DOCTOR’S BK DISCHARGE DENIED DUE RECKLESS DISREGARD FOR TRUTH

Debtors who ask for bankruptcy relief must be truthful and honest about their financial transactions. Debtors who are not truthful or honest may be denied a bankruptcy discharge of their debts pursuant to Section 727(a)(4) of the bankruptcy code. That section states that debtor will not be given a discharge if “the debtor knowingly and fraudulently, in or in connection with the case- (A) made a false oath or account…” Debtors are required to disclose all material information to the court. Omissions or falsely stated information may be fatal to the bankruptcy.

 In Re Stamat involved a chapter 7 case filed by a medical doctor who operated a clinic for pediatrics. His wife was an accountant who owned and operated a billing company, which handled billing for her husband’s medical practice. The couple filed their joint chapter 7 petition on July 26, 2007 listing more than $1.5 million in debt. Debtors said they received $53,309 from the business in 2006. However, their tax returns showed that their business had gross income of $287,200 with net of $20,559. At the 341a meeting of creditors, debtors disclosed past investments or interests in various enterprises that were not disclosed in the Statement of financial affairs. Debtor told the trustee that he worked as a part time police officer. This job was not reported in the original schedules although his monthly income of about $80 was included in the business income listed on schedule I. Debtor also stated that he paid $10,000 to a creditor to settle pending litigation in 2005.

In a Rule 2004 examination of the debtors conducted after the 341 A meeting, Mrs. Stamat admitted that she and her husband received more than $90,000 by refinancing a vacation property in Michigan twice in the two years prior to their bankruptcy filing.

Debtors subsequently amended their schedules and statement of financial affairs to correct errors disclosed at the meeting of creditors. Debtors previously amended their schedules to disclose two guns owned by debtor. The U.S. Trustee asked the bankruptcy court to deny the debtors’ discharge because of the numerous omissions in their schedules and statements. The debtors argued that there was no need to disclose their interests in businesses that no longer existed, and asserted that they did not need to disclose “passive investment interests” in which they were merely limited partners. Further, debtors challenged their need to disclose the $10,000 settlement payment and the $90,000 received in mortgage refinancing on the basis that the transfers occurred in the ordinary course of their financial affairs.
The bankruptcy court focused on the refinancing of the debtors vacation house and their failure to list all of their business interests. The court found that the cumulative effective of their false statements was material and established a pattern of reckless indifference to the truth. The District Court and the 7th Circuit Court of Appeals agreed. The Court of Appeals said that the continued existence of the businesses was not relevant to the disclosure requirement. “Question 18 of the SOFA asks for all business interests ‘within six years immediately preceding the commencement of this case,’ and in fact, asks for ‘beginning and ending dates’…” the court said. The 7th Circuit said there was nothing in the record to suggest that borrowing $10,000 and using the money to settle a disputed debt was something that debtors did on a regular basis. Refinancing was a closer call, but the fact that some of the money was used for personal reasons and some was used to operate the businesses meant the transfers were not in the regular course of business. In addition, the bankruptcy court found that the debtors had not accounted for all the proceeds from the refinancing. Section 727 (a)(5) denies discharge to a debtor who has “failed to explain satisfactorily…any loss of assets or deficiency of assets to meet the debtor’s liabilities."

 The 7th circuit affirmed the bankruptcy court and District Court’s denial of discharge to doctor and his wife. 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.