FALSE STATEMENT MUST BE FRAUDULENT & MATERIAL TO WARRANT DENIAL OF BK DISCHARGE

Section 727(a)(4)(c) states that the court shall grant the debtor a discharge, unless… “(4) the debtor knowingly and fraudulently, in or connection with the case (A) made a false oath or account…” Not every false statement made by debtor is a ground for denial of discharge. Bankruptcy law requires that a false statement must be “knowingly and fraudulently” made by debtor for a discharge to be denied to debtor. For instance, client’s case was filed a week after he filed his 2010 tax returns which showed a refund of $7,500. Thus, the tax refund of $7,500 became a receivable, an asset of debtor, when his chapter 7 case was filed. However, his chapter 7 petition did not disclose the tax refund. When questioned by the trustee at the 341-a meeting if his petition was accurate, debtor replied that it was. Upon further questioning, debtor testified that he had a tax refund of $7,500. Trustee then said that debtor had testified earlier that his petition was accurate but was in fact not accurate because the refund of $7,500 was not reflected, so trustee demanded that the $7,500 be transferred to him.

Is trustee correct? No, because debtor’s false statement was not “knowingly and fraudulently” made. I cross-examined debtor to elicit the fact that the case had been filed right before he filed his 2010 tax returns and that he was unaware that the tax refund needed to be declared. And I told the trustee that there were enough applicable exemptions to allow debtor to keep the $7,500, therefore there was no intent to defraud the court, and an amendment would be made and filed accordingly.

In Re Jacobs, debtor was the president, sole shareholder and manager of a closely-held corporation that ran two boutique franchised fitness centers. She obtained financing for the business from the plaintiff. The original debt was $40,000. The debt was secured by virtually all of the exercise equipment owned by the corporation. At the time of the original transaction in January 2008, the collateral was appraised at a value of $50,000. When the business started to fail, the debtor closed one center and, at the franchisor’s request, sold the franchise-specific equipment without the plaintiff’s knowledge. The debtor said she used the proceeds for business purposes, including paying interest to the plaintiff. The debtor eventually closed the other location, and notified the plaintiff that it could repossess its collateral. The debtor then filed for Chapter 7 relief one month later. She did not schedule the transfer of the exercise equipment or her stock in the closely-held corporation. About this time, the debtor learned that the plaintiff intended to file a criminal complaint against her for the missing equipment. In an effort to correct what she saw as a misunderstanding, debtor made a settlement offer to the bank. After the bank filed a complaint objecting to her discharge, debtor made a second settlement offer. The court found that the debtor was unsophisticated (totally unlike Donald Trump, a country bumpkin, maybe?), and made no distinction between herself and the corporation. The court concluded that the debtor’s purportedly false statements were not fraudulent and not material. The plaintiff also said that the debtor should be denied a discharge because she attempted to bribe it from pursuing the action (creditor attempted to re-write the code of civil procedure by equating a settlement offer with a bribe, only Khadaffi can do this). The court, however, pointed out that the debtor made her initial settlement offer before the complaint was filed while the second offer was nothing more than an attempt by the debtor’s lawyer to negotiate a settlement of pending litigation. “It is not extortion. It is not a bribery attempt. It does not constitute conduct inconsistent with that expected of an honest debtor. It does not evidence any knowing and fraudulent intent on the part of the debtor to commit any of the acts proscribed by Section 727 of the code.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.