Ryan et al v. Fox

1 The relevant portions of this statute provide as follows:
The court shall grant the debtor a discharge unless --
(3) the debtor has concealed, destroyed, mutilated, falsified, or
failed to keep or preserve any recorded information, including
books, documents, records and payments, from which the debtor’s
financial condition or business transactions might be
ascertained, unless such act or failure to act was justified
under all the circumstances of the case;
(4) the debtor knowingly and fraudulently, in or in connection
with the case --
(A) made a false oath or account;...
(5) the debtor has failed to explain satisfactorily, before
determination of denial of discharge under this paragraph, any
loss of assets or deficiency of assets to the debtor’s
liabilities....
Page 1 of 	14
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
CLIFFORD DALE FOX,
Debtor. 	No. 7-06-10690 SL
KIERAN RYAN, TRUSTEE,
Plaintiff,
v. 	Adv. No. 06-1189 S
CLIFFORD DALE FOX, 	Consolidated with:
Defendant.
UNITED STATES TRUSTEE,
Plaintiff,
v. 	Adv. No. 06-1190 S
CLIFFORD DALE FOX,
Defendant.
MEMORANDUM OPINION IN SUPPORT OF
JUDGMENT DISMISSING COMPLAINTS WITH PREJUDICE
These adversary proceedings were brought by the trustee and
the Office of the United States Trustee respectively to deny the
debtor a discharge pursuant to section 727(a)(3), (a)(4) and
(a)(5). 1 	The Court has jurisdiction of the subject matter and of
the parties pursuant to 28 U.S.C. §§1334 and 157(a), this is a
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2 This is not to say that the complaints should not have
been brought; like so many bankruptcy matters, what appeared to
be a flagrant violation of the Code has turned out to be, on
closer inspection, an incidence probably of sloppiness rather
than fraud. 	A more searching inquiry in preparing the case for
filing might have avoided this adversary proceeding altogether.
Debtor had different counsel for his bankruptcy filing than for
this adversary proceeding.
Page 2 of 	14
core proceeding under §157(b)(2)(J), and these are findings of
fact and conclusions of law as required by Rule 7052 F.R.B.P.
The Court finds and concludes that Plaintiffs have not
convinced the Court, by a preponderance of evidence, that Debtor
violated any of the three subsections of §727(a). 	Therefore the
consolidated complaints will be dismissed. 2
Debtor filed his petition on May 1, 2006. 	Following three
§341 meetings (the middle one of which Debtor missed) and a
subsequent deposition, both the case trustee and the Office of
the United States Trustee filed adversary proceedings objecting
to Debtor’s discharge.
Plaintiffs’ trial presentations were based primarily on two
congeries of evidence, in addition to Debtor’s statement of
financial affairs (“SOFA”) and schedules: checks for $39,797.19
paid by Russel F. Ahrens, Jr. to Debtor in calendar year 2005
(Trial Exhibit 5) and bank statements confirming that those sums
had been received by Debtor (Trial Exhibit 6), and loan
applications submitted to Bank of the Southwest which claimed
ownership of two properties in Santa Fe and $200,000 worth of
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3 Debtor renewed his objection to the admission of these
latter three exhibits on the grounds that they are inadmissible
character evidence. 	Fed.R.Evid. 404. 	Given the disposition of
this adversary proceeding, the Court need not rule on the
objection.
Page 3 of 	14
tools (Trial Exhibits 7, 8 and 9). 3 	Plaintiffs argued that
Debtor’s failure to disclose the Ahrens payments constituted a
false oath. 	They also argued that the failure to have available
the invoices for materials and labor that Debtor sent to Ahrens
for further payments was a failure to keep records, as was the
Debtor’s nonproduction of his 2004 tax return at his deposition.
Similarly, Plaintiffs argued that Debtor made a false oath when
he failed to disclose the Santa Fe properties and the tools, and
that he had failed to explain satisfactorily the loss of these
assets. 	Plaintiffs also asserted generally that Debtor had
failed to honor the overarching commands of transparency and
integrity, which together with accountability, constitute the
three bedrock values of the Bankruptcy Code and bankruptcy
practice.
Trial Exhibit 1 is comprised of Debtor’s schedules and SOFA.
His schedule A lists a single property on North Date Street in
Truth or Consequences, New Mexico, which is both his primary
residence and a commercial property, the latter apparently by
virtue of renting out a portion of the building on a month-to-
month tenancy to a barber shop. 	(Trial Exhibit 2 includes a copy
of Debtor’s amended schedule I, disclosing $150 of monthly income
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4 For category 7 (“Furs and jewelry”), Debtor listed “usual
jewelry” valued at $1,000. 	Since it was not germane to the case,
there was no evidence about what the “usual jewelry” would be for
a middle-aged divorced male in the construction industry.
Page 4 of 	14
from the rental.) 	Schedule B states “none” for virtually all the
categories, including for category 29 (“Machinery, fixtures,
equipment, and supplies used in business”). 	For category 33
(“Other personal property of any kind not already listed.
Itemize.”) Debtor listed “hand tools” valued at $2,000. 4
In his SOFA, Debtor answered question 1 (“Income from
employment or operation of business”) with “$9,000 Wages 2004;
$8,500 Odd jobs 2005; $900 Odd jobs 2006". 	He answered “none” to
question 2 (“Income other than from employment of operation of
business”), although after the §341 meeting, Debtor amended
schedule I to list $150 per month in rental income from the
barber shop. 	He answered “none” to question 19(d) (“List all
financial institutions...to whom a financial statement was issued
by the debtor....”).
In making its decision, the Court is governed by “the
requirement that the Bankruptcy Code must be construed liberally
in favor of the debtor and strictly against the [objecting
parties].” 	Gullickson v. Brown (In re Brown), 108 F.3d 1290,
1293 (10 th Cir. 1997 ). 	(Citation omitted.)
Plaintiffs established that Debtor had submitted to Bank of
the Southwest three different loan applications, the first of
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5 Legend, and perhaps the facts, have it that Sutton, a
prominent 1930's bank robber, was asked, upon being arrested, why
he robbed banks. 	“Because that’s where the money is” was the
response.
Page 5 of 	14
which (Trial Exhibit 7) listed and valued the two Santa Fe
properties at $675,000 and the third of which (Trial Exhibit 9)
claimed monthly rental income from the properties of $1,400. 	The
bank officer testified that the bank verified (or attempted to
verify) Debtor’s employment income for the three applications.
The bank did not require proof of ownership of the properties nor
of the ownership or valuation of the tools; it nevertheless made
the loans. 	No direct evidence of the ownership of the property,
such as a deed, nor of the value of the tools (whatever that
evidence might be), was offered. 	Debtor testified that he took
out the loans because he wanted to finance a home for himself and
get (re)started in his business and on his life. 	(As Debtor put
it, Willy-Sutton style 5, the idea behind applying for a loan is
to get the money.) 	It is abundantly clear to the Court that
Debtor lied on the loan applications; Debtor never owned the
Santa Fe real estate, and almost certainly Debtor’s valuation at
$2,000 in Schedules B and C is the real value of the tools.
Conceivably there was a dischargeability action for the bank in
these circumstances; there is no basis for an objection to
discharge.
There was no question that Debtor received the $39,797.19
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6 This harsh result was completely legal because before
Debtor began the work, he had lost his general contractor’s
license. 	See NMSA §60-13-30(A) (Repl. Pamp. 2004) (repealed
effective July 1, 2006) (contractor may not bring an action for
compensation without proof of a contractor’s license); Triple B.
Corporation v. Brown & Root, Inc., 106 N.M. 99, 100, 101 (1987),
739 P.2d 968, 970, 971 (“[The statute] clearly bars suits by
unlicensed contractors even when they seek compensation for
construction work fully and satisfactorily performed..... 	Its
policy must override the judicial principle that disfavors unjust
enrichment.” 	(Citation omitted.))
Page 6 of 	14
from Ahrens in CY 2005. 	That he was subsequently sued by Ahrens
to recover all the payments, despite Debtor’s having done all the
work and supplied all the materials, and that Ahrens obtained a
default judgment for $39,547.00 in April 2006 (Trial Exhibit 3),
is irrelevant. 6
Debtor explained that he had not treated the payments he
received from Ahrens as gross income, either on his 2005 tax
return or in his SOFA, because he understood that it did not need
to be treated as income until the job was finished. 	The last
payment received was a check on December 18, 2005. 	Debtor also
testified, without dispute, that Ahrens still owed him
approximately $8,000, that he sued Ahrens in small claims court
for that amount but the action was dismissed because he did not
have his contractor’s license, that Ahrens then sued him in
district court and obtained the default judgment, which led
Debtor to file his bankruptcy petition on May 1, 2006. 	Thus,
under Debtor’s theory, there would have been no need to report to
the IRS the Ahrens payments in his 2005 return. 	(Debtor
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Page 7 of 	14
testified his 2006 return had not been filed as of the trial
date.)
The Court on its own motion takes judicial notice of the
adjudicative fact, F.R.Evid. 102, that an acceptable and commonly
used accounting method for contracts such as these, as an
alternative to accounting for the income, expenses and profit
year by year, is to wait until the entire project is completed to
provide the complete accounting for gross income received,
expenses paid and profit or loss. 	This is not part of Generally
Accepted Accounting Principles (GAAP) but it is part of Other
Comprehensive Basis of Accounting (OCBOA). 	Thus, Debtor’s
understanding of how to account for and report the Ahrens’
payments, at least for accounting and IRS tax purposes, is
reasonable and believable.
On the other hand, the demand of SOFA 1 admits of less
sophistication or choice; it requires the disclosure of “the
gross amount of income the debtor has received from employment,
trade or profession, or from operation of the debtor’s
business....” 	This is a fairly straightforward demand. 	Assuming
that Debtor in fact read the question carefully at some point
before signing the SOFA and testifying under pain of perjury (as
this Court does assume, regardless of whether it is true or not),
Debtor should have been on notice that the accounting method he
used for his 2005 IRS return would not work for his bankruptcy
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Page 8 of 	14
disclosure.
The bankruptcy standard also includes, however, a
consideration of whether the debtor “knowingly and fraudulently”
made a false oath. 	“To trigger section 727(a)(4)(A), the false
oath must relate to a material matter and must be made willfully
with intent to defraud.” 	Job v. Calder (In re Calder), 907 F.2d
953, 955 (10 th Cir. 1990).
In this instance, the Court does not find it more likely
than not that Debtor’s failure to list and testify at the §341
meetings about the Ahrens’ payments was the result of Debtor’s
intent to deceive as opposed to what was likely a good-faith
misunderstanding. 	Neither side called as a witness the attorney
that Debtor employed to file his bankruptcy case, so it is not
clear what preparation that office did or whether Debtor was
instructed on the more simplistic standard of disclosure imposed
by SOFA 1. 	And while it is clear to experienced bankruptcy
practitioners, such as all the counsel in this case, that SOFA 1
required disclosure of the Ahrens payments, the Court cannot
assume that, in these particular circumstances, it would be
obvious to Debtor that accepted accounting standards and IRS
reporting standards would differ from what SOFA 1 required. 	If
Debtor in good faith believed that he did not need to list the
Ahrens’ payments, then justifiably he could believe he did not
need to testify about them (assuming he was even thinking about
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7 In his deposition, Debtor was confronted with the two
varying figures for his CY 2005 income and asked whether if the
larger figure was correct, then the smaller figure he actually
reported must have been “false”. 	Debtor agreed. 	In this
context, “false” could have meant merely incorrect, or it could
have meant not true accompanied by an intention to deceive.
Compare Webster’s Ninth New Collegiate Dictionary (1991) 447
definition 3 (“not true [~ concepts]”) with definition 2a
(“intentionally untrue [~ testimony]”). 	Plaintiffs did not
follow up in the deposition or at trial to confirm which meaning
of “false” Debtor was using, although the Debtor testified at
trial that at the time he swore to the accuracy of his schedules
and SOFA, and at the time he was testifying under oath, he
believed he had been accurate. 	Based on Gullickson v. Brown and
on Debtor’s testimony, the Court cannot assume that Debtor had an
intention to deceive.
Page 9 of 	14
the payments) during the §341 meetings. 	And Debtor’s demeanor
and presentation during the trial confirmed for the Court that
Debtor was acting and testifying in good faith on this score. 7
Plaintiffs also charged Debtor with failing to maintain
records, specifically in connection with the invoices for
materials (and perhaps subcontract labor) for the Ahrens job.
Debtor testified that he had sent Ahrens the invoices he had when
he was trying to collect the last $8,000, and had not kept copies
for himself, so he did not have them. 	While it is certainly not
the obligation of the trustee or the Office of the United States
Trustee to collect documents on behalf of a debtor, Plaintiffs
were in direct contact with Ahrens’ attorney in obtaining the
checks that Ahrens wrote to Debtor. 	Presumably Plaintiffs could
easily have obtained the invoices as well (or confirmed that few
or no invoices existed) if it were likely that the existence or
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Page 10 of 	14
not of the invoices would shed much light on the disposition of
the Ahrens payments. 	In any event, what documents a debtor
should be expected to have on hand during the bankruptcy case
depends greatly on the circumstances of the debtor.
The scope of the debtor's duty to maintain records
depends on the nature of the debtor's business and the
facts and circumstances of each case. One authority
explains as follows: The debtor's obligation to present
records of financial information is intended to protect
the trustee and creditors by enabling them to determine
or confirm the debtor's financial condition and the
cause of the debtor's financial difficulty....
....
There are cases in which no duty to keep books arises;
in general, consumer debtors have no obligation to keep
books. On the other hand, a debtor who is a
sophisticated business person will be held to a higher
level of accountability in record keeping. If the
nature and extent of the debtor's transactions were
such that others in like circumstances would ordinarily
keep financial records, the debtor must show that
because of unusual circumstances there was no duty to
keep them.
6 Collier on Bankruptcy ¶ 727.03[3][a],[b] (Lawrence P.
King ed., 15th ed. rev. 1998) (footnotes omitted). The
court in Keystone Automotive Warehouse, Inc. v. LaBonte
(In re LaBonte), 13 B.R. 887, 892 (Bankr.D.Kan.1981),
quoted the rule long recognized in the Tenth Circuit
that:“Records need not be so complete that they state
in detail all or substantially all of the transactions
taking place in the course of the business. It is
enough if they sufficiently identify the transactions
that intelligent inquiry can be made respecting them.”
Hedges v. Bushnell, 106 F.2d 979, 982 (10th Cir.1939).
See Johnson v. Bockman (In re Bockman), 282 F.2d 544,
546 (10th Cir.1960) (same).
Bailey v. Ogden (In re Ogden), 251 B.R. 441, 1999 WL 282732, at 6
(10 th Cir. B.A.P. 1999) (Table) (unpublished decision). 	In this
instance, with Debtor apparently operating on a shoestring and
not even having a contractor’s license, it is not surprising that
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8 Plaintiffs also argued that, once the various omissions
(including the failure to list the Ahrens payments) came to
light, Debtor should have amended his schedules and answers to
SOFA. 	(He did amend schedule I to show the barbershop rental
income, but failed to amend his answer to SOFA 2 to show that
income and some other income.) 	One would have expected Debtor’s
bankruptcy counsel to see to it that that was done. 	And there
was no evidence that the trustee requested an amendment. 	But
beyond that, “once the cat was out of the bag, so to speak, we do
not believe that failing to amend the schedules to list no-
longer-hidden assets can indicate that the original omission was
knowing and fraudulent.” 	Sloan v. Tirey (In re Tirey), 271 B.R.
213 (Table), 2001 WL 963996 at *3 (10 th Cir. B.A.P. 2001)
(unpublished decision).
Page 11 of 	14
he had relatively little in the way of documents. 	Debtor also
testified that when he was still married, his wife was the
bookkeeper for his business, and that he had an accountant for
taxes. 	Debtor appears to be one of a myriad of sole proprietors
running small businesses, who may be very good at the production
or service side of the business but who are sorely lacking on the
paperwork side. 	Debtor’s was not a major business case; it was
much closer to being a mere consumer case. 8
Debtor admitted that he had been requested to bring to his
deposition his 2004 tax return but did not do so. 	Whether this
behavior rises to the level of a violation of the §727(a)(3) or
whether it should be treated essentially as a failure of
discovery is the issue. 	As reflected in its current form Order
Arising out of Initial Pretrial Conference, the Court generally
expects that discovery disputes will be resolved during the
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9 The form is available at
www.nmcourt.fed.us/usbc/forms-attorney.
Page 12 of 	14
discovery period or at a final pretrial conference. 9 	Thus, even
though in this case there were not the usual pretrial orders
entered, Plaintiffs should have addressed the failure to produce
the tax return to the Court in the context of a motion to compel
production. 	Then, if Debtor persisted in an unjustified refusal
to produce the return, the Court could have taken action at that
time. 	And that action could have included the sanction of
defaulting Debtor on the merits. 	The mere fact of non-
production, devoid of any background for the non-production
(including whether the non-production was deliberate and
avoidable), does not support a finding of a violation of the
requirement to maintain records.
The charge that Debtor failed to explain satisfactorily the
loss of assets was also not supported at trial. 	It seems clear
that much if not all of the $39,797.19 had gone for materials and
perhaps payments to subcontractors; indeed, Debtor was still owed
about $8,000, which he never received. 	Unless this was an
unusually lucrative contract for Debtor, it is unlikely that
there was so much profit in the contract that it would have
constituted a material fund of cash to repay creditors.
In a related vein, the bank statements, including the copies
of checks and deposit slips, show many checks made out to “Dale
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10 “And isn’t it ironic, at the end of the day, that the
bankruptcy system has so much to say to the larger marketplace
about integrity, transparency and accountability?” 	Leif Clark,
Dicta: Conflicts of Interest, ABI Journal, Vol 21, No. 3 (April
2002), at 37. 	The context of the article was the then-ongoing
disclosures of corporate and personal wrongdoing in cases such as
Enron, HealthSouth, Adelphia, etc.
Page 13 of 	14
Fox” (Debtor). 	Debtor explained that after he bounced a check or
two at Home Depot, he had to start dealing in cash with them for
building supplies. 	The last check made out to Home Depot is no.
111, dated November 11, 2004, which corroborates Debtor’s
testimony. 	While there were what appears to the Court to be a
relatively large number of checks in the mid-three-figures range
made out to Debtor, there was no evidence presented that Debtor
was wasting these funds. 	If anything, Debtor appears to have
conducted a number of transactions in cash (although there was no
evidence presented of what Debtor’s monthly credit card
expenditures were), which by itself does not offend the statute.
The same applies in spades to the charge that Debtor failed
to explain the loss of the Santa Fe real estate and the $200,000
worth of tools. 	Since Debtor never owned them (or, in the case
of the tools, since Debtor’s tools were never worth that sum),
there was no loss to explain.
Plaintiffs were absolutely correct to emphasize the values
of transparency and integrity which should inform every debtor’s
invocation of the Code. 	These principles are foundational. 10
Nevertheless, in this instance these values are adequately
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expressed in the specific provisions of the Code. 	The fact that
Debtor has not violated any provisions of §727, coupled with his
straightforward presentation about the facts surrounding his
filing, lead the Court to conclude that Debtor has also not
violated the principles of transparency or integrity.
For the foregoing reasons, the Court finds and concludes
that there has been no violation of §727(a). 	The Court will
therefore enter a judgment dismissing with prejudice the
complaints.
James S. Starzynski
United States Bankruptcy Judge
COPY TO:
R Trey Arvizu, III
PO Box 1479
Las Cruces, NM 88004-1479
Kieran F Ryan
Ryan Law Office
PO Box 26
Las Cruces, NM 88004-0026
Leonard K Martinez-Metzgar
PO Box 608
Albuquerque, NM 87103-0608
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