U.S. Trustee v. Potter

1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	JEFFERY WATSON POTTER, 	No. 7-05-14071 MS
Debtor.
____________________________________________________________________________
UNITED STATES TRUSTEE,
Plaintiff,
v. 	Adversary No. 07-1084 M
JEFFERY WATSON POTTER,
Defendant
And
YVETTE J. GONZALES, Chapter 7 Trustee,
Plaintiff,
v. 	Consolidated into
Adversary No. 07-1083 M
JEFFERY WATSON POTTER,
Defendant.
MEMORANDUM OPINION
Before the Court are two motions for summary judgment: 1) Plaintiff United States
Trustee’s Motion for Summary Judgment (“UST’s Motion”); and 2) Plaintiff’s Motion for
Summary Judgment in Adversary Proceeding No. 07-1084 (“Chapter 7 Trustee’s Motion”) and
Memorandum in Support of Plaintiff’s Motion for Summary Judgment in Adversary Proceeding
No. 07-1084. 	See Docket No. 72, Docket No. 73, and Docket No. 74. Defendant Jeffery
Watson Potter did not file an objection to either motion, but appeared pro se at the final hearing
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1The United States Trustee filed her Complaint Objecting to the Debtor’s Discharge
under 11 U.S.C. § 727 on June 11, 2007 as Adversary Proceeding No. 07-1083M. On the same
date, the Chapter 7 Trustee filed her Complaint Objecting to Discharge under 11 U.S.C. Section
727 as Adversary Proceeding No. 07-1084M. Because both complaints seek to deny Mr. Potter’s
discharge under 11 U.S.C. § 727(a) and share common questions of fact and law, the Court
consolidated Adversary Proceeding No. 07-1084 M with Adversary Proceeding No. 07-1083M
for all purposes. See Order Granting Jeffery Potter’s Motions for Consolidation with Adversary
Proceeding No. 07-1084 M and Denying Stay of Proceedings - Docket No. 41.
2The Chapter 7 Trustee also seeks summary judgment on the following claims: 1) a claim
for denial of discharge under 11 U.S.C. § 727(a)(3) and/or (a)(4) based on Mr. Potter’s post-
petition receipt of $6,800 representing a refund of California property taxes and his failure to
provide the Chapter 7 Trustee with an accounting of the refund; 2) a claim for denial of
discharge under 11 U.S.C. § 727(a)(3) based on Mr. Potter’s failure to provide the Chapter 7
Trustee with a copy of the mold inspection report for the property located at 53 La Vista, Santa
Fe, New Mexico and his failure to provide the Chapter 7 Trustee with copies of medical records
relating to his alleged injuries from mold poisoning; and 3) a claim for denial of discharge under
11 U.S.C. § 727(a)(2)(A) and (B), (a)(4)(C) and (a)(7) based on Mr. Potter’s actions in
connection with Adversary Proceeding No. 05-1151. The United States Trustee’s Motion also
2
at which he offered certain exhibits in defense of the motions. 	At the conclusion of the final
hearing on the UST’s Motion and the Chapter 7 Trustee’s Motion, held March 16, 2009, the
Court directed Plaintiff United States Trustee and Plaintiff Yvette J. Gonzales, Chapter 7
Trustee, to file any objection to Mr. Potter’s proposed exhibits no later than March 23, 2009, and
took the matters under advisement.
The United States Trustee and Yvette J. Gonzales, Chapter 7 Trustee each seek to deny
Mr. Potter’s discharge under 11 U.S.C. § 727(a), though each relies in part upon different factual
allegations to support their claims.1 Both The United States Trustee and the Chapter 7 Trustee
assert that Mr. Potter’s pre-petition sale of his partnership interest in Monte Mac No. 2, a
California limited partnership (“Monte Mac”) that was not disclosed in his bankruptcy
statements and schedules supports a claim to deny Mr. Potter’s discharge under 11 U.S.C. §
727(a)(2)(A) and/or 11 U.S.C. § 727(a)(4).2
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asserts that Mr. Potter’s failure to keep and preserve books and records from which his financial
condition may be ascertained supports a denial of discharge under 11 U.S.C. § 727(a)(3).
3See In re Beaubouff, 966 F.2d 174, 177 (5th Cir. 1992)(“If any one of these grounds
justifies the denial of discharge, we need not decide the propriety of the others.”)(citation
omitted).
3
Upon review of the UST’s Motion, the Chapter 7 Trustee’s Motion, and the supporting
documentation, the Court finds that there are sufficient undisputed facts to support the denial of
Mr. Potter’s discharge as a matter of law under 11 U.S.C. § 727(a)(4) based upon his undisclosed
pre-petition sale of his partnership interest in Monte Mac. 	Those same facts do not, however,
support summary judgment under 11 U.S.C. § 727(a)(2). 	Because there is sufficient undisputed
evidence concerning the pre-petition sale of Mr. Potter’s interest in Monte Mac from which to
conclude that Mr. Potter’s discharge should be denied, the Court need not reach the parties’
additional arguments in support of summary judgment as to the remaining claims of either the
United States Trustee or the Chapter 7 Trustee to deny Mr. Potter’s discharge under 11 U.S.C. §
727(a)(2), (a)(3), (a)(4), (a)(5), and/or (a)(7). 3
SUMMARY JUDGMENT STANDARDS
It is appropriate for the Court to grant summary judgment if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law. Rule 56, Fed.R.Civ.P., made applicable to bankruptcy proceedings
by Rule 7056, Fed.R.Bankr.P. 	“[A] party seeking summary judgment always bears the initial
responsibility of informing the . . . court of the basis for its motion, and . . . [must] demonstrate
the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323,
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4See also Razzaboni v. Schifano (In re Schifano), 378 F.3d 60, 66 (1st Cir. 2004)(“The
non-moving party must show more than conclusory allegations, improbable inferences or
unsupported speculation to establish genuine issues of material fact.”).
4
106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
In determining whether summary judgment should be granted, the Court will view the
record in the light most favorable to the party opposing summary judgment. Harris v. Beneficial
Oklahoma, Inc. (In re Harris), 209 B.R. 990, 995 (10th Cir. BAP 1997)(citing Wolf v. Prudential
Ins. Co. of America, 50 F.3d 793, 796 (1995)(remaining citations omitted)). 	In order to defeat a
motion for summary judgment, the opposing party may not simply rest on its pleading or denials
of the allegations; rather, the opposing party must demonstrate that genuine issues of material
fact require a trial. See Rule 56(e), Fed.R.Civ.P., made applicable to bankruptcy proceedings by
Rule 7056, Fed.R.Bankr.P. (A party opposing a properly supported motion for summary
judgment “may not rest upon the mere allegations or denials of the adverse party’s pleading, but
the adverse party’s response, by affidavits or as otherwise provided in this rule, must set forth
specific facts showing that there is a genuine issue for trial.”).4 “Only disputes over facts that
might affect the outcome of the suit under the governing law will properly preclude the entry of
summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510,
91 L.Ed.2d 202 (1986).
Mr. Potter did not submit any affidavits in defense of the UST’s Motion or the Chapter 7
Trustee’s Motion, but sought to introduce certain exhibits at the final hearing. 	The United
States Trustee objected to the admission of these exhibits, asserting that Mr. Potter failed to
establish a proper evidentiary foundation, and that the exhibits are inadmissible hearsay evidence
to the extent prepared by someone other than Mr. Potter. 	The United States Trustee argues
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5See Order Granting Motion for Order Compelling Discovery Under Rule 7037, granting
the United States Trustee’s motion for order compelling discovery (Docket No. 64). See also,
Order Granting, In Part, and Denying, In Part, Motion for Order Compelling Discovery Under
Rule 7037 and for Sanctions for Failure to Cooperate in Discovery (Docket No. 65), relating to
Chapter 7 Trustee’s motion to compel discovery.
6See Fed. R. Evid. 803(6).
7See Rosen v. Bezner, 996 F.2d 1527, 1534 (3rd Cir. 1993)(noting that Ҥ 727 is to be
construed liberally in favor of the debtor and that a total bar to discharge is an extreme
5
further that because Mr. Potter failed to respond to discovery, and failed to comply with the
Court’s order compelling discovery,5 which provided that Mr. Potter would not be allowed to
introduce at trial any document he did not produce through discovery, he should not be allowed
to introduce the documents in defense of the motions for summary judgment. 	The Chapter 7
Trustee’s objection to Mr. Potter’s exhibits echos the objections of the United States Trustee.
Upon consideration of Mr. Potter’s proposed exhibits, the Court finds that they should be
admitted over the objections of the United States Trustee and the Chapter 7 Trustee. 	The disc
offered by Mr. Potter at the final hearing consists of profit and loss and general ledger statements
relating to several limited liability companies in which Mr. Potter held an interest. 	Because they
are relevant to the claims that Mr. Potter has failed to maintain or keep accurate records, and
because they appear to fit within the business records exception6, the Court will admit them for
the limited purpose of responding to the UST’s Motion and the Chapter 7 Trustee’s Motion.
DISCUSSION
Because of the “fresh start” policy underlying the Bankruptcy Code and the harshness of
the penalty of denial of a debtor’s discharge, the Court construes the discharge provisions under
the Bankruptcy Code liberally in favor of the debtor and strictly against the party objecting to
discharge.7 Nevertheless, a debtor who seeks the protections afforded under the Bankruptcy
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penalty.”); Freelife Int’l, LLC v. Butler (In re Butler), 377 B.R. 895, 915 (Bankr.D.Utah
2006)(stating that “‘[e]xceptions to discharge are to be construed strictly against a creditor and
liberally in favor of the debtor.’”)(quoting In re Kontrick, 295 F.3d 724, 736 (7th Cir.
2002)(remaining citation omitted)). See also Gullickson v. Brown (In re Brown), 108 F.3d 1290,
1292 (10 th Cir. 1997) (acknowledging generally “that the Bankruptcy Code must be construed
liberally in favor of the debtor and strictly against the creditor.”)(citation omitted)).
8Butler, 377 B.R. at 914-15 (“In exchange for that ‘fresh start,’ the Code requires debtors
to accurately and truthfully present themselves before the court.”)(citing Farouki v. Emirates
Bank Int’l, Ltd. 14 F.3d 244, 249 (4th Cir. 1994)). See also, The Cadle Co. v. King (In re King),
272 B.R. 281, 300 (Bankr.N.D.Okla. 2002)(“‘The bankruptcy schedules and statement of affairs
do not ask the debtor to make an assessment of what he thinks are important assets or debts.
Debtor[s] must, under oath, list all creditors and assets, as well as all transfers of property within
the prior year.’”)(quoting Superior Nat'l Bank v. Schroff (In re Schroff), 156 B.R. 250, 256
(Bankr.W.D.Mo.1993)).
9Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997)(quoting Boroff v. Tully (In re
Tully), 818 F.2d 106, 110 (1st Cir. 1987)).
10See In re Chavin, 150 F.3d 726, 728 (7th Cir. 1998)(“A denial of knowledge may be so
utterly implausible in light of conceded or irrefutable evidence that no rational person could
believe it; and if so, there is no occasion to submit the issue of knowledge to determination at a
trial.”)(citing Seshadri v. Kasraian, 130 F.3d 798, 801-02 (7th Cir. 1997)(remaining citations
omitted)). See also In re Kontrick, 295 F.3d 724 (7th Cir. 2002), aff’d, 540 U.S. 443, 124 S.Ct.
906, 157 L.Ed.2d. 867 (2004)(affirming bankruptcy court’s grant of summary judgment on claim
to deny the debtor’s discharge under § 727(a)(2) based on subjective intent to hinder, delay, or
defraud a creditor by transferring or concealing estate property); Garrett v. Vaughan (In re
Vaughan), 342 B.R. 385, 2006 WL 751388 (10 th Cir. BAP 2006) (Table, text in Westlaw No.
WO-05-028), aff’d, 233 Fed. Appx. 783 (10th Cir. 2007) (affirming grant of summary judgment
under § 727(a)(4)(A) where debtor failed to list certain assets and interests on schedules); First
Nat'l Bank, Larned v. Davison (In re Davison), 296 B.R. 841 (Bankr.D.Kan. 2003), aff’d, 2004
WL 2852352 (10th Cir. BAP 2004) (summary judgment granted under § 727(a)(4)(A) where
6
Code has a duty to fully disclose the nature of his assets and financial affairs when completing
his statements and schedules. 8 The denial of discharge provisions serve to ensure that “‘those
who seek the shelter of the shelter of the bankruptcy code do not play fast and loose with their
assets or with the reality of their affairs.’” 9
Even when a debtor’s intent is at issue under the denial of discharge provisions, the
undisputed facts may be so overwhelming as to support summary judgment.10 Thus, summary
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debtors failed to disclose certain substantial pre-petition transfers).
11Towle v. Hendrix (In re Hendrix), 352 B.R. 200, 204-05 (Bankr.W.D.Mo. 2006)(citing
United Mortgage Corp. v. Mathern, 137 B.R. 311, 322 (Bankr.D.Minn.1992)(remaining citations
omitted).
7
judgment may be granted even though subjective factors such as the debtor’s intent or motive are
at issue when “the movant produces sufficient evidence to support its asserted inference, and the
respondent fails to produce significantly probative evidence to counter the inference.”11
Undisputed Facts
The following facts are not in dispute:
1. Defendant Jeffery Potter filed a voluntary petition under Chapter 11 of the Bankruptcy
Code on Mary 19, 2005 as Case No. 11-05-14071 MS.
2. Mr. Potter filed his Schedules and Statement of Financial Affairs (“SOFA”) on June
17, 2005. See Case No. 11-05-14071 MS - Docket No. 18.
3. The case converted to Chapter 7 on November 26, 2006. See Order Granting Motion
to Convert Case to Chapter 7 (Case No. 7-05-14071 MS - Docket No. 228)
4. Pre-petition, Mr. Potter owned an interest in a limited partnership known as Monte
Mac.
5. Monte Mac owned several shopping centers.
6. 	The schedules filed in Mr. Potter’s bankruptcy case do not show any interest in
Monte Mac, nor does the SOFA reflect any transfer of an interest in Monte Mac during the year
prior to the filing of the bankruptcy petition.
7. 	At the first meeting of creditors following the filing of Mr. Potter’s Chapter 11
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8
petition, Mr. Potter testified that he had reviewed the Schedules and SOFA, that they were true
and correct, and that he listed in his Schedules all property in which he had an interest as of the
petition date.
8. Mr. Potter’s bankruptcy counsel filed a motion to withdraw, which the Court granted
on May 22, 2006. See Case No. 7-05-14071 MS - Docket No. 186.
9. 	On April 11, 2007, at the meeting of creditors following the conversion of Mr.
Potter’s bankruptcy case to Chapter 7, Mr. Potter testified that he had owned an interest in
Monte Mac, and that he sold that interest for $72,000, but could not recall when he sold his
interest in Monte Mac.
10. Mr. Potter executed an Agreement Re Purchase of Limited Partnership Interest
(“Purchase and Sale Agreement”) on April 15, 2005, approximately one month before the date of
the filing of his voluntary petition. 	See Exhibit 1 to UST’s Motion. The Purchase and Sale
Agreement provided for the sale of Mr. Potter’s 1.6% interest in Monte Mac for $70,400. Id.
11. 	Robert A. Potter, Mr. Potter’s father, was a party to the Purchase and Sale
Agreement and one of the purchasers of Mr. Potter’s 1.6% interest in Monte Mac. Id.
12. Mr. Potter received $70,400 in exchange for the sale of his 1.6% interest in Monte
Mac to his father and three other purchasers in April of 2005.
13. Mr. Potter never filed an amendment to his schedules or SOFA to reflect his interest
in Monte Mac or the pre-petition sale of his interest in Monte Mac.
The Undisputed Facts are Insufficient to Grant Summary Judgment Under 11 U.S.C.
§727(a)(2)(A) - Transfer or Concealment of Property
A debtor’s discharge may be denied under 11 U.S.C. § 727(a)(2)(A) if the debtor has
fraudulently transferred or concealed property within one year before the petition date. 11
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12See First Nat’l Bank of Gordon v. Serafini (In re Serafini), 938 F.2d 1156, 1157 (10 th
Cir. 1991)(standard of proof for action under 11 U.S.C. § 727(a)(2) is by a preponderance of the
evidence, not clear and convincing standard); Davison, 296 B.R. at 845 (preponderance of
evidence standard applies to claim for denial of discharge under 11 U.S.C. § 727(a)(2)).
13 Marine Midland Bus. Loans, Inc. v. Carey (In re Carey), 938 F.2d 1073, 1077 (10 th Cir.
1991)(emphasis in original)(citations omitted).
14Turner v. Keck (In re Keck), 363 B.R. 193, 200 (Bankr.D.Kan. 2007).
9
U.S.C. § 727(a)(2)(A). 	That section provides:
The court shall grant the debtor a discharge, unless –
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of
the estate charged with custody of property under this title, has transferred,
removed, destroyed, mutilated, or concealed, or has permitted to be transferred,
removed, destroyed, mutilated, or concealed –
(A) property of the debtor, within one year before the date of the filing of
the petition[.]
11 U.S.C. § 727(a)(2)(A).
The party seeking to deny a debtor’s discharge under 11 U.S.C. § 727(a)(2)(A) bears the burden
of proving all elements by a preponderance of the evidence.12 Denial of discharge under this
section requires a showing of “actual intent to defraud creditors.” 13 But because a debtor is
unlikely to admit fraudulent intent through direct testimony, the Court may infer the existence of
fraudulent intent based on the surrounding facts and circumstances and the debtor’s course of
conduct.14
The undisputed facts establish that Mr. Potter sold his 1.6% interest in Monte Mac within
one-year of the date of the filing of the petition. 	At the final hearing, he asserted that his interest
was held by the California Legal Defense and Maintenance Trust, but offered no evidence to
support that assertion. 	To the contrary, the Purchase and Sale Agreement clearly reflects that
Mr. Potter held the 1.6% interest in Monte Mac. See Exhibit 1. 	It is also undisputed that Mr.
Potter received $70,400 from the pre-petition sale of his interest in Monte Mac. These facts
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15See, e.g., Brown, 108 F.3d at 1293 (evaluating bankruptcy court’s application of the
“badges of fraud” to denial of discharge action under 11 U.S.C. § 727(a)(2)(A)); Groman v.
Watman (In re Watman), 301 F.3d 3, 8 (1st Cir. 2002) (noting that “courts have identified several
objective indicia that, taken together, strongly indicate fraudulent intent.”); Keck, 363 B.R. at
199 (stating that “[c]ourts typically look for specific indicia of fraud, often referred to as ‘badges
of fraud,’ when analyzing a case under § 727(a)(2)(A).”).
16Marine Midland Bus. Loans, Inc. v. Carey (In re Carey), 938 F.2d 1073, 1077 (10 th Cir.
1991)(citations omitted). See also, Watman, 301 F.3d at 8 (indicia of fraud include “(1) insider
relationships between the parties; (2) the retention of possession, benefit, or use of the property
in question; (3) the lack or inadequacy of consideration for the transfer; (4) the financial
condition of the party sought to be charged both before and after the transaction at issue; (5) the
existence or cumulative effect of the pattern or series of transactions or course of conduct after
the incurring of debt, onset of financial difficulties , or pendency or threat of suits by creditors;
(6) the general chronology of the events and transactions under inquiry; and (7) an attempt by
debtor to keep the transfer a secret.”)(citations omitted).
10
establish that Mr. Potter transferred property of the debtor within one year of the date of the
petition. 	The remaining element under 11 U.S.C. § 727(a)(2)(A) is whether Mr. Potter
transferred his interest in Monte Mac with actual intent to hinder, delay, or defraud a creditor.
Courts often look to certain “badges of fraud” to assist in evaluating a debtor’s intent
under 11 U.S.C. § 727(a)(2).15 Those include: 	1) whether the transfer was made gratuitously;
2) whether the debtor continues to use the transferred property; 3) whether the property was
transferred to a family member; 4) whether the transfer was concealed; 5) whether the transfer
occurred immediately before the filing of the bankruptcy; 6) whether the conversion of assets
resulted in the insolvency of the debtor; and 7) the value of the converted assets.16
The circumstances surrounding the Monte Mac transaction could support an inference of
fraudulent intent. On the eve of bankruptcy, Mr. Potter liquidated his interest in Monte Mac for
cash, spent the money, and failed to disclose the transfer in his bankruptcy schedules. In
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17Cf. Keck, 363 B.R. at 199 (fraudulent intent present where the value of the assets
converted was high, the conversion occurred shortly before the filing of the bankruptcy, and the
conversions were concealed from creditors and the trustee by failing to accurately disclose the
conversion of assets in order to purchase exempt property, “coupled with the tenor of [the
debtor’s] live testimony”).
18See Compton v. Herrman (In re Herrman), 355 B.R. 287 (Bankr.D.Kan. 2006)(stating
that, “[a]s a general rule, questions involving a person’s intent or other state of mind cannot be
resolved on summery judgment.”)(citing Prochaska v. Marcoux, 632 F.2d 848, 851 (10 th Cir.
1980)(remaining citation omitted). See also, Watman, 301 F.3d at 8 (noting that “[o]ften, the
intent issue will tern on the credibility and demeanor of the debtor . . .”)(citation omitted).
19Brown, 108 F.3d at 1293 (citing 6 Collier on Bankruptcy ¶ 727.02(3)(a) (15th ed. rev.
1996)).
20Cf. Davison, 296 B.R. at 846 (stating that “[t]he fact that the real property was
transferred to Mrs. Davison’s sisters is also somewhat less suggestive of fraudulent intent here
because they were the co-owners of the property, those most likely to be interested in buying it
and willing to pay the most for a fractional interest in real property.”)
21 When questioned at his deposition taken in connection with this adversary proceeding
about the sale of his interest in Monte Mac, Mr. Potter testified, in part, as follows:
11
addition, one of the transferees was Mr. Potter’s father.17 Questions of intent, however, are
difficult to resolve on summary judgment.18
“The mere fact that a transaction occurred soon before the filing of bankruptcy does not
necessarily support the inference of fraud.” 19 Thus, while the timing of Mr. Potter’s sale of his
interest in Monte Mac is suspect, it is not sufficient in itself to support an inference of fraudulent
intent. 	Next, because Mr. Potter’s father was one of the remaining interest holders in Monte
Mac, the fact that a close relative purchased a portion of Mr. Potter’s partnership interest is not
particularly suggestive of fraudulent intent.20 Finally, when questioned about the transfer at the
deposition taken in connection with this adversary proceeding, Mr. Potter testified that he sold
his interest in Monte Mac because he needed the money to stay alive, and that he lived off of the
proceeds from the sale. 21 These statements, if taken as true, tend to negate Mr. Potter’s
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Q 	And why did you sell it?
A 	I needed the money to stay alive.
Q 	And what did you do with the proceeds?
A 	Lived off it.
Deposition of Jeffery Potter, July 28, 2008, p. 26, lines 4 -7; UST’s Exhibit 4.
22Cf. Davison, 296 B.R. at 846 (denying summary judgment under 11 U.S.C. §
727(a)(2)(A) were debtor testified that she used the money from the pre-petition sale of real
property to pay for general living expenses, which “if believed by the fact finder, could lead to
the conclusion that the [debtors] were not acting with any fraudulent intent when they made the
transfers.”); Brown, 108 F.3d at 1293 (finding a lack of evidence to support inference of
fraudulent intent based on pre-petition grant of security interest to “obtain much needed capital
for his businesses, which were his sole source of income” especially when “[t]here was no
evidence that the money was not reasonably used or that it was squandered.”).
23Structured Asset Services, LLC v. Self (In re Self), 325 B.R. 224, 245 (Bankr.N.D.Ill.
2005)(citing Clean Cut Tree Service, Inc. v. Costello (In re Costello), 299 B.R. 882, 899
(Bankr.N.D.Ill. 2003)(remaining citations omitted)).
24 That section provides:
The court shall grant the debtor a discharge, unless –
(4) the debtor knowingly and fraudulently, in or in connection with the
case--
(A) made a false oath or account.
11 U.S.C. § 727(a)(4)(A).
12
fraudulent intent at the time of the transfer.22 The Court, therefore, cannot grant summary
judgment on the claims to deny Mr. Potter’s discharge under 11 U.S.C. § 727(a)(2)(A) based on
the pre-petition Monte Mac transaction because intent has not been established.
The Undisputed Facts are Sufficient to Support Denial of Discharge Under 11 U.S.C.
§ 727(a)(4) - False Oath
“The purpose of § 727(a)(4) is to enforce a debtor's duty of disclosure and to ensure that
the debtor provides reliable information to those who have an interest in the administration of the
estate.” 23 Under 11 U.S.C. § 727(a)(4) 24
, the party objecting to the debtor’s discharge must
prove by a preponderance of the evidence that “(1) the debtor made a statement under oath; (2)
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25McVay v. Phouminh (In re Phouminh), 339 B.R. 231, 242 (Bankr.D.Colo.
2005)(citations omitted); Clark v. Kearns (In re Kearns), 149 B.R. 189, (Bankr.D.Kan.
1992)(stating that the Chapter 7 trustee must prove the elements for denial of discharge under §
727(a)(4) by a preponderance of the evidence)(citing In re Hadley, 70 B.R. 51, 54 (Bankr.D.Kan.
1987).
26See In re Garland, 385 B.R. 280, 298 (Bankr.E.D.Okla. 2008)(“Omitting assets from
the debtor’s Statement of Affairs or other schedules may constitute a false oath under § 727(a)(4)
sufficient to deny a discharge.”)(citing Calder v. Job (In re Calder), 907 F.2d 953, 955 (10 th Cir.
1990)); In re Butler, 377 B.R. 895, 922 (Bankr.D.Utah 2006)(“‘A debtor's petition, schedules,
statement of financial affairs, statements made at a 341 meeting, testimony given at a Federal
Rule of Bankruptcy Procedure 2004 examination, and answers to interrogatories all constitute
statements under oath for purposes of § 727(a)(4).’”)(quoting Self, 325 B.R. at 245)(remaining
citations omitted)); Davison, 296 B.R. at 847 (“A false statement by the debtor at an examination
during the course of the proceedings also may constitute a false oath under §
727(a)(4)(A).”)(citation omitted).
27In re Calder, 907 F.2d 953, 955 (10 th Cir. 1990)(quoting In re Chalik, 748 F.2d 616,
618 (11 th Cir. 1984).
13
the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the
statement with fraudulent intent; and (5) the statement related materially to the bankruptcy
case.” 25 Omissions from the debtor’s Schedules and Statement of Financial Affairs as well as
statements made by the debtor at the meeting of creditors can constitute false oaths within the
meaning of 11 U.S.C. § 727(a)(4).26 A false statement is material for purposes of 11 U.S.C. §
727(a)(4) if it bears a relationship to the debtor’s business transactions or estate, concerns the
discovery of assets, business dealings, or the existence and disposition of the debtor’s property. 27
Mr. Potter failed to respond to the UST’s Motion or to the Chapter 7 Trustee’s Motion,
but attended the final hearing. 	At the final hearing, Mr. Potter stated that he did not intend to
hinder or delay his creditors and that he never wanted to file bankruptcy. He blamed his former
counsel for forcing him to file bankruptcy, and claimed that he has been duped by his attorneys
throughout the bankruptcy process. 	What Mr. Potter failed to do is offer any explanation as to
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28See Brown, 108 F.3d at 1294-1295 (“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
is not a proper basis for denial of discharge.”)(citations omitted).
29See also United States Trustee v. Eppers (In re Eppers), 311 B.R. 826, 832-833
(Bankr.D.N.M. 2004)(stating that “[r]eliance on counsel in completing statements and schedules
is no defense to material misstatements contained therein, unless such reliance was
reasonable.”)(citing Hatton v. Spencer (In re Hatton), 204 B.R. 477, 484 (E.D.Va. 1997)).
14
why he did not list the sale of his interest in Monte Mac in his SOFA.
The sale occurred only one month before the filing of the bankruptcy petition. Question
10 on the SOFA requests the debtor to
List all other property, other than property transferred in the ordinary course of the
business or financial affairs of the debtor, transferred either absolutely or as security
within one year immediately preceding the commencement of this case.
It is implausible that Mr. Potter simply forgot about the transaction that occurred shortly before
the filing of the bankruptcy from which he obtained over $70,000. 	At his first meeting of
creditors, he testified under oath that his statements and SOFA were true and correct, yet this
transfer was plainly omitted from the SOFA. 	He never filed an amendment to correct this
omission, and did not voluntarily inform anyone of this pre-petition transfer until questioned at
the meeting of creditors following the conversion of his case. 	His omission cannot plausibly be
characterized as an inadvertent omission or honest mistake. 28
Mr. Potter consistently blames his former counsel for giving poor advice in connection
with his bankruptcy, but “‘the advice of counsel is not a defense when it is transparently plain
that the property should be scheduled.’” Hibernia Nat’l Bank v. Perez, 124 B.R. 704, 710
(E.D.La. 1991), aff’d, 954 F.2d 1026 (5th Cir. 1992)(quoting In re Mascolo, 505 F.2d 274, 277
(1st Cir. 1974)(remaining citations omitted). 29 A debtor is obligated to amend his or her
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15
statements and schedules to correct any inadvertent omissions or mistakes, and may not
decide for himself which questions on the Statement of Affairs should be answered fully,
completely and truthfully. The Debtor cannot omit information required of him simply
because he believes or decides the property omitted has no value or the information is not
necessary. This is for the creditors and the Court to decide.
Morrel, West & Saffa, Inc. v. Riley (In re Riley), 128 B.R. 567, 569 (Bankr.N.D.Okla.
1991).
The undisputed facts in this case are similar to those in First Nat’l Bank, Larned v.
Davison (In re Davison), 296 B.R. 841 (Bankr.D.Kan. 2003). 	In Davison, the debtors failed to
list two pre-petition transfers of property to relatives: a gift of a 1/64th oil and gas interest to the
debtor’s mother, and a sale of a one-third landlord’s interest in certain farmland to the debtor’s
sisters. In granting summary judgment on plaintiff’s claim to deny the debtors’ discharge under
11 U.S.C. § 727(a)(4), the Davison court relied on the undisputed evidence that the debtors 1)
never filed an amendment to correct their statement of financial affairs; 2) failed to voluntarily
bring their omissions to the attention of the trustee until examined for a second time under Rule
2004; 3) waited until they were questioned to disclose the transfers; 4) offered no explanation as
to why they failed to disclose the transfers in their statement of financial affairs. Id. at 848.
In the instant case, Mr. Potter omitted any reference to Monte Mac from his statements
and SOFA, and did not voluntarily inform anyone of the transfer at his first meeting of creditors.
To the contrary, he only disclosed the information when questioned about it by a creditor at the
continuation of the meeting of creditors. He never filed an amendment to correct this omission.
Further, the omission was material. It related to Mr. Potter’s business transactions, and
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30See Calder, 907 F.2d at 955 (a false statement is material “‘if it bears a relationship to
the bankrupt’s business transactions or estate, or concerns the discovery of assets, business
dealings, or the existence and disposition of his property.’”)(quoting Chalik, 748 F.2d at 618).
31See, e.g., Beaubouff, 966 F.2d at 178 (affirming bankruptcy court’s determination that
the debtor’s failure to correct inconsistences and omissions in amended schedules “constituted
reckless indifference to the truth, and, therefore, the requisite intent to deceive.”)(citation
omitted); King, 272 B.R. at 302 (stating that “‘reckless indifference to the truth has consistently
been treated as the functional equivalent of fraud for purposes of § 727(a)(4).’”)(quoting Tully,
818 F.2d at 112 (internal quotes, citation and footnote omitted)). See also Butler, 377 B.R.at
922-923 (acknowledging that reckless indifference to the truth can satisfy the fraudulent intent
element under 11 U.S.C. § 727(a)(4) and defining “reckless disregard” as “‘not caring whether
some representation is true or false.’”)(quoting Self, 325 B.R. at 248).
16
concerned the disposition of his property. 30 The circumstances surrounding the omission also
demonstrate, at a minimum, that his failure to list the transfer was made with reckless
indifference to the truth, which is sufficient to establish fraudulent intent under 11 U.S.C. §
727(a)(4).31 The transfer occurred shortly before the filing of the bankruptcy petition and
involved a significant sum of money. 	Essentially, Mr. Potter converted what would have
otherwise constituted property of the bankruptcy estate to his own personal use, and concealed
the transaction by failing to report the transfer on his SOFA. 	This circumstantial evidence is
sufficient for the Court to infer that Mr. Potter’s omission was both knowing and fraudulent
within the meaning of 11 U.S.C. § 727(a)(4). 	As stated by the Davison court, “[t]he intent that
is relevant under § 727(a)(4)(A) is whether the [debtors] ‘knowingly and fraudulently’ omitted
the transfers from their statement of financial affairs, not whether they made the transfers with a
fraudulent intent.” Davison, 296 B.R. at 848. 	Given Mr. Potter’s failure to offer any
reasonable explanation for the omission, no other inference but that the omission was both
knowing and fraudulent can be drawn from the undisputed facts now before the Court. 	Mr.
Potter did not file a response to the UST’s Motion or the Chapter 7 Trustee’s Motion, and his
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32See Fed.R.Civ.P. 56(e). see also Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct.
2548, 91 L.Ed.2d. 265 (1986).
17
simple denial of fraudulent intent at the final hearing is insufficient to raise an issue of material
fact.32
Based on the foregoing, the Court will grant the UST’s Motion and the Chapter 7
Trustee’s Motion on their claims to deny Mr. Potter’s discharge under 11 U.S.C. § 727(a)(4). 	A
judgment consistent with this Memorandum Opinion will be entered.
__________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: June 23, 2009
COPY TO:
Alice Nystel Page
Office of the United States Trustee
PO Box 608
Albuquerque, NM 87103
George “Dave” Giddens, Jr.
Attorney for Chapter 7 Trustee
10400 Academy Road NE, Suite 350
Albuquerque, NM 87111
Jeffery W. Potter
PO Box 8280
Santa Fe, NM 87504
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