asserted that the record was unclear
11   on what standard the bankruptcy court applied in determining
12   materiality.    To the extent the bankruptcy court applied the
13   materiality test set forth in In re Khalil, Kluge argued that it
14   was erroneous to do so because In re Khalil involved assets of
15   the estate and, thus, did not apply because the omitted income
16   was not an asset of the estate.
17        In response, RHI argues that Kluge’s failure to disclose the
18   income affected administration of the estate, and counters that
19   the bankruptcy court was not required to first determine whether
20   it was property of the estate.    It maintains that income is never
21   property of the estate, and, thus, that Kluge’s reliance on
22   In re Wills, which involved assets of the estate rather than
23   income, is misplaced.
24        Kluge, and to some extent RHI, misinterpret the standard for
25   materiality.    Whether a fact is material is broadly defined:
26   “[a] fact is material if it bears a relationship to the debtor's
27   business transactions or estate, or concerns the discovery of
28   assets, business dealings, or the existence and disposition of

                                       9
 1   the debtor's property.”   In re Khalil, 379 B.R. at 173 (citation
 2   omitted).   While the standard for materiality does not expressly
 3   refer to “income,” it is sufficiently broad such that it may
 4   encompass income based on the particular circumstances in a case.
 5   See id. at 177 (observing that non-disclosure of information such
 6   as creditors and debts is also important because “[i]nformation
 7   regarding business and personal dealings can lead to discovery of
 8   assets, potentially avoidable transfers, or other relevant
 9   information such as grounds to deny a debtor's discharge.”).
10        Here, although the bankruptcy court did not explicitly state
11   the standard for materiality, the record supports the bankruptcy
12   court’s determination that Kluge’s omission was material.     First,
13   the record shows that the monthly transfers constituted income
14   from Kluge’s corporation and that Kluge previously acknowledged
15   that it was income.   Second, the income clearly bore a connection
16   to Kluge’s business dealings and the existence of property,
17   including the alleged loans and investments made to Affirm
18   Direct.   Had Kluge properly disclosed the alleged loans or
19   income, it would have allowed for a prompt investigation as to
20   potential assets.   The fact that Affirm Direct may have owed
21   Kluge thousands of dollars or had the ability to transfer
22   thousands of dollars is significant.   And the monthly payments to
23   his wife were significant in amount.   Kluge, in fact,
24   acknowledged at oral argument that the amount of the monthly
25   transfers were not a de minimis amount in proportion to his
26   wife’s monthly income from her employment.
27        Moreover, the bankruptcy court’s determination of
28   materiality was linked to its conclusion that Kluge was not

                                     10
 1   candid about the nature of the monthly transfers.   It considered
 2   the evidence presented and found that Kluge’s testimony was not
 3   credible, based on his demeanor at trial and several
 4   inconsistencies in his testimony within the trial itself and at
 5   his Rule 2004 Examination.   The bankruptcy court determined that
 6   Kluge knew that the transfers were income from his corporation,
 7   which he should have scheduled but instead omitted.    The
 8   bankruptcy court’s determinations are supported by the record,
 9   and we emphasize that we give great deference to the bankruptcy
10   court’s determination as to Kluge’s credibility as a witness.
11   See In re Retz, 606 F.3d at 1203.
12        In doing so, we reject Kluge’s assertion that the bankruptcy
13   court was required to explicitly make certain findings in its
14   path to decision.   In In re Wills, we held that a misstatement or
15   omission as to an asset with little value or that was not
16   property of the estate could be material if it detrimentally
17   affected the administration of the estate.   See 243 B.R. at 64.
18   This language, however, does not create a bright line standard
19   for determining materiality in a § 727(a)(4)(A) context.     Nor is
20   there other case law establishing that a bankruptcy court must
21   always consider and make these particular findings in a
22   § 727(a)(4)(A) context.
23        In re Wills also provides that: “[a] false statement or
24   omission that has no impact on a bankruptcy case is not grounds
25   for denial of a discharge under § 727(a)(4)(A).”    243 B.R. at 63.
26   But, this statement stands only for the general proposition that
27   any material misstatement or omission will necessarily impact the
28   estate.   This truism does not establish some kind of sub-element

                                     11
 1   that the bankruptcy court must expressly find in rendering a
 2   determination of materially in a § 727(a)(4) context.      This is
 3   particularly evident in the face of subsequent case law, which
 4   does not discuss “impact” as a standalone sub-element.      See
 5   In re Retz, 606 F.3d 1189 (no express discussion as to “impact”
 6   on the estate); In re Khalil, 379       B.R. at 172 (states general
 7   proposition, but no express discussion as to “impact” on the
 8   estate.)   Thus, the bankruptcy court was not required to
 9   expressly make the findings that Kluge emphatically argues should
10   have been made.
11        On this record, and based on the broad definition of
12   materiality, the bankruptcy court correctly concluded that
13   Kluge’s omission of the income related to a material fact.
14               3.    Knowingly Made
15        A debtor “acts knowingly if he or she acts deliberately and
16   consciously.”    In re Retz, 606 F.3d at 1198 (citation and
17   quotation marks omitted).
18        Here, the bankruptcy court found that Kluge knowingly
19   omitted the income.    It found that Kluge’s testimony at trial was
20   inconsistent with his testimony at the Rule 2004 Examination with
21   respect to whether Kluge knew that the monthly transfers were
22   income.    Based on its assessment of Kluge’s credibility during
23   his testimony at trial, the bankruptcy court stated that it did
24   not believe Kluge’s protestations of innocence or mistaken
25   belief.    It determined that Kluge was aware that the transfers
26   were income and, consequently, that he consciously omitted the
27   income from his Schedule I and SOFA.      On this record, the
28   bankruptcy court did not err in finding that Kluge knowingly made

                                        12
 1   a false oath in his case.
 2                4.   Fraudulent Intent
 3        A debtor acts with fraudulent intent when:       (1) the debtor
 4   makes a misrepresentation; (2) that at the time he or she knew
 5   was false; and (3) with the intention and purpose of deceiving
 6   creditors.    In re Retz, 606 F.3d at 1198-99 (citation omitted).
 7   Fraudulent intent is typically proven by circumstantial evidence
 8   or by inferences drawn from the debtor’s conduct.      Id. at 1199
 9   (citation omitted).    Circumstantial evidence may include showing
10   a reckless indifference or disregard for the truth.      Id.
11   (citation omitted); In re Wills, 243 B.R. at 64 (intent may be
12   established by a pattern of falsity, debtor's reckless
13   indifference, or disregard of the truth).
14        Here, the bankruptcy court found that Kluge acted with
15   fraudulent intent when he omitted the income on his Schedule I
16   and SOFA.    Citing to In re Khalil, the bankruptcy court stated
17   that circumstantial evidence of fraudulent intent existed.       As
18   previously discussed, it observed a number of inconsistencies in
19   Kluge’s testimony and found that his testimony at trial lacked
20   credibility.
21        To the extent Kluge contends that he followed the advice of
22   his bankruptcy counsel when he initially filed his schedules, he
23   presented no credible evidence that his reliance was reasonable
24   or that he relied in good faith.       Lack of intent may be proven by
25   a debtor’s reliance on his attorney’s advice.      In re Retz,
26   606 F.3d at 1199 (citation omitted).      The debtor’s reliance,
27   however, must be made in good faith, and such reliance is not a
28   defense when the error should have been obvious to the debtor.

                                       13
 1   Id. (citation omitted).
 2        At the trial, Kluge testified that he discussed the alleged
 3   loans and money transfers with his bankruptcy counsel at the time
 4   of filing.   He testified that he discussed with counsel the type
 5   of investment loans he had made to Affirm Direct and that counsel
 6   expressly acknowledged a “loan to officer” type of loan.   Kluge
 7   also testified that he disclosed the income to counsel.    Yet, he
 8   subsequently testified that while he explained to counsel that
 9   the money transfers were repayments on his investments, he did
10   not use accounting loan terms or disclose that it would go to
11   household expenses.
12        The record is devoid of any testimony from Kluge’s
13   bankruptcy counsel.   Moreover, Kluge’s testimony as to what he
14   disclosed to his bankruptcy counsel is inconsistent, even within
15   the trial itself.   Kluge has not shown either that he relied on
16   his counsel’s advice when he failed to disclose the income or
17   that his reliance on counsel’s advice, if any, was reasonable or
18   made in good faith.   See In re Retz, 606 F.3d at 1199 (“[A]
19   debtor cannot, merely by playing ostrich and burying his head
20   deeply enough in the sand, disclaim all responsibility for
21   statements which he has made under oath.").
22        On this record, there are sufficient patterns of falsities
23   or reckless indifference on Kluge’s part to support the
24   bankruptcy court’s determination that advice of counsel was not a
25   defense.   And, again, we give abundant deference to the
26   bankruptcy court’s findings based on its assessment of Kluge’s
27   credibility at trial.   Id. at 1196.   Thus, the bankruptcy court
28   did not err in finding that Kluge fraudulently made a false oath

                                     14
 1   in his case.
 2        In sum, the bankruptcy court did not err in finding that
 3   Kluge made a false omission on his Schedule I and SOFA, that his
 4   false omission related to material facts, and that he omitted the
 5   information knowingly and fraudulently.   Therefore, the
 6   bankruptcy court did not err in denying Kluge’s discharge under
 7   § 727(a)(4)(A).
 8                              CONCLUSION
 9        Based on the foregoing, we AFFIRM.
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