Fraleigh v. Fraleigh

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FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re
Case No. 10-36282
Donna M. Fraleigh, 	Chapter 7
Debtor.
---------------------------------------------------- X
Brian Fraleigh,
Plaintiff, 	Adv. P. No. 10-09091
-against-
Donna M. Fraleigh,
Defendant.
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MEMORANDUM DECISION DENYING OBJECTION TO DISCHARGE
A P P E A R A N C E S :
Andrea B. Malin
Genova & Malin, Attorneys
The Hampton Center
1136 Route 9
Wappingers Falls, NY 12590
Thomas W. Bauer
Thomas W. Bauer Esq.
42 Catharine Street
Poughkeepsie, NY 12601
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CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
Introduction
Plaintiff objects to the Defendant’s discharge on the grounds that she
knowingly and fraudulently made a false oath or account, by failing to disclose her
live-in boyfriend’s presence as a household member and his alleged contribution to
the support of herself and her dependents on the means test and schedules. The
Court conducted a trial, and denies the objection to discharge, because the live-in
boyfriend did not make a material contribution to the Debtor’s support, and even if
he did, the couple’s attitude toward their financial relationship was such that it
cannot be said that the Debtor had intent to defraud when she approved and filed
her schedules and means test without disclosing the boyfriend or his alleged
contribution. The couple viewed themselves as splitting household expenses and
having no responsibility with respect to each other’s non-household expenses, the
antithesis of a relationship of financial support. Finally, the Court finds that the
Debtor was forthright with her counsel at the time the schedules and means test
were prepared, and she relied on his advice and representation. For all these
reasons, the Plaintiff has failed to prove the elements required for denial of
discharge under 11 U.S.C. § 727(a)(4)(A). The objection to discharge is DENIED
and this complaint is DISMISSED.
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Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a),
28 U.S.C. § 157(a) and the Amended Standing Order of Reference signed by Chief
Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” under
28 U.S.C. § 157(b)(2)(J) (objections to discharge).
Background 1
Plaintiff and Defendant are divorced. In 2004, the Defendant began dating
Christopher Sekul (“Sekul”). Trial Tr., 13, 137-38, Apr. 11, 2012 (hereafter, cited
as “Tr.”). In 2006, the Defendant moved into Sekul’s home with her twin
daughters; the couple rented a home together that year while Sekul’s home was
rebuilt after a fire. Tr. at 13. The Defendant resided with Sekul in his home with
her daughters from 2008 until the time her bankruptcy case was commenced,
including during the six-month pre-petition period that is used to prepare a debtor’s
schedules and means test. 2 See Tr. at 143-45. During the six months prior to the
Defendant’s bankruptcy case, the parties’ twin daughters were minors, resided with
1 Unless otherwise noted, the following discussion constitutes the Court’s findings of facts and
conclusions of law pursuant to Fed. R. Bankr. P. 7052.
2 The Court and the parties stated throughout the trial that the relevant period was October 2009
“to” April 2010. The Defendant commenced her bankruptcy case on April 30, 2010. A debtor’s
income and expenses of the month of filing are not considered in the calculation of income for
purposes of the means test. See 11 U.S.C. § 101(10A)(i) (defining “current monthly income” as
the average monthly income from all sources that the debtor receives during the 6-month period
ending on the last day of the calendar month immediately preceding the date of the
commencement of the case). The evidence on which the Court rests its decision is from October
2009 through March 2010.
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the Defendant, and Defendant received child support from the Plaintiff. While the
precise details were not established at trial, it has been alleged in this adversary
proceeding that at some point, Plaintiff’s child support obligation was reduced
from $215 per week to about $66 per week. Compare Answer to Complaint, 4, ¶ 35
with Defendant’s Trial Exhibit A (indicating child support payments of $66.49).
Defendant commenced her bankruptcy case on April 30, 2010. On Schedule
I, a statement of her current income, the only income listed was what the
Defendant received from her employment and the child support she received from
Plaintiff. Case No. 10-36282, ECF No. 1. An expense for “electricity and heating
fuel” of $225 was listed on Schedule J, a statement of current expenditures, as well
as $150 for DirecTV and $35.70 for garbage pickup, among other expenses. Id.
Sekul was listed as a codebtor with respect to creditor “Hudson Valley Federal;”
the address provided for Sekul was different from the Defendant’s home address.
Id. On Official Form 22A, commonly referred to as the “means test” established by
11 U.S.C. § 707(b), Debtor listed only her wages and the child support as income,
despite a section being provided on the form for “income from all other sources.”
ECF No. 2, 2. She listed a “household size” of three. Id., 3. Under this information
and the corresponding calculations, the “presumption of abuse” did not arise,
suggesting that the Debtor could receive the chapter 7 discharge.
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On July 1, 2010, Plaintiff, by counsel, filed motions for examination of
Defendant and Sekul pursuant to Federal Rule of Bankruptcy Procedure 2004, and
to extend the deadline to object to Defendant’s discharge under Bankruptcy Code
§§ 523 and 727. ECF Nos. 10, 11, 12. The motions were granted by orders entered
July 22, 2010, and July 30, 2010. ECF Nos. 17, 19. Other orders and stipulations
subsequently were entered with respect to the scheduling of the Rule 2004 exams
and the deadlines to object to discharge. Additionally, the chapter 7 trustee and
United States Trustee’s deadlines to object to discharge were extended; with
respect to these entities, the deadline has passed without the filing of a complaint.
The present adversary proceeding was commenced on October 29, 2010.
Adv. P. No. 10-09091, 1. The Court granted the Defendant’s motion for summary
judgment by order entered on August 18, 2011, for the reasons stated in a decision
entered on August 16, 2011, on all counts except for denial of discharge for
making a false oath. See ECF Nos. 45, 46. The Court found that there was a triable
question of material fact concerning whether the Defendant intentionally
misrepresented her household size as three instead of four, which would include
Sekul, on the means test, and omitted his alleged contribution to the support of her
and her daughters on the means test and Schedule I. See ECF No. 45. Specifically,
the Court stated, “The plaintiff has raised a triable question of material fact with
respect to the amount of money, if any, that Sekul contributed to the support of the
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debtor and her defendants for purposes of the means test calculation. It may be that
the defendant should have disclosed Sekul as a member of the household, because
evidence has been offered that suggests that Sekul and defendant function as an
economic unit.” Id. at 26.
Upon request of the Defendant, the Court issued a pretrial ruling from the
bench on March 5, 2012, finding upon the uncontroverted allegations presented in
the motion for summary judgment that the Defendant and Sekul function as an
“economic unit” for purposes of establishing household size on the means test. The
“economic unit” test was articulated in In re Morrison, 443 B.R. 378, 386 (Bankr.
M.D.N.C. 2011), on a motion to dismiss pursuant to section 707(b): “whether the
individuals in the house are acting as a single economic unit. Thus, a household
will include individuals who are financially dependent on a debtor, individuals
who financially support a debtor, and individuals whose income or expenses are
inter-mingled or interdependent with a debtor.” The Morrison court identified
seven factors for consideration in applying the economic unit test:
1) the degree of financial support provided to the individual by the
debtor; 2) the degree of financial support provided to the debtor by the
individual; 3) the extent to which the individual and the debtor share
income and expenses; 4) the extent to which there is joint ownership
of property; 5) the extent to which there are joint liabilities; 6) the
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extent to which assets owned by the debtor or the individual are
shared, regardless of title; and 7) any other type of financial
intermingling or interdependency between the debtor and the
individual.
Id. at 388. Compare In re Epperson, 409 B.R. 503, 507-508 (Bankr. D. Ariz. 2009)
(denying United States Trustee’s motion to dismiss for failure to include all of
roommate’s income; finding household was of two and only part of roommate’s
income paid to debtor was necessary for means test, noting “The household
expenses of the Debtor, such as rent, food, and utilities, include the Roommate’s
expenses. The Roommate’s $900 contributions benefit the Debtor by decreasing
the household expenses the Debtor would otherwise have to pay”).
In the alternative, some bankruptcy courts define household size using
definitions and guidelines of the Internal Revenue Service or the Census Bureau.
The “Internal Revenue dependency approach” relies on the Internal Revenue
Manual, which states that the number of household members allowed for purposes
of determining the applicable National Standards should generally be the same as
those allowed as dependents on the taxpayer’s tax returns. See In re Jewell, 3655
B.R. 796, 800-801 (Bankr. S.D. Ohio 2007) (rejecting the IRS approach advocated
by the UST; “[the narrow definition] fails to recognize those instances when a
debtor may be actually providing support for a household member, but the
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circumstances do not fall neatly within the parameters envisioned by the [United
States Trustee]”). A court might determine household size using the Census
Bureau’s definition, as that entity’s definition of “median family income” is
referenced in the Bankruptcy Code’s definition of “median family income”—
though not in a definition of household, which is not defined in the Bankruptcy
Code. Cf. 11. U.S.C. § 101(39A)(A) (defining “median family income”). “The
Census Bureau defines ‘household’ as ‘all of the people, related and unrelated,
who occupy a housing unit.’” In re Ellringer, 370 B.R. 905 (Bankr. D. Minn.
2007) (citation omitted). The Ellringer court held that the Census Bureau
definition of household should apply: “The Census Bureau provides the most
appropriate definition of ‘household’ for use in the means test because it ensures
that a household in the means test will have the same number of members as the
calculation of median family income.” Id. at 910-911. The flaws with the IRS and
Census standards are neatly summarized by the court in In re Herbert:
While this court agrees with the Ellringer court to the extent it
recognizes that there will be instances in which unrelated, non-
dependent individuals should be treated as part of a household, the
“heads on bed” approach adopted by that court is too broad because it
includes anybody who may be residing under the debtor's roof without
regard to their financial contributions to the household or the
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monetary support they may be receiving from the debtor. Neither does
it take into consideration their dependency or relationship to the
debtor. On the other hand, the court declines to adopt the standards of
the Internal Revenue Manual for purposes of determining household
size because they do not account for the situation in which a debtor
may be supporting an individual without declaring that person as a
dependent on his tax return.
In re Herbert, 405 B.R. 165, 169 (Bankr. W.D.N.C. 2008).
On March 5, 2012, the Court ruled that the economic unit standard is the
appropriate measure of household size in the case at bar. Arguably, the Court had
already ruled in the decision on the motion for summary judgment that this is the
standard under which the means test should have been calculated. Further, several
of the factors articulated by the Morrison court are present in the circumstances at
bar and were uncontroverted on the motion for summary judgment: the Defendant
and Sekul allegedly shared expenses such as the mortgage payment; the couple
shared a home; Sekul allowed the Defendant use of his boat; Defendant co-signed
Sekul’s loan for the boat; Debtor had loaned Sekul $43,000, which was repaid; and
Defendant co-signed a second loan of $25,000 from the credit union. See ECF Nos.
38, 41, 45.
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The Court applied the economic unit test to the determination of household
size; the amount of Sekul’s actual contribution to the support of the Defendant was
left to be established at trial. The amount of Sekul’s support goes to whether the
means test and schedules were false, and if so, whether such falsity was material.
Further, as the present cause of action is for denial of discharge under Bankruptcy
Code § 727(a)(4)—as opposed to the less severe penalty of dismissal under §
707(b), which does not require intent to defraud—the Court required Plaintiff to
present evidence of knowledge of the falsity and fraudulent intent. The Court
emphasized that the issue to be tried was not whether the Debtor filled out the
means test and schedules properly, but was whether the Debtor intentionally
mislead creditors and the Court by omitting Sekul’s presence in her financial life
from the filings.
The Court ruled that only the amount of Sekul’s income that goes to the
support of the Debtor should be included in the Debtor’s current monthly income.
See Rice v. Sasse (In re Sasse), 438 B.R. at 643 (“[Plaintiff] wants the debtor to
include all of his girlfriend’s income as part of his current monthly income, but
ignore the reality that she is part of the resulting ‘household.’ It is as if the plaintiff
suggests that she is little more than a phantom, existing only to supply the debtor
with additional income but never actually resting her head in a physical location.”);
Epperson, 409 B.R. at 508 (“the Code explicitly limits a third-party's contribution
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to current monthly income to that amount the third-party pays toward the
household expenses of the debtor.”) (citing 11 U.S.C. § 101(10A)(b)); In re
Ellringer, 370 B.R. 905, 91 (Bankr. D. Minn. 2007) (noting that the roommate was
not a dependent of the debtor, and stating, “the statute only requires that the debtor
include income provided by a person other than the debtor for support of the debtor
or the debtor’s dependents.”).
It appears that the question of how much of a third party’s income should be
factored into the debtor’s “current monthly income” and disclosed on Schedule I is
a matter of first impression for a court applying the “economic unit” approach to
household size. The reasoning underlying Sasse, Epperson and Ellringer applies
with equal force when the question is in the context of an “economic unit.” The
nonfiling unit-member presumably has his or her own expenses. Bankruptcy Code
§ 101(10A)(B) plainly limits third-party income, when computing “current
monthly income,” to amounts paid “on a regular basis for the household expense of
the debtor or the debtor’s dependents …” 11 U.S.C. § 101(10A)(B) (emphasis
added). Further, the purpose of disclosures is to ease the burden on trustees and to
yield assets that can be liquidated for the benefit of creditors, see Bernhardt v.
Radloff (In re Radloff), 418 B.R. 316, 322 (Bankr. D. Minn. 2009), and the purpose
of the means test is to be sure that a debtor who can afford to repay debts does not
“abuse” the Bankruptcy Code by filing a chapter 7 case. See In re Gilligan, No. 06-
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00885-5-ATS, 2007 WL 6370887, at *1 (Bankr. E.D.N.C. Jan. 24, 2007)
(“According to § 707(b)(2), if a debtor’s means test shows an ability to repay some
portion of his debts, then there is a presumption of abuse, and, absent special
circumstances, the case must either be converted to chapter 13 or dismissed.”).
Similarly, for purposes of section 727(a)(4), a false oath is material “simply if it is
pertinent to the discovery of assets, and a ‘material’ matter is one bearing a
relationship to the debtor’s business, transactions or estate which might lead to the
discovery of assets, business dealings, or the existence or disposition of the
debtor’s property.” Baron v. Klutchko (In re Klutchko), 338 B.R. 554, 568 (Bankr.
S.D.N.Y. 2005); In re Curcio, 387 B.R. 278 (Bankr. N.D. Fla. 2008) (“even if a
portion of the proceeds [of a sale of real property] would qualify as ‘income,’ the
Debtor could not have ‘received’ any proceeds because she held no equitable
interest in the property.”). Requiring a nonfiling third party to disclose all income
regardless of a debtor’s interest in such property, even in the context of an
“economic unit,” would confuse these goals and yield no benefit to the estate.
Further, the factors a court may consider in determining whether the debtor
and thirty party function as an economic unit are not all concerned with the support
of the debtor. The court considers, among other things, the financial support the
debtor provides the other party, whether there are joint liabilities, and whether
assets are shared regardless of title. The “economic unit” test considers the debtor’s
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overall financial picture and applies only to determine household size. Where, as
here, the debtor operates in an economic unit with a third party but the third-party’s
financial contribution to the Debtor’s support is inconsequential, requiring
disclosure of all the third-party’s income as an automatic application of the
“economic unit” test would distort the debtor’s assets and ability to repay debt.
Evidence presented at trial
The Court required an evidentiary hearing to determine whether the
Defendant’s alleged failure to include the contribution of her live-in boyfriend,
Sekul, to the support of herself and her two dependent children constitutes a false
oath in connection with the bankruptcy case, for purposes of whether the discharge
should be denied pursuant to 11 U.S.C. § 727(a)(4). The issue is whether the
Defendant’s failure to disclose Sekul as a member of the household and his alleged
contribution to Defendant’s support on the schedules and means test is a material
misrepresentation that warrants denial of discharge. 3
The Court heard testimony from Sekul, his friend Corey Madison, the
Defendant, and Brian Juran, the attorney who prepared and filed the Debtor’s
bankruptcy petition and schedules. The testimony of Madison was largely
irrelevant, and the Court found that he lacked credibility as a witness. See Tr. at
3 Despite having stipulated to this legal issue in the joint pretrial order, Plaintiff incorrectly
argues in his post-trial brief that the case is one of “abuse” that must be dismissed under
Bankruptcy Code § 707(b). Plaintiff failed to include a cause of action for dismissal under §
707(b) in the complaint—assuming he would have had standing to do so. See 11 U.S.C. §
707(b)(6). The Court declines to consider such relief at this stage in the litigation.
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130 (“The credibility here is shot. But … he’s not testifying to anything.”). Juran
did not remember the Defendant specifically, and his testimony is largely
unhelpful to the Court, other than his testimony that his practice is to require
several months of bank statements and other financial information from his clients
before filing their bankruptcy cases. E.g., Tr. at 350 (“I’m sure I had bank
statements. You know, my normal thing is I give them a list. So I have things like
bank statements, the title to the car, things of that nature.”). The Court denied
admission of evidence and testimony concerning Sekul’s landscaping business, as
only the amount of Sekul’s support of the Debtor was in issue, as opposed to
Sekul’s total income. Tr. at 64-69; 99-119. The Court admitted Defendant’s
Exhibits A (bank statements from Hudson Valley Federal Credit Union); B
(checks); C (cash advance from credit card) into evidence. Consistent with its
ruling on the “economic unit” test, the Court emphasized throughout the trial that
the issue was narrow, concerning Sekul’s contribution to the Defendant’s support.
E.g., Tr. at 38 (“It doesn’t make any difference where the money went. He’s not
the one in bankruptcy. He’s not a married partner. All we have to know is what he
gave to her.”). The Court denied admission of a statement of financial support filed
in a proceeding before another tribunal in connection with child support, because
the statement concerned a period several months after the bankruptcy case was
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commenced, and was irrelevant to whether Sekul supported the Debtor and her
dependents in the six months prior to filing. Tr. at 46.
Denial of Discharge under § 727(a)(4) (false oaths to Court)
Denial of discharge is a harsh and drastic penalty. See Korte v. U.S. (In re
Korte), 262 B.R. 464, 473 (B.A.P. 8 th Cir. 2001). The provisions of section 727 are
strictly construed in favor of the debtor. Id. (citation omitted).
“The court shall grant the debtor a discharge, unless . . . (4) the debtor
knowingly and fraudulently, in or in connection with the case . . . made a false oath
or account . . . .” 11 U.S.C. § 727(a)(4)(A). To prove an objection to discharge
under section 727(a)(4)(A), the party objecting to discharge must establish by a
preponderance of the evidence that: (1) the debtor made a statement under oath; (2)
the statement was false; (3) the debtor knew that the statement was false; (4) the
debtor made the statement with intent to deceive; and (5) the statement related
materially to the bankruptcy case. Baron v. Klutchko (In re Klutchko), 338 B.R.
554, 567 (Bankr. S.D.N.Y. 2005).
Statements made on the means test and schedules are made “under oath” for
purposes of section 727(a)(4). See Bernhardt v. Radloff (In re Radloff), 418 B.R.
316 (Bankr. D. Minn. 2009).
“[T]he question is whether the debtor intended to deceive any recipient or
reader of the debtor’s statements and schedules.” Id. at 322 (citation omitted). The
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questions of Defendant’s knowledge of the falsity and intent to deceive are
questions of fact. Id. “Two factors go to a debtor’s state of mind under the
‘knowledge’ element of the statute’s scienter requirement. The first is the debtor’s
awareness of his own interest in, or claim to, an asset material to the bankruptcy
process, or his actual knowledge of the occurrence of a past event or condition in
his financial history that is to be disclosed. The second is the debtor’s
understanding that he was required to disclose the specific points of information on
his statements and schedules.” Id. “As to the fraud element, the inquiry is whether
the Debtor intended to induce the reader or recipient of the statements and
schedules, to a particular course of action or forbearance, via reliance on the
omission or misrepresentation in the document’s entries.” Id. at 322-323.
“Fraudulent intent must be shown by actual, not constructive fraud, although a
‘reckless indifference to the truth’ also suffices.” Baron v. Klutchko (In re
Klutchko), 338 B.R. 554, 567 (Bankr. S.D.N.Y. 2005) (citation omitted).
With respect to the burden of proof, the creditor must prove the elements of
the claim by a preponderance of the evidence. Klutchko, 338 B.R. at 567.
Although the objector to a debtor’s discharge bears the ultimate
burden of proof, by a preponderance of the evidence, the objector may
present a sufficient prima facie case on certain aspects of the question
to place the burden on the debtor to come forward with contrary
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evidence. The rule leaves to the courts the formulation of rules
governing the shift of the burden of going forward with the evidence
in the light of considerations such as the difficulty of proving the
nonexistence of fact and of establishing a fact as to which the
evidence is likely to be more accessible to the debtor than to the
objector. In litigation under section 727(a)(4)(A), where it reasonably
appears that the oath is false, the burden falls upon the debtor to come
forward with evidence to prove that it was not an intentional
misrepresentation. If the debtor fails to provide such evidence or a
credible explanation for his failure to do so, a court may infer
fraudulent intent.
Klutchko, 338 B.R. at 567 (citations omitted); see also Fed. R. Bankr. P. 4005 (“At
the trial on a complaint objecting to a discharge, the plaintiff has the burden of
proving the objection”).
“To merit denial of discharge under § 727(a)(4), a debtor’s
misrepresentation or omission must be material; that is, it must bear a relationship
to the debtor’s business transactions or estate, or concern the discovery of assets,
business dealings, or the existence and disposition of the debtor’s property.” In re
Radloff, 418 B.R. 316, 322 (Bankr. D. Minn. 2009) (citation omitted). Materiality
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will not turn on the value of the nondisclosed asset, or upon whether it is exempt.
See id.
In re Radloff is useful for the proposition that mistakes in the schedules will
not doom a debtor’s discharge. The Radloff court stated, “[t]he application of §
727(a)(4) does not require the draconian, zero-tolerance execution of a technical-
compliance fiat.” Radloff, 418 B.R. at 326. In Radloff, a creditor requested denial
of discharge pursuant to section 727(a)(4), on the grounds that he had totally failed
to include any income from his non-filing spouse on Schedule I, among other
reasons. The court allowed the discharge, stating, “The Debtor had relied on his
attorney to see that [schedule I’s] disclosures complied with legal requirements.”
The court acknowledged that the objecting creditor “had a point,” and was
“puzzled” that debtor’s counsel had missed the instruction to include income from
a nonfiling spouse over many years of practice. The court ultimately denied the
objection to discharge, as the nonfiling spouse’s income was included on the
means test, and debtor’s reliance on counsel was not unreasonable. See id. at 327;
accord In re Sasse, 438 B.R. 631, 633-644 (Bankr. W.D. Wis. 2010) (“The debtor
relied upon his attorney to prepare the means test form, and the decision to claim
only a single member household did not materially misrepresent the debtor’s
financial situation.”). The Radloff court concluded by summarizing the effect of the
creditor’s failure to carry her burden of proof: “her anger alone could not suffice;
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and even her minute analysis of the inconsistencies and holes in the Debtor’s court
filings was not enough to make out a case for the drastic expedient of § 727(a)(4).”
Radloff, 418 B.R. at 332.
In re Sasse instructs that failure to include a live-in partner’s contribution is
not grounds for denial of discharge, when that partner is not included in the
household. In Sasse, an attorney who represented the debtor in matters unrelated to
the bankruptcy objected to the debtor’s failure to include his live-in girlfriend’s
contribution to household expenses. The creditor sought dismissal of the case, or
denial or revocation of the discharge. On his means test, the debtor indicated that
his was a household of one, and that he was below the state median income. The
complainant argued that the case should be dismissed because debtor failed to
rebut the presumption of abuse if the girlfriend’s income were included, or that the
discharge should be denied because the debtor “fraudulently” prepared the means
test form.
The bankruptcy court considered whether the discharge should be denied
pursuant to 11 U.S.C. § 727(d), the statute that governs revocation of discharge.
The bankruptcy court construed 11 U.S.C. § 101(10A)(B) to require the inclusion
of third-party income when determining debtor’s “current monthly income,” but
only the amount of such third-party income to the extent that it is used to support
the debtor or the debtor’s dependents should be included. Sasse, 438 B.R. at 641.
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The bankruptcy court noted, “the plaintiff cannot demonstrate why amending the
means test to include the girlfriend’s income would not result in a corresponding
increase in the household size.” Id. The court concluded that the means test had not
been fraudulently prepared:
[T]here may be instances in which another household member makes
sufficient contributions to the debtor’s current monthly income such
that the debtor simply cannot claim a smaller household size or
exclude the totality of that person’s income. The burden is on the
creditor, however, to prove that the contributions are so substantial as
to alter the equation. … [h]ere, even accepting the plaintiff’s
allegations at face value—i.e., even assuming for sake of argument
that every penny of the girlfriend’s income could be imputed to the
debtor—the debtor’s household size would justifiably increase and the
debtor would still be below median income. The debtor relied upon
his attorney to prepare the means test form, and the decision to
claim only a single member household did not materially
misrepresent the debtor’s financial situation.
Id. at 643-644 (emphasis added).
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With these principles in mind, the Court rules that the Defendant should
receive the chapter 7 discharge, as the required knowledge and intent to defraud
have not been established by a preponderance of the evidence.
(1) the Defendant made a statement under oath, and (2) the statement was false.
In the matter at bar, the first two factors for denial of discharge under §
727(a)(4)(A) have been met: Debtor made a statement under oath, by signing and
filing the means test and schedules; and, as the Court has previously ruled that the
Debtor and Sekul operated as an economic unit, these statements were false as they
omit Sekul’s presence as a member of the household and do not reflect the
couple’s agreement to share household expenses. On the means test, the household
size and corresponding standards for expenses correspond to a family of three, not
four. Schedule J list electricity and heating fuel expenses of $225, even though the
electric bill was paid by Sekul. Tr. at 28; but see 76 (Sekul testifying that whoever
had the money at the time the fuel bill came would pay it). Defendant testified that
most of the stated expenses were overstated, compared with the evidence of the
bank statements as presented at trial. Tr. at 327-33. The Court does not undertake
an audit of the Defendant’s financials to determine what her expenses actually
were, because the Plaintiff has failed to meet its burden to prove that the Debtor
acted with knowledge and intent to defraud.
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(3) The Defendant did not know that the statement was false; and (4) the
Defendant did not make the statement with intent to deceive.
The third and fourth elements for denial of discharge have not been
established. As demonstrated by the briefs filed concerning the Court’s “pretrial
ruling” of March 5, 2012, the household size of the Debtor was actually within a
measure accepted by other courts, the “IRS approach.” Given that the measure of
household size used by Defendant in this case satisfied a legal standard, albeit not
the more appropriate one, the Debtor’s knowledge of a false statement with respect
to the household size has not been established. How to measure household size is a
controversial and unsettled question, and Defendant’s initial household size of
three might be accepted by other bankruptcy courts.
In light of the evidence presented at trial, it cannot be said that Defendant
concealed her arrangement and relationship with Sekul with intent to defraud,
because the Court finds as a fact that Defendant and Sekul’s intent was that they
not financially support each other at all. The Defendant’s subjective impression of
her financial relationship was that she and Sekul would equally share the expenses
directly associated with the house—mortgage, electricity, garbage—by offsetting
bills, and Defendant would be solely responsible for the expenses personal to the
health and well-being of herself and her daughters—insurance, food, health care.
At trial, Sekul and Defendant testified about the couple’s financial arrangement,
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and Defendant gave a line-by-line review of her bank statements. The Court finds
certain evidence especially persuasive to the finding that the Debtor believed that
she was not financially supported by Sekul:
1. The Defendant credibly testified that she paid the majority of the monthly
food bills “because I had more mouths to feed.” Tr. at 152. Defendant’s
reasoning that she was responsible for feeding her dependent children is
the antithesis of expecting financial support from a partner.
2. The Debtor took substantial cash advances from her credit cards--$1000
and $3000—in October 2009, parts of which were used to “reimburse”
Sekul for household expenses. Tr. at 253-57, 365-66.
3. Sekul required the Defendant to pay $264.19 for the cleaning of his
septic system, having perceived that the Defendant and her daughters
caused the damage. Tr. at 78. The check for this expense was dated
February 8, 2010, and posted to the Defendant’s checking account on
February 17, 2010. Tr. at 308. Sekul required the Debtor to pay for
cleaning the septic despite the credit union having advanced her funds to
avoid bouncing checks at least seven times before that point, suggesting
that Debtor was in financial stress at the time. Tr. at 276, 277, 282, 283,
284. Sekul knew or should have known that the Defendant was in
financial stress around the time he required her to pay the septic bill,
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testifying, “I know in the beginning of 2010 she was starting to, but
exactly what month I don’t know, but somewhere around the spring of
2010 I know she was starting to have trouble paying bills.” Tr. at 50.
Additionally, Sekul testified that he accompanied the Defendant to
Juran’s office before her bankruptcy was filed, and a check Defendant
made out to Juran is dated February 23, 2010, indicating that the
Defendant had made an appointment with a bankruptcy attorney at about
the time Sekul charged her to clean his septic system. While the septic
charge itself was a single isolated expense, the timing of this charge
indicates that the couple believed that Defendant should pay her own
bills, including Sekul’s perceived damage to his house.
4. Defendant testified that it was mandatory in the home that her daughters
take drug tests. Tr. at 335. It appears that the condition was imposed by
Sekul, because he testified that his own teenage children moved out of
his home and back in with their own mother because she had more
permissive attitudes toward smoking marijuana and other “typical
teenage behavior” that Sekul didn’t tolerate. See Tr. at 18. Notably, in
one instance the Debtor reimbursed Sekul $20 for a drug test kit by
adding the $20 to the monthly rent, and Sekul transferred the Defendant
$1.65 for the change. See Tr. at 312-13, 378. The transfer of the $1.65
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persuades the Court that Sekul and Defendant shared a narrow view
regarding the financial support of each other; additionally, although the
drug tests appear to have been a requirement of Sekul’s, the financial
burden fell on the Debtor and her daughters. Tr. at 271, 312. Even though
the expense for the tests was not great and appears to have arisen as a
condition of the household members living together, it illustrates the
Defendant’s children as having financial liabilities separate from Sekul’s
responsibilities.
5. Debtor paid the education expenses of her daughters, such as those
associated with Advanced Placement courses, SATs, and athletics. Tr. at
207, 289-90, 317-18, 319, 323.
6. Sekul transferred $1100 into the Defendant’s account on February 23,
2010, with an annotation, “sooner i pay you the better.” Tr. at 377-78;
Defendant’s Exhibit A. The Defendant testified that she had “overpaid”
Sekul for her share of the household expenses, using one of the credit
card advances, and this was him returning the overpayment. Tr. at 378.
The Court finds that Sekul’s begrudging reimbursement of Debtor’s
“overpayment”—of borrowed money, no less—is inconsistent with a
relationship of financial support. If Sekul had truly supported the
Defendant financially as Plaintiff argues, then the couple wouldn’t have
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characterized the transaction as “reimbursement”—to say nothing of the
accompanying derisive remark.
7. Debtor paid for her own health, automobile, and disability insurance. Her
daughters were covered by her health insurance. Tr. at 152-53 (testifying
about the twins’ health insurance), 158-61 (testifying about payroll
deductions for health insurance), 206-07 (testifying about auto
insurance), 207 (disability insurance).
8. Sekul did not testify that he financially supported the Debtor’s children
during the relevant pre-petition period:
Q 	So this supporting of Ms. Fraleigh’s daughters strictly
happened after the filing?
A 	I mean, define support. Would I give them a ride if they
needed a ride? Of course.
Tr. at 91. Accord Tr. at 242 (Defendant testifying that she did not ask Sekul
for additional contribution, during October 2009 to April 2010).
Looming over all this evidence is the fact that Sekul and the Defendant
switched off bills in the first place, instead of owning a joint checking account
where the household expenses might have been more efficiently tracked and paid.
Tr. at 189 (Defendant testifying that Sekul was “on” the loans, but not her savings
and checking accounts). While the Court does not go so far as to adopt Defendant’s
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argument that the only contribution Sekul made was his half of the mortgage
payment, see ECF No. 95, the evidence makes it clear that Sekul and Defendant
understood that it was Sekul’s house, and the Defendant and her children had to
pay their own way.
With respect to “reckless indifference to the truth,” there is no proof that the
Debtor was reckless in omitting Sekul’s income and contributions from her
schedules and means test. Schedule I prominently demands disclosure of the
income of a spouse, and Debtor and Sekul are unmarried. Further, there is a
complete failure of proof by Plaintiff that the Debtor had any interest in the funds
from Sekul’s alleged side businesses that should have been disclosed. Whether he
made significant income from the businesses, and in what amount, is irrelevant, as
Plaintiff has failed to prove that the Debtor had an interest in those funds. As a
third party, the only relevant income of Sekul is the portion he contributed to the
Debtor’s support, and, as shown by Debtor’s explanation of her bank statements,
Debtor largely supported herself and her dependents on her own income and credit
in the months before the bankruptcy case was commenced.
The Defendant credibly testified that she relied on her attorney in preparing
her schedules and means test. Tr. at 177-78, 201, 216-17, 339. She testified that
she disclosed to her bankruptcy attorney “what I paid and what he paid.” Tr. at
217-18. Sekul testified that he accompanied the Defendant to attorney Juran’s
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office at the time of her bankruptcy consultations, introduced himself to Juran, and
advised Juran that they lived together. Tr. 55. It is clear to the Court that the couple
fully disclosed their relationship and their financial agreement to Defendant’s
bankruptcy counsel, and that the Debtor reasonably relied on her attorney to make
the appropriate use of that information in the legal work she had hired him to
perform.
(5) The false statement did not materially relate to the bankruptcy case.
The Court finds that the Defendant did not materially misstate Sekul’s
presence and contribution to the Defendant’s support, because the contribution was
minimal, even nonexistent. Plaintiff failed to prove that disclosing Sekul as a
member of the Defendant’s household would have yielded assets that could be
liquidated for the benefit of the Defendant’s estate, or that Sekul increased the
Defendant’s income in the relevant pre-petition period by giving her money.
First, Plaintiff failed to produce any evidence at trial of an asset that the
Defendant owned with Sekul that could be liquidated for the benefit of creditors.
Second, the evidence did not persuade the Court that Sekul provided the Defendant
any regular financial support. Sekul and the Defendant both testified that they
shared the cost of Sekul’s home, by splitting the mortgage payment—which
included an escrow for property taxes and insurance—50-50. The inequality of this
arrangement is readily apparent. While the payment itself might have been split,
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Defendant actually paid more, because she paid half the expenses—mortgage,
insurance, property taxes—plus her own lost opportunity of homeownership. She
received none of the benefits of homeownership, such as building equity, gaining
long-term security, establishing good credit, or taking a tax deduction for the
interest on the home loan. Sekul reaped the full benefit of owning the home, while
paying just half the cost. With respect to the housing cost, the Defendant actually
supported Sekul.
As noted above, Defendant paid several important expenses for herself—
health, auto, and disability insurance. Her children contributed to their own car
insurance and cell phone costs. Tr. at 266, 267, 287-88. While it may be wise
parenting to require teenagers to contribute to their expenses, the fact is the money
for these expenses came from the Defendant’s children, not Sekul.
The Debtor’s cross-examination by her own counsel of her bank statements
revealed a series of garden-variety consumer transactions in the months leading up
to the filing—dental costs, pet care, food from convenience stores. See Tr. at 244-
326. The debits were not shown by either side to be anything other than ordinary
consumer transactions—financed in substantial part by cash advances from
Debtor’s own credit cards, filtered through the Debtor’s line of credit with her
credit union. Sekul credibly testified that he did not make any contributions to
clothing or furniture during the relevant pre-petition period. Tr. at 34-35.
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The evidence shows that the main sources of Debtor’s support in the
relevant period before her case was filed were her own wages and credit (cash
advances of $4000 on October 14, 2009 and $3000 on October 30, 2009). Tr. at
253-257, 365-366. Substantial deposits into Defendant’s checking account that
could be credited to Sekul were conspicuously absent. In fact, Debtor credibly
testified that the bank statements reflected deposits from the Debtor’s daughters to
cover their cell phone and car insurance costs. Tr. at 266, 267, 287-88. Plaintiff has
not presented proof that the Defendant would have treated Sekul’s contributions
any different from her daughters.’ The Defendant would have been compelled to
deposit any cash contributions from Sekul, for the same reasons she deposited the
contributions from the children—to avoid overdrafts and pay bills.
In the review of the Debtor’s bank statements, there was just one significant
deposit, $940 plus $60 cash back at the time of deposit, of which the Debtor could
not explain the source. The Debtor testified that she could not remember the source
of the $940 deposit, and suggested that it might have come from her parents or her
sister. Tr. at 376-77. If the deposit had come from Sekul, then the deposit might
support the Plaintiff’s argument that Sekul financially supported the Debtor during
the relevant period. The Court finds that it would be speculative to assume that the
deposit was from Sekul, and inconsistent with the other evidence of the couple’s
attitude toward their financial relationship. As noted above, the one substantial
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deposit that was identified as having come from Sekul—the reimbursement of
$1100—was made under protest. Further, the $940 was deposited on February 2,
2010, and the check for the septic cleaning was dated February 8, 2010—less than
a week later. Defendant’s Exh. A, B. It makes no sense to give someone a gift of
$1000 with one hand, and then demand $260 to clean the septic with the other.
With respect to the cash advances from the credit cards, the Debtor testified that
the $4000 advance was part of a larger advance of $5000—the other $1000 was
meant to reimburse Sekul for other house bills. Tr. 253-56. Similarly, the
Defendant testified that the $3000 advance from a credit card was used by Sekul to
pay household expenses. Tr. 257-58, 365-66. Sekul testified that he “picked up the
slack” AFTER the Defendant commenced her bankruptcy case, because the
Defendant could not use her credit cards to pay bills anymore. Tr. at 90-91 (“Since
Ms. Fraleigh had filed for bankruptcy she had no credit cards to use to pay bills
which I believe she was doing, and I was picking up the slack for some of the
household bills.”). Plaintiff has failed to prove that Sekul made such a significant
financial contribution to the Defendant’s support that the failure to disclose it
related materially to the bankruptcy case.
Findings of Fact
1. The Defendant’s household was of four members—Sekul, Defendant,
and Defendant’s twin daughters.
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2. The Defendant did not know the means test was inaccurate regarding
household size.
3. Defendant and Sekul subjectively intended that they not financially
support each other, and instead separately meet their own financial
obligations.
4. The Defendant did not act with fraudulent intent in omitting the
information about Sekul, because she assumed that she and Sekul split
household expenses equally and that he did not support her or her
daughters.
5. The Defendant relied upon the advice of counsel in preparing the means
test and schedules, including his depictions of her household size, income
and expenses.
6. The failure to disclose Sekul as a member of the household was not a
material misrepresentation, because Sekul did not make a meaningful
financial contribution to the support of the Defendant and her
dependents.
Conclusions of Law
1. The Plaintiff failed to meet his burden of proof with respect to his
objection to the Defendant’s discharge.
2. The Defendant should be granted the chapter 7 discharge.
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Conclusion
The Plaintiff failed to meet his burden to show that the Debtor made a false
oath to the Court with intent to defraud. The evidence presented at trial proves that
the Debtor did not receive financial support from Sekul during the relevant pre-
petition period. The Court denies the Plaintiff’s objection to the Defendant’s
discharge.
An order will be entered consistent with this ruling.
Dated: 	June 12, 2012
Poughkeepsie, New York
/s/ Cecelia G. Morris
Chief United States Bankruptcy Judge
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