United States Trustee v. Sanchez et al

1 Mr. Hays was not the attorney representing the Debtors in
their bankruptcy case.
2 The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(J); and these
are findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
ALFRED D. SANCHEZ and
LINDA J. SANCHEZ,
Debtors. 	No. 7-09-13618 SA
UNITED STATES TRUSTEE,
Plaintiff,
v. 	Adv. No. 10-1032 S
ALFRED D. SANCHEZ and
LINDA J. SANCHEZ,
Defendants.
MEMORANDUM OPINION AFTER TRIAL ON
US TRUSTEE’S COMPLAINT OBJECTING
TO DEBTORS’ DISCHARGE
This matter came before the Court for three days of trial on
the merits of the US Trustee’s (“UST”) Complaint Objecting to
Debtors’ Discharge under Section 727. 	The UST appeared through
its trial attorney Alice Nystel Page. 	Defendants appeared
through their attorney Law Office of Brad L. Hays, LLC (Brad L.
Hays) 1. 	This is a core proceeding. 	For the reasons set forth
below, the Court will deny the relief requested by the UST and
grant Debtors a discharge. 2
STANDARDS RELATING TO DENIAL OF DISCHARGE
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The Complaint seeks denial of discharge under Sections
727(a)(2) and (a)(4). 	The statute provides as follows:
(a) 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; or
(B) property of the estate, after the date of the
filing of the petition;
...[or]
(4) the debtor knowingly and fraudulently, in or in
connection with the case--
(A) made a false oath or account;
(B) presented or used a false claim;
(C) gave, offered, received, or attempted to
obtain money, property, or advantage, or a promise
of money, property, or advantage, for acting or
forbearing to act; or
(D) withheld from an officer of the estate
entitled to possession under this title, any
recorded information, including books, documents,
records, and papers, relating to the debtor's
property or financial affairs.
The Bankruptcy Code must be construed liberally in favor of the
debtor and strictly against the creditor. 	Gullickson v. Brown
(In re Brown), 108 F.3d 1290, 1292-93 (10 th Cir. 1997).
To succeed in a denial of discharge under Section
727(a)(2)(A) the objector must show, by a preponderance of the
evidence, that (1) the debtor transferred, removed, concealed,
destroyed or mutilated, (2) property of the estate, (3) within
one year prior to the bankruptcy or postpetition, (4) with the
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intent to hinder, delay or defraud a creditor. 	Id. at 1293. 	The
objector must also prove actual intent to defraud. 	Marine
Midland Business Loans, Inc. v. Carey (In re Carey), 938 F.2d
1073, 1077 (10 th Cir. 1991).
Debtors rarely admit an intent to hinder, delay or defraud a
creditor. 	United States Trustee v. Potter (In re Potter), 2009
WL 2913210 at *4 (Bankr. D. N.M. 2009)(citing Turner v. Keck (In
re Keck), 363 B.R. 193, 200 (Bankr. D. Kan. 2007)). 	Therefore,
Courts may consider actual direct evidence of fraud as well as
any circumstantial evidence of “badges of fraud.” 	Wolkowitz v.
Beverly (In re Beverly), 374 B.R. 221, 236 (9th Cir. BAP 2007),
aff'd in part, dismissed in part, 551 F.3d 1092 (9th Cir. 2008)
(cited in Geyer & Associates CPA’s, P.C. v. Stewart (In re
Stewart), 421 B.R. 603 at *3 (10 th Cir. BAP 2009)(unpublished)).
[B]adges of fraud evincing a debtor's actual intent to
hinder, delay, or defraud include the following: (1)
lack or inadequacy of consideration for transfer; (2)
existence of a family, friendship, or special
relationship between parties; (3) attempt by debtor to
keep transfer secret; (4) financial condition of the
party sought to be charged both before and after
transaction; (5) existence or cumulative effect of
pattern or series of transactions or course of conduct
after incurrence of debt, onset of financial
difficulties, or pendency or threat of suits by
creditors; and (6) overall chronology of events and
transactions. 	Gullickson, 108 F.3d at 1293.
First Savings Bank v. Turner (In re Turner), 335 B.R. 755, 761
(Bankr. D. N.M. 2005). 	“Some courts consider as a badge of fraud
the retention of possession, benefit, or use of the property in
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question by the debtor even after the debtor transfers the
property.” 	Id. (citing In re Lang, 246 B.R. 463, 469 n. 9
(Bankr. D. Mass.), aff’d., 256 B.R. 539 (1st Cir. BAP 2000)).
To succeed in a denial of discharge under Section 727(a)(4)
the objector must show, by a preponderance of the evidence, that
the debtor (1) knowingly and fraudulently made a false oath, (2)
relating to a “material” fact. 	Gullickson, 108 F.3d at 1294
(citing In re Hadley, 70 B.R. 51, 54 (Bankr. D. Kan. 1987)).
Discharge will not be denied, however, if the false statement is
due to mistake or inadvertence. 	Id. (citing In re Butler, 38
B.R. 884, 889 (Bankr. D. Kan. 1984)).
A false oath is “material” and thus sufficient to bar
discharge “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.” 	Job v. Calder (In re Calder), 907 F.2d 953, 955 (10 th
Cir. 1990).
Finally, similar to the proof required for fraudulent
concealment under section 727(a)(2)(A), intent can be deduced
from the facts and circumstances of the individual case. 	Id. at
956 (citing In re Devers, 759 F.2d 751, 754 (9 th Cir. 1985)).
DISCUSSION
Plaintiff’s opening statement concisely sets forth the four
theories on which it relies to deny discharge to these Debtors.
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Plaintiff relies on false statements and schedules filed in the
case as well as transcripts of several section 341 meetings at
which the Debtors testified under oath.
First, Plaintiff claims that Mr. Sanchez granted a mortgage
on certain commercial property to his children ten months before
the bankruptcy to protect that asset from creditors and then
failed to disclose the transfer on the Statement of Financial
(“SFA”). 	Plaintiff also alleges that Debtors then failed to
disclose the sale of that property until the 341 meeting.
Plaintiff claims that Debtors amended their SFA and stated that
the transfer was for no cash. 	Then, allegedly Debtors’ second
amended SFA disclosed cash from the sale of $35,000 but in
reality it was $45,000. 	Plaintiff claims that Debtors have not
amended their statements again to correct the information or to
account for the funds. 	Also, Plaintiff claims that the mortgage
to the children was released for no consideration.
Second, Plaintiff claims that the sale of a Porsche
automobile was not disclosed until the Debtors were questioned by
the Chapter 7 Trustee at the 341 meeting. 	Plaintiff argues that
the fact that the sale was one month pre-petition is evidence of
fraud and that the Statements fail to disclose the disposition of
the proceeds.
Third, Plaintiff claims that Debtors presented false
testimony concerning the transfer of a Hummer automobile from the
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Debtors to Mr. Steve Garcia, Mr. Sanchez’s employer. 	Debtors
claimed that the creditor repossessed the vehicle and that Mr.
Garcia funded the redemption and took the title.
Finally, Plaintiff claims that the Debtors intentionally
undervalued a Mercedes automobile on their Schedules to protect
their exemption in the vehicle.
Overall, Plaintiff argues that these four events indicate a
pattern of nondisclosure and intent to defraud creditors. 	It
also argues that the Debtors revealed undisclosed assets only
under pressure.
FACTS
The UST’s case is based mostly on the filings in this case
and the testimony at section 341 meetings. 	Therefore, the Court
will start by discussing those items.
UST Exhibit 1 consists of Debtors’ SFA and Schedules.
Schedule A lists one parcel of real estate on Valtierra but says
it was “sold for note.” 	Schedule B values the Mercedes at
$12,000. 	It lists no interests in corporations, parterships or
other businesses. 	Schedule D lists four creditors secured by
real estate: Bank of America and GMAC were secured by Valtierra,
and Chase Mortgage and First Horizon were secured by property on
Talmadge. 	Schedule F totals $1,735,771. 	SFA question 10,
concerning transfers of property, states “none.” 	SFA question
18, concerning businesses debtors have been involved in, lists
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ADS Mortgage, ADS Financial Services, Sterling Homes and Sterling
Industries, and Sterling Properties. 	SFA question 21 (which
applies only to corporate debtors, not individual debtors)
discloses that Alfred Sanchez is President and 99% owner (of
something) and Linda Sanchez is Vice President and 1% owner.
Exhibit 1 was filed on September 8, 2009 as doc. 17, and was
signed by both Debtors under penalty of perjury.
UST Exhibit 5 consists of the transcript of the first
meeting of creditors conducted on September 14, 2009. 	At pages
2, l. 21 to p. 3, l. 6 the Trustee asked if the Debtors had read
both the statements and schedules before they signed them, if
they were true and correct, and if they listed everything that
they owned and all of their debts, to which the Debtors answered
yes. 	Three questions later, the Trustee asked if either of them
owned land or buildings other than Valtierra. 	Mr. Sanchez said
“Yes.” 	Ex. 5, p. 3, l. 17. 	For the next three pages of the
transcript, both Debtors are totally forthright in stating their
current and/or previous ownership in the Coors residence, the
Talmadge property, and a commercial property. 	When asked why
they had not been listed on SFA question 10, Debtors’ attorney
stated:
Other transfers? 	Because I think he was looking a[t]
this “property transferred in the ordinary course of
business. 	List all other property other than property
transferred in the ordinary course of business.” 	And
so since he was doing real estate investment, those
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transfers were in the ordinary course of business, that
we can - - 	we can list them.
Ex. 5, p. 6, l. 21 to p.7, l. 2. 	The questioning continued:
Trustee: Well, the ordinary course of business in the
real estate business would be to sell properties; I
don’t know that turning them over to creditors is in
the ordinary course of business.
Attorney: Well, I - - I understand what you’re saying,
He couldn’t - - he couldn’t pay them anymore. 	His
income collapsed, so - -
Trustee: That’s not ordinary course of business.
Attorney: Okay, we can - - we can supplement that.
That’s no problem.
Id. 	p. 7, l. 3 to l. 12. 	Then, starting at p. 7, l. 15 and
continuing to p. 13, l. 3 the Trustee and Mr. Sanchez discuss in
detail, albeit confused detail, the commercial property. 	Mr.
Sanchez disclosed that it was one acre, its location, its value
of $500,000, a debt on it of $350,000, the fact that he was about
to go into default on February 29, 2009, that he co-owned it with
two other people, that one of them agreed to take over the
payments, he owed that person $200,000, he signed a deed to that
person on February 15 th and received $200,000 debt cancellation.
He testified that their relationship was not like a partnership,
but like a “joint venture, if you will.” 	He further disclosed
his original intent to build a commercial building on the
property with funding from Wells Fargo, but that at the last
minute the funding fell through, causing his bankruptcy.
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The Trustee then asked about the status of Valtierra,
stating that Schedule A said it was sold to third party for the
amount of the note. 	Ex. 5, p. 13, l. 11. 	Mr. Sanchez stated
that was not true; he had told the current tenants that they were
welcome to buy it for the note. 	Debtors’ attorney then stated:
“I didn’t understand what he is saying. 	It’s in foreclosure.”
Id. l. 25 to p. 14, l. 1.
The Trustee asked if anyone owed them any money. 	Id. p. 14,
l. 21. 	Mr. Sanchez stated that he had two construction
contracts, one worth $600,000 and the other worth $700,000, which
both defaulted. 	Id. l. 22 to l. 25. 	He stated “we’ve been in
litigation now for, God, almost a year now.” 	Id. p. 15, ll. 2-3.
The Trustee asked if these contracts were owed to the Debtors,
individually, or whether they were owed to one of his businesses.
Mr. Sanchez answered: “No, they owe it to me as a corporation,
right.” 	Id. l. 11-12. 	After some comparatively lengthy
questioning by creditors and creditors’ attorneys, the Trustee
asked Debtors’ attorney to provide documents and to amend the
Statements and SFA to reflect items that had been discussed. 	He
scheduled a continued creditors’ meeting for October 26, 2009.
UST Exhibit 2 consists of Debtors’ Amended SFA and
Schedules. 	SFA question 10 now discloses transfers:
Transferee 	Date 	Property
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1. 	Chase Mortgage
(deeded to Cordova)
12/08 	Talmadge.
“Ordinary course
of business”
2. 	EMC Mortgage
(since foreclosed)
8/09 	residence
6301 Coors
“Ordinary course
of business”
3. 	First Horizon 	being
foreclosed
Talmadge
“Ordinary course
of business”
4. 	GMAC Mortgage 	in
foreclosure
residence
Coors
“Ordinary course
of business”
5. 	Southwest Lending
(deeded to Lloyd)
2/09 	commercial lot
“Ordinary course
of business”
6. 	Bank of America
Mortgage
in
foreclosure
Valtierra
residence
“Ordinary course
of business”
Exhibit 2 was filed on October 1, 2009 as doc. 25, and was signed
by both Debtors under penalty of perjury.
Exhibit 6 consists of the transcript of the continued
meeting of creditors conducted on October 26, 2009. 	The Trustee
confirmed that amendments had been filed, reminded the Debtors
they were still under oath, and confirmed that he had been
provided with all the documents he had requested. 	Then he turned
the questioning over to a creditor’s attorney who did a very
complete review of the statements and schedules with the Debtors.
The attorney asked the Debtors why their state court lawsuit was
not listed in their schedules. 	Debtors’ attorney answered “No,
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it was listed in the Schedules as being abandoned, I believe.
He’s abandoning all litigation.” 	Ex. 6, p. 8, l. 25 to p. 9, l.
2. 	As the questioning continued, Debtors’ attorney searched
through the Statements and SFA for the listing of the lawsuit.
Then, creditor’s attorney asked if he ever found the listing.
Id. p. 15, l. 24. 	Debtors’ attorney answered “I was not able to
find that. 	The only lawsuit that I was aware of in speaking to
him that he had an interest in - - ”. 	Id. l. 25 to p. 16, l. 2.
Mr. Sanchez corrected the attorney and said “There were two.
There were - - ”. 	His attorney told him to “go ahead and
explain.” 	Id. l. 5. 	Mr. Sanchez gave details of the lawsuits,
and then Debtors’ attorney added:
[F]or some strange reason, I don’t know why, it’s - -
it should be under 4. 	It was not listed, so I’m going
to amend it to reflect the two. ... Yeah, those were
the two that he had an interest in that he was
abandoning. 	I don’t know how it got left out, I don’t
know why. 	I was looking, and it’s question number 4,
obviously, this has to do with that information, but we
can just amend that. 	I don’t - - I don’t know how it
got left out.
Id. p. 17, l. 18 to p. 18, l. 4.
As the questioning continued, creditor’s attorney asked “Can
you tell me why, if you and your wife own these three
corporations or - - that none of them are listed in your
schedules?” 	Id. p. 20, l. 24. 	Debtors’ attorney answered that
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3 This makes no sense. 	Question 10 deals with property
transfers, not ownership of businesses.
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they were disclosed in the amended SFA under question 10. 3 	Id.
p. 21, ll. 9-10. 	The Trustee told the attorney that if the
Debtors owned a corporation, it had to be listed on Schedule B,
and that any lawsuits had to be listed on Schedule B as well.
Id. ll. 10-12 and ll. 24-25. 	The Trustee then continued the
meeting of creditors again, and instructed Debtors’ attorney to
go over the Schedules line by line to ensure that everything was
complete and to file amendments as necessary. 	Id. p. 23, ll. 20-
24. 	The meeting was continued to November 9, 2009. 	Id. p. 28,
ll. 24-25.
UST Exhibit 3 consists of Debtors’ second amended SFA and
Schedules. 	Schedule A was amended to now list real properties in
addition to Valtierra. 	It adds their former residence on Coors
with a value of $-0- and a secured debt of $1.65 million, five
different investment properties (none with any equity), and a
property they now reside in as tenants (Buckeye). 	Schedule B now
valued the same Mercedes at $19,000. 	Schedule B item 13 was also
amended to add stocks: ADS Mortgage, value $1000; Sterling Homes
and Industries, $1000; Sterling Properties, $-0-; and ADS
Financial, $-0-. 	Schedule B item 21 discloses two lawsuits
having a total value of $1.3 million. 	Schedule F was amended to
total $1,893,546. 	Exhibit 3 was filed on December 3, 2009 as
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doc. 55, and was signed by both Debtors under penalty of perjury.
The date of the signatures appears as December 3, 2009. 	Both
Debtors testified that they refused to sign the amendments on
that date because they had not had an opportunity to review them
for correctness. 	They did not know who inserted the date. 	The
date appears to be different handwriting from the Debtors’.
Debtors further testified that they signed a signature page on
December 29, 2009 because they were told by their attorney that
he could not file third amended statements and schedules until
the second ones had been signed.
Debtors’ Exhibit V contains the transcript of the November
9, 2009 meeting of creditors. 	The Trustee states, in relevant
part:
The debtors do appear. 	However, there has been no
amendments that were required, and other data, not to
mention the debtors’ attorney is not present, so we’re
going to adjourn this meeting to the 3 rd of December at
10:30 a.m.
Debtors’ Exhibit AA contains the transcript of the December
3, 2009 meeting of creditors. 	The Trustee states, in relevant
part:
[W]e were adjourned for today so that I could review
amended statements and schedules that were to have been
filed prior to today. 	That wasn’t done. 	I was handed
an unfiled copy of what apparently was filed earlier
today, statements and schedules, which I haven’t had a
chance to review. 	And I don’t know that there is any
point in going over those at this time.
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The Trustee rescheduled the creditors meeting, yet again, to
January 15, 2010.
UST Exhibit 4 consists of Debtors’ third amended SFA and
Schedules. 	Schedule B now lists the same Mercedes with a value
of $15,000. 	Schedule F now totals $2,843,132. 	Both the SFA and
Schedules were signed by Debtors on December 29, 2009 under
penalty of perjury. 	Exhibit 4 was filed on December 29, 2009 as
doc. 60.
UST Exhibit 7 consists of the transcript of the continued
meeting of creditors conducted on January 15, 2010. 	The first
fifty-three pages consist of questioning by the Trustee and Ms.
Michelle Lombard, a Bankruptcy Analyst from the UST’s office, on
the topics of real estate, transfers, and business dealings.
Debtors fully answered all question asked. 	During this
questioning, Debtors first disclosed that when the commercial
property was transferred, Mr. Sanchez also received $35,000
(later discovered to be $45,000). 	Ex. 7, pp. 15-16. 	And, this
was the first time that Debtors revealed the mortgage to the
children. 	Id., pp. 23-28.
On page 58 the Trustee asked Ms. Sanchez if she ever owned a
Porsche. 	She stated that yes, she had, but had sold it to
someone in Canada. 	Id. p. 59, ll. 2-9. 	On page 73, the UST
representative asked why the Mercedes had been valued at $12,000,
then $19,000 then $15,000 when the Blue Book value was $25,000.
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Id. p. 74, ll. 6-8. 	Mr. Sanchez responded that it needed $10,00
of work. 	She also asked what had happened to the Debtors’
Hummer. 	Id. p. 75, l. 20. 	Mr. Sanchez stated that it had been
repossessed. 	Debtors later stated that the Porsche had sold
through a Craiglist internet listing for $10,000. 	Id. p. 77, ll.
17 to p. 78 l. 4. 	On pages 79 through 83 the Debtors disclosed
how the Hummer had been repossessed, how it came to be owned by
Mr. Sanchez’s employer, and its ultimate disposition to third
parties.
THE TRIAL
The UST’s first witness was Stella Cordova, who worked as
Mr. Sanchez’s personal secretary and general manager for his
companies from November 2005 to November 2008. 	She testified
that starting in 2008 the bills were not getting paid timely
because the money was not coming in as it had previously.
She was familiar with both the Porsche and the Mercedes
owned by the Debtors. 	Both vehicles were in Debtors’ possession
when she left her job in November 2008.
Ms. Cordova was also familiar with the mortgage from Mr.
Sanchez to the children. 	UST Ex. 19. 	She testified that she and
Mr. Sanchez drafted the mortgage. 	The opening line of the
mortgage states that it is “made” on April 17, 2006. 	Mr. Sanchez
signed it; there is no date accompanying his signature line. 	The
acknowledgment by Ms. Cordova is also dated April 17, 2006.
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However, the promissory note attached to the mortgage and labeled
Exhibit A to the mortgage, states that Mr. Sanchez promises to
pay $359,000 on April 17, 2006 [sic]. 	The next sentence says the
note shall become due and payable on April 17, 2016. 	The note is
signed by Mr. Sanchez with a date of April 17, 2008. 	The
mortgage was filed of record November 5, 2008.
The UST’s second witness was “Sunny” Chavez, an experienced
insurance adjuster and auto appraiser. 	The Court accepted him as
an expert on vehicle appraisals. 	His appraisal report on the
Mercedes appears as UST Ex. 14. 	His value was $24,292 without
factoring in any mechanical repairs and without analyzing what
repairs would be necessary. 	UST Ex. G is an estimate of repairs
that the Mercedes dealer provided to Mr. Chavez that totals about
$11,000 plus tax. 	However, there were some duplicate repairs
that Mr. Chavez had already considered in arriving at his value
of $24,292. 	Subtracting these duplicate expenses reduces the Ex.
G amount to about $9,650. 	Therefore, the Court finds that a fair
estimate of the Mercedes’ value would be $24,292 less $9,650, or
$14,642.
Mr. Chavez also had a different estimate of mechanical
repairs of $6,800. 	If this were more accurate, the fair value
would be $2,850 higher, or $17,492.
On cross-examination, Mr. Chavez was asked if a lay person,
without the resources available to him as a professional car
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4 During the defense case, Debtors also called Ricardo
Brack, the president of German Motor Works, Inc., an Albuquerque
dealer of German and Swedish cars. 	The Court accepted him as an
expert in both Mercedes repairs and valuations. 	He currently had
possession of the subject Mercedes at the request of the case
trustee, and is performing mechanical repairs. 	He believed that
the total repairs would be about $7,500 and that he would market
it, after the repairs were done, for $20,000.
5 See discussion starting on page 21, below. (“From the
October meeting ... ”)
Page -17-
appraiser, could have come up with a reliable value for this
vehicle. 	He testified: “I don’t think so.” 4
The Debtors initially valued the Mercedes at $12,000 (UST
Ex. 1, doc 17). 	The Court finds that Debtors did not review the
Second Amended SFA and Schedules (UST Ex. 3, doc 55) before their
attorney filed them 5. 	Therefore, the Court finds that Debtors
did not adopt the value of $19,000 listed on those Schedules.
The Third Amended SFA and Schedules (UST Ex. 3, doc 55) valued
the Mercedes at $15,000. 	The Court finds both the $12,000 and
$15,000 reasonable, given the experts’ values and the difficulty
in appraising a high end vehicle with unknown needed repairs.
The UST’s third witness was Phillip Montoya, the Chapter 7
Trustee for the case. 	His testimony closely tracked the
transcripts of the creditors meetings and the series of amended
documents, but usefully added his observations and impressions.
He first testified about the lack of disclosure of the
commercial property transfer. 	However, Mr. Sanchez readily
acknowledged his prior ownership at the first meeting of
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Page -18-
creditors. 	The Trustee continued the meeting of creditors
because he was not satisfied with the completeness of the
disclosures. 	“A lot of things were not scheduled and the Debtors
could not explain.” 	He also testified that he asked Debtors’
attorney to amend the papers and provide supporting documents
from both the Debtors’ personal affairs as well as business
affairs. 	He testified that the documents requested were
provided.
Mr. Montoya further testified that during the second
creditors meeting Mr. Sanchez explained his business relationship
with Mr. Lloyd, who had a second mortgage on the property, and
that the property was held by “like a partnership with Mr. Lloyd
and Mr. Brown”, and that he transferred the property to them in
full satisfaction of debts he owed them and their agreement to
continue paying the first mortgage. 	Mr. Montoya recalled that
Mr. Sanchez valued the property at between $500,000 and $550,000
and that it had a first mortgage of about $350,000 and a second
mortgage of about $100,000. 	Instead of concluding the creditors
meeting, the Trustee continued it again to ensure that the
schedules were correct.
Mr. Montoya testified that after the creditors meetings he
investigated the commercial property to see if he should attempt
to recover it. 	He discovered that the values were as stated and
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Page -19-
that the mortgages were valid liens on the property. 	He decided
against trying to recover it.
Mr. Montoya also testified regarding the Debtors’ Hummer,
which had been repossessed. 	He basically agreed with the
Debtors’ version of repossession, redemption using funds provided
by Mr. Garcia (Mr. Sanchez’s employer), and subsequent transfer
to Mr. Garcia. 	He decided to not pursue recovery.
On cross-examination, Mr. Montoya testified that it appeared
to him that Debtors’ bankruptcy attorney advised them not to list
the omitted transfers. 	This is supported by the quoted passage
above from the first creditors meeting where the attorney stated
that he had not listed transfers that were made in the ordinary
course of business. 	He apparently believed that since Mr.
Sanchez was a realtor, any transfer of real estate should not be
included. 	Mr. Montoya testified: “To be perfectly honest,
nothing [this attorney] would do on statements and schedules
would surprise me. 	What he advised, I can’t say.” 	Mr. Montoya
explicitly testified that he did not believe that Mr. Sanchez was
misleading, but he did believe that certain items should have
come up earlier, such as the cash received in exchange for the
commercial property.
Mr. Montoya either read, or attended, the deposition of Mr.
Lloyd in this case. 	He testified that substantially all of Mr.
Sanchez’s testimony was corroborated by Mr. Lloyd’s (with the
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exception that Mr. Lloyd stated that, in addition to what Mr.
Sanchez described, he also paid back due property taxes and
interest on those taxes on the property.) 	The Trustee was clear
that Mr. Sanchez did not transfer the property for less than its
value.
The UST’s final witness was Lawrence Lloyd. 	His testimony
confirmed the details of his relationship with Mr. Sanchez
regarding the commercial property. 	He also confirmed that it was
transferred to him because Debtors could no longer pay the
mortgage and he was willing to make the payments and forgive debt
in exchange for it. 	He also testified that Mr. Sanchez never
suggested structuring the transaction to disguise any payments or
misdirect them, nor did he attempt to conceal the transfer or the
payment. 	He also confirmed that Mr. Sanchez has no current or
future interest in the property. 	The UST concluded its case by
asking the Court to take judicial notice of anything in the file,
to which the Debtors did not object.
Debtor Linda Sanchez testified first for the Debtors. 	She
is a well-spoken, highly intelligent and completely believable
witness. 	She has a Master’s Degree in Education, and currently
works as an “instructional coach” (in her words, she teaches the
teachers) at a Middle School in Albuquerque. 	Previously she was
a classroom teacher. 	There is no doubt that she had and has no
involvement with Mr. Sanchez’s business affairs. 	She described
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Page -21-
herself as a full-time teacher, working early and late, with no
present or past interest in being in business with her husband.
She testified that they decided to file bankruptcy in
August, 2009 when she was notified that her paycheck would be
garnished by one of her husband’s business vendors. 	At first, it
appeared that she took the situation well. 	“It was one of those
business things.” 	Her husband picked out the bankruptcy
attorney, but she had no idea how he did that. 	Then, the
situation apparently turned for the worse. 	The attorney gave
them lots of forms to fill out and papers to read. 	Lacking a
business background, she found it difficult to understand a lot
of the questions and even more difficult to answer. 	She
testified that she did the best she could. 	She succinctly
described the first meeting of creditors: “It was horrible.” 	Her
memory of the meeting was that mostly the Trustee was angry and
spent his time telling their attorney what and where to put
information on the forms.
Her next public encounter with the process was the October,
2009 creditors meeting. 	All she recalled was that the forms were
still not right and the Trustee was asking a lot about her
husband’s businesses. 	The meeting was continued to November 9,
2009.
From the October meeting to the November 9, 2009 meeting,
she never spoke to the attorney. 	When the attorney failed to
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appear at the November meeting, the Trustee continued it to
December 3. 	During that month, she and her husband worked
diligently to provide everything that their attorney and the
Trustee wanted. 	On December 3, before the next meeting, their
attorney presented them with amended statements and schedules,
represented that he had made all the necessary corrections, and
instructed the Debtors to sign and date the signature page. 	They
refused because they had had no opportunity to examine them. 	The
attorney filed the papers without a signature and presented
unsigned copies to the Trustee at the meeting. 	The Trustee
refused to consider the untimely and unsigned copies, and
continued the creditors meeting to January.
In late December, their bankruptcy attorney requested that
they now sign the Third Amended Schedules and SFA. 	He told them
that he had prepared a Fourth, and hopefully final set, and that
the Fourth set could not be filed until the Third had been
signed. 	They signed.
At the January 15, 2010 meeting of creditors, the Trustee
asked Ms. Sanchez if she ever owned a Porsche. 	She stated she
had. 	Debtor Ex. B is the title. 	She testified that earlier in
the year, she could not remember exactly, she posted an
advertisement on the internet site Craigslist, and a man from
Canada purchased it. 	Mr. Sanchez believed she received $10,000;
she later testified that she believed it was either $10,000 or
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Page -23-
$12,000. 	She testified that she sold it for its fair market
value. 	She also testified that she simply forgot to list it on
the forms. 	She stated that she deposited the money into the
checking account and used it to “try to” pay bills, which were
all overdue. 	She testified that she was under a lot of stress at
the time, many creditors were calling incessantly, both at home
and at her work, and felt that she could not escape. 	When asked
why she had omitted it, she stated: “Everyone assumes we know
what we’re doing. 	But to me property is land and houses, not
vehicles and furniture. 	I did not know.” 	When asked why she had
not amended to include it, she stated that her attorney never
told her it was required and never advised her to do so. 	She
testified that she and her husband had gone line by line through
each iteration of the documents. 	She repeatedly emphasized that
at all times she and her husband believed the filings were
correct.
Mr. Sanchez also testified. 	He never contemplated
bankruptcy until a state court issued a bench warrant for his
failure to appear in court to show his financial statements in
aid of execution of judgment. 	He also, at about the same time,
learned of the pending garnishment of Ms. Sanchez. 	He knew a
bankruptcy attorney through his association with the University
of New Mexico Lobo Club.
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6The UST argued that Mr. Sanchez should be deemed to be a
sophisticated business person due to his ownership of four
businesses and dealings with large banks on large real estate
deals. 	While the Court finds him relatively knowledgeable about
real estate, the Court also finds him surprisingly
unsophisticated about business in general. 	For example, when
asked who owned the contracts that were subject to the state
court breach of contract litigation, Mr. Sanchez answered “No,
they owe it to me as a corporation.” 	UST Ex. 5, p. 15, l. 11-12.
The Court also specifically finds that he has little to no
knowledge of bankruptcy law.
Page -24-
He met the bankruptcy attorney who told him that this would
be a “personal” bankruptcy. 	He also told him that after he
received his personal discharge, then they could proceed to file
separate business bankruptcies for each corporation. 	Mr. Sanchez
believed 6 this, and therefore also believed that the business
transactions, no matter how structured, were irrelevant to his
personal case. 	The Court finds, under all of the circumstances,
that his belief was reasonable.
At the time of trial, Mr. Sanchez had been employed for
eighteen months as a limo driver for Lucky Boy Limos, owned by
Mr. Garcia. 	Mr. Garcia is a friend of Mr. Sanchez. 	Mr. Sanchez
testified that they formerly owned a Hummer (financed through
Lighthouse Financial at 115% interest per year) that was
repossessed while they were out shopping in late May or early
June, 2009. 	At the time of repossession, Debtors owed only about
$8,000 to $9,000. 	However, they did not have the money to redeem
the car. 	Mr. Sanchez called Mr. Garcia, for whom he had already
started working, and asked for a ride home. 	Mr. Garcia did give
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Page -25-
them a ride home, and during the conversation suggested that he
redeem the vehicle and use it in his business. 	Mr. Sanchez
agreed, but Lighthouse insisted that the redemption be in Mr.
Sanchez’s name as owner of the car, so Mr. Garcia loaned the
money to Mr. Sanchez to redeem the car and Mr. Garcia signed the
title over to him. 	In fact, Mr. Garcia used the vehicle in his
business and allowed Mr. Sanchez to drive it home from time to
time. 	Mr. Garcia also allowed other employees to drive vehicles
home. 	Mr. Garcia later sold the Hummer and Mr. Sanchez did not
receive any proceeds.
Mr. Sanchez testified that when he stated he received
$35,000 out of the transfer of the commercial building, he was
mistaken. 	He further testified that he had not realized he
misspoke until he attended Mr. Lloyd’s deposition who correctly
stated the amount as $45,000. 	He testified that he intended to
answer honestly, and had no motive to lie about the amount. 	He
testified that he received the money, deposited it, and then used
all of it for ordinary bills and living expenses. 	He stated that
there was no part of the $45,000 remaining when he filed
bankruptcy. 	Mr. Sanchez further testified that he explained this
transaction to his bankruptcy attorney, who reminded him that
this was only a personal bankruptcy that had nothing to do with
the corporations. 	When further questioned about this
transaction, Mr. Sanchez admitted the land had been personally
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Page -26-
owned, and that he had explained it to the bankruptcy attorney,
but then the bankruptcy attorney also said it was an ordinary
course of business transaction that should be omitted.
Mr. Sanchez described the circumstances under which he
executed a mortgage to his children. 	Their grandfather had died
and left them a considerable amount of money. 	Without providing
details, it seems the money was entrusted to Mr. Sanchez, and
that it went into operating expenses for Mr. Sanchez’s
businesses. 	He thought he should provide for repayment of these
funds, and executed the mortgage. 	He specifically testified that
he signed it on April 17, 2008, but that he did not record it.
Neither child received any money as a result of the mortgage, and
they voluntarily released it when Mr. Sanchez transferred the
property to Lloyd.
The remainder of Mr. Sanchez’s testimony was largely
repetitive of Ms. Sanchez’s testimony. 	The Court will therefore
not repeat the details.
CONCLUSIONS OF LAW
1. 	Plaintiff’s first theory is that because Mr. Sanchez did not
disclose the mortgage to his children or the transfer of the
commercial property on his original filings, his discharge should
be denied. 	The Court will address each part.
First, the evidence before the Court established that Mr.
Sanchez owed a debt to the children. 	And, the evidence suggests
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a preference to the children. 	See 11 U.S.C. § 547. 	The making
of a preferential transfer, however, is not evidence of intent to
hinder, delay or defraud other creditors. 	See Conrol Power
Systems, Inc. v. Reddington (In re Reddington), 36 B.R. 62, 65
(Bankr. S.D. Fla. 1984)(citing In re White v. Brown Shoe Co., 30
F.2d 674 (5th Cir. 1929))(“[I]t is clear that a mere preferential
transfer is not the equivalent of a fraudulent transfer for
purposes of an objection to discharge and would further not
constitute evidence of actual fraud.”); Everwed Co. v. Ayers (In
re Ayers), 25 B.R. 762, 770 (Bankr. M.D. Tenn. 1982)(“Like the
Act, the Code does not make a preference an objection to
discharge. 	There is no element of moral turpitude connected with
the giving of a mere preference.”); Coder v. Arts (In re
Armstrong), 213 U.S. 223, 241 (1909)(“An attempt to prefer is not
to be confounded with an attempt to defraud, nor a preferential
transfer with a fraudulent one.”)(citation omitted); Marchbanks
v. McCullough, 47 N.M. 13, 132 P.2d 426, 429 (1943)(“[T]here is
no law which prevents a preference of one creditor over another
(except bankruptcy and insolvency laws not involved here), if the
transfer is not in fact made with the intent and purpose of
hindering, delaying or defrauding any creditor; notwithstanding
the transferer may be insolvent, although the effect will be to
hinder and delay other creditors.”) 	Nothing else in the
complaint or in the proof at trial suggests an actual intent by
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Mr. Sanchez to hinder, delay or defraud creditors. 	All the UST
proved is that the Debtor executed a mortgage to his children.
But, a relationship between the parties does not, by itself, cast
suspicion upon the transaction or create a prima facie
presumption of invalidity. 	Gottlieb v. Thatcher, 151 U.S. 271,
279 (1894). 	Accord Lumpkins v. KcPhee, 59 N.M. 442, 450, 286
P.2d 299, 303 (1955)(“The fact that the parties to the
transaction are related by blood or marriage is to be considered,
of course, but it requires more than that to impeach an otherwise
valid conveyance.”). 	See also § 56-10-18(B)(1) NMSA (“In
determining actual intent ... consideration may be given, among
other factors, to whether: (1) the transfer or obligation was to
an insider.”
Because the UST did not prove actual fraudulent intent, the
Court looks at “badges of fraud” to determine intent.
Gullickson, 108 F.3d at 1293. 	Therefore, the Court will review
the facts to identify badges of fraud set out in Turner, 335 B.R.
at 761.
Badge of fraud 	Evidence
1. 	Lack or inadequacy of
consideration
Only testimony was from Mr.
Sanchez, that he owed the
children. 	Under § 56-10-17 NMSA,
value is given if, in exchange,
an antecedent debt is secured or
satisfied.
2. 	family, friendship or
special relationship
Family relationship.
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3. 	attempt to keep
transfer secret
No direct evidence Mr. Sanchez
attempted to keep the transfer
secret. 	His failure to list it
on the SFA is not dispositive,
based on claims that his attorney
instructed him that it was an
ordinary course of business
transaction that should not be
disclosed. 	The fact that he
retained ownership of the land is
not relevant, because the
transfer - the mortgage - was a
lien on the asset, not a transfer
of the asset itself, which would
have been by deed. 	See
Gullickson, 108 F.3d at 1293.
4. 	financial condition
before and after
transfer
No direct evidence presented that
the transfer caused them to
become insolvent.
5. 	existence of cumulative
effect or pattern
There was a single transaction
with the children. 	There is no
evidence of other mortgages on
the commercial property.
6. 	overall chronology 	Nothing probative. 	Debtors were
in bad shape before, during, and
after the transfer.
7. 	other factors 	The children voluntarily released
the mortgage, without
consideration, before the
bankruptcy was filed. 	The
property itself was transferred
before the bankruptcy itself.
Debtors’ attorney omitted
disclosure of the transfer;
Debtors readily disclosed
property transfer at the first
meeting of creditors. 	Debtors
had no motive to hide the
transfer.
Second, it is true that Debtors omitted the transfer of the
commercial property from their SFA. 	Debtors both testified they
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had made their attorney aware of the transfer. 	Debtors’ attorney
announced at the first meeting that he had omitted “ordinary
course of business transfers.” 	When the Trustee requested an
amendment to SFA question 10, the attorney complied, but insisted
on describing each transfer as an “ordinary course of business”
transaction. 	The Court has found that the Debtors reasonably
relied on their attorney. 	This reliance negates any fraudulent
intent. 	Furthermore, one purpose of the disclosure requirement
is to ensure that the trustee and all creditors are aware of all
of the debtors’ business transactions and assets so that they
(trustee and creditors) can evaluate for themselves the value of
the assets at issue. 	See, e.g., Beaubouef v. Beaubouef (In re
Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992). 	In this case,
that purpose is not defeated: there was no equity, it was
transferred before the commencement of the case, and its
disclosure could not have lead to additional estate assets.
2. 	Plaintiff’s second theory is that because Debtors did not
disclose the sale of the Porsche, their discharge should be
denied. 	The Court finds that the omission was mere mistake or
inadvertence. 	The omission was not knowing and fraudulent. 	When
questioned about the vehicle at the creditors meeting, Debtors
readily disclosed the transfer. 	The Debtors also testified that
the funds were reasonably used and not squandered or hidden.
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7 This ruling should not be taken in any way to constitute a
criticism of the United States Trustee for prosecuting this §727
action. 	Certainly the facts on their face suggest the likelihood
of wrongdoing, and that office could not be expected to
anticipate such surprising conduct on the part of Debtors’
bankruptcy counsel that turned out to be at the heart of the
suspicious behavior that led to this prosecution.
Page -31-
3. 	Plaintiff’s third theory is that because Debtors presented
false testimony regarding the Hummer, their discharge should be
denied. 	The Court finds that the testimony was true. 	The Court
also finds that the evidence presented does not show a continuing
concealment of the Hummer.
4. 	Plaintiff’s fourth theory is that the Debtors undervalued
their Mercedes to protect their exemption. 	The Court finds that
Debtors did not undervalue the Mercedes or, if they did, it was
not intentional or willful.
CONCLUSION
The Court concludes that the UST has failed to meet its
burden of proof to show that the Debtors either acted with an
intent to hinder, delay or defraud creditors, or made a false
oath in connection with the case. 	The Court will dismiss this
adversary proceeding and grant Debtors their discharge. 7
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Honorable James S. Starzynski
United States Bankruptcy Judge
Date entered on docket: October 11, 2011
Copies to:
Alice Nystel Page
Office of UST
PO Box 608
Albuquerque, NM 87103
Brad L Hays
PO Box 15520
Rio Rancho, NM 87174-0520
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