Opinion
Case No. 2:20-bk-51323 Adv. Pro. No. 2:20-ap-02079
2021-11-03
IN RE: Nathan L. APPLEBY, Debtor. Larry J. McClatchey, Plaintiff, v. Nathan L. Appleby, Defendant.
Larry J. McClatchey, Columbus, OH, Plaintiff, Pro Se. Matthew M. Zofchak, Kegler Brown Hill & Ritter, Columbus, OH, for Plaintiff Larry J. McClatchey. Matthew J. Thompson, Nobile & Thompson Co., L.P.A., Reynoldsburg, OH, for Defendant Nathan L. Appleby.
Larry J. McClatchey, Columbus, OH, Plaintiff, Pro Se.
Matthew M. Zofchak, Kegler Brown Hill & Ritter, Columbus, OH, for Plaintiff Larry J. McClatchey.
Matthew J. Thompson, Nobile & Thompson Co., L.P.A., Reynoldsburg, OH, for Defendant Nathan L. Appleby.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
C. Kathryn Preston, United States Bankruptcy Judge
This matter came on for evidentiary hearing before the Court on September 20, 2021, upon the Complaint for Denial of Discharge filed by Trustee Larry McClatchey (Doc. #1). Present at the hearing were Matthew Thompson, representing the Debtor, and Matthew Zofchak and Larry McClatchey, representing the Trustee.
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334, and General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. Denial of discharge determinations are core proceedings; thus, this is a core proceeding pursuant to 28 U.S.C. §§ 157 (b)(2)(I).
II. Findings of Fact
Debtor, Nathan L. Appleby ("Appleby"), filed a petition for relief under Chapter 7 of the Bankruptcy Code on March 10, 2020. Larry McClatchey ("Plaintiff") was duly appointed Chapter 7 trustee and is the plaintiff in this case. Included among Appleby's assets is a 2009 Mercedes Benz G Wagon (the "Vehicle"). CME Federal Credit Union ("CME") has a lien on the Vehicle. Appleby indicated on his Statement of Intent (Doc. #4) that he would surrender the Vehicle to CME.
Appleby is required by the Bankruptcy Code and Local Bankruptcy Rules to provide the trustee with certain records including but not limited to tax returns, statements of depository and investment accounts, personal property leases, and title documents to real estate among other things. FED. R. BANKR. P. 4002 ; LBR 4002-1. Additionally, the Bankruptcy Code requires that Appleby perform his stated intention. See 11 U.S.C. § 521(a)(2)(B) ; see also FED. R. BANKR. P. 1007(b)(2). On April 17, 2020, the first § 341 meeting of creditors took place. Appleby failed to produce all the required documents despite the obligation to do so. Appleby testified that he had the Vehicle in his possession and that he intended to surrender the Vehicle consistent with his filed Statement of Intent.
On May 11, 2020, the trustee sent a letter to Appleby's attorney requesting certain documents from Appleby. Eleven days later, on May 22, 2020, the trustee requested information from Appleby's attorney about the Vehicle's location while also reminding Appleby's attorney about Appleby's Statement of Intention to surrender the Vehicle. Neither the documents nor information regarding the Vehicle were produced. Thus, on June 2, 2020, the trustee filed a Motion to Compel Performance of Stated Intention (Doc. #23) and, on June 8, 2020, a Motion to Compel Compliance and Production of Information (Doc. #24). Appleby did not oppose either of the motions.
On June 19, 2020, the second § 341 meeting took place. Yet again, Appleby failed to provide all the required documents. Most of the documents in the trustee's request for information were not produced, and the documents that were produced, like domestic court records and US Bank statements, were of lesser importance. Regarding the Vehicle, this time Appleby testified that the Vehicle had been in an accident and was in a repair shop in Houston, Texas by the name of Imperial Motor Sports. Based on this new information, CME reached out to Imperial Motor Sports several times via telephone and email. After some time, a repair shop representative responded to CME, telling CME that Imperial Motor Sports did not know anything about the Vehicle and that the Vehicle had never been at its repair shop.
On July 28, 2020, the Court entered an Order Granting Trustee's Motion to Compel Compliance and Production of Information ("Production Order") (Doc. #33) and an Order Granting Trustee's Motion to Compel Performance of Stated Intention ("Vehicle Order") (Doc. #34). The Production Order required Appleby to produce certain books, records, and documents related to Appleby's finances by August 7, 2020. The Vehicle Order required Appleby to disclose the location of the 2009 Mercedes Benz G Wagon within 10 days of the order and surrender the Vehicle to CME Federal Credit Union within 5 business days after disclosure of the Vehicle's whereabouts.
Appleby produced some of the requested documents to the trustee, including his divorce decree and some bank statements from 2019; however, Appleby did not produce all the documents that the trustee sought, including but not limited to Chase Bank statements, US Bank statements for 2017 and 2018, certain loan documents, and certain tax returns. The Production Order remains unfulfilled.
Appleby failed to disclose to CME the location of the Vehicle. Appleby also failed to turn it over to CME - even after this adversary proceeding was filed. CME has attempted to locate the Vehicle and repossess it but to no avail. In short, CME does not have the Vehicle, nor does CME definitively know the Vehicle's whereabouts. The Vehicle Order remains unsatisfied.
Appleby never requested more time to produce all the documents or informed the Trustee that he was having difficulties obtaining copies. Appleby never requested copies of loan documents from CME. The same attitude of neglect applies to disclosing the whereabouts of the Vehicle. On August 18, 2020, the trustee filed this adversary proceeding because Appleby failed to comply with any Orders of the Court. At trial Appleby declined to answer almost all questions, invoking the Fifth Amendment to the United States Constitution.
III. Analysis
The overarching purpose of the Bankruptcy Code is to provide a fresh start to those in need of relief from creditors in the form of a discharge of debt, but there are exceptions to the discharge. These exceptions are to be strictly construed against the complaining party. Rembert v. AT&T Universal Card Servs., Inc. (In re Rembert) , 141 F.3d 277, 281 (6th Cir. 1998). The relief brought about by a discharge is intended for the "honest but unfortunate" debtor, not those who engage in fraud or other egregious conduct. Grogan v. Garner , 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
A. 11 U.S.C. § 727(a)(6)(A)
Section 727(a)(6)(A) of the Bankruptcy Code provides in relevant part: "The court shall grant the debtor a discharge, unless, the debtor has refused , in the case to obey any lawful order of the court, other than an order to respond to a material question or to testify." 11 U.S.C. § 727(a)(6)(A) (emphasis added).
The Bankruptcy Code's use of the term "refused" has been interpreted differently among courts. To some courts "the mere failure or inability to comply with a court order, by itself, does not warrant a denial or revocation of discharge." Noland v. Johnson (In re Johnson) , 387 B.R. 728, 750 (Bankr. S.D. Ohio 2008) ; see also Sicherman v. Rivera (In re Rivera) , 338 B.R. 318, 329 (Bankr. N.D. Ohio 2006) ; Taunt v. Patrick (In re Patrick) , 290 B.R. 306, 313 (Bankr. E.D. Mich. 2003). These courts require a willful and intentional refusal to obey a court order. See Smith v. Jordan (In re Jordan) , 521 F.3d 430, 433 (4th Cir. 2008) ("The term used in § 727(a)(6)(A) is ‘refused’ not ‘failed.’ ") (citation omitted); Concannon v. Costantini (In re Costantini) , 201 B.R. 312, 315-16 (Bankr. M.D. Fla. 1996) ; Wilmington Tr. Co. v. Jarrell (In re Jarrell) , 129 B.R. 29, 33 (Bankr. D. Del. 1991). Conversely, other courts have found the concept of "refusal" for purposes of § 727(a)(6) to be akin to a charge of civil contempt , which does not require the element of intent. Hunter v. Magack (In re Magack) , 247 B.R. 406,409-10 (Bankr. N.D. Ohio 1999) ; United States v. Richardson (In re Richardson) , 85 B.R. 1008, 1011 (Bankr. W.D. Mo. 1988).
These courts are considered the minority. Jordan , 521 F.3d at 434 (citing Marcus v. Jeffries (In re Jeffries) , 356 B.R. 661, 667 (Bankr. E.D. Va. 2006) ) (citations omitted).
However, various courts’ viewpoints seem contradictory on this point. Compare Johnson , 387 B.R. at 750 (stating that "courts require a higher standard of proof such as that needed to demonstrate civil contempt.") with Magack , 247 B.R. at 409-10 (stating that "the use of the word ‘refused’ in § 727(a)(6) ... should ... simply be treated as a civil contempt proceeding, thereby implicitly negating the intent requirement ....") (citing In re Richardson , 85 B.R. 1008, 1011 (Bankr. W.D. Mo. 1988) ).
The Code contains multiple iterations of a debtor's "failure" as opposed to a "refusal." For example, § 727 alone has four separate instances where a debtor is required to have "failed." 11 U.S.C. §§ 727(a)(3), (5), (11), (d)(4) (requiring that the debtor failed to "keep or preserve any recorded information," "explain satisfactorily ... any loss of assets," "complete an instructional course," or "explain satisfactorily a material misstatement ... or a failure to make available."). Meanwhile, there is only one instance in § 727 where a debtor is required to have "refused." 11 U.S.C. § 727(a)(6). The statute's plain language demands that "failed" and "refused" be interpreted differently.
Failure is defined as an "omission of occurrence or performance." Failure, Merriam-Webster.com Dictionary , https://www.merriam-webster.com/dictionary/failure (last visited Oct. 5, 2021). "Refuse," derived from "refusal," is defined as "to show or express unwillingness to do or comply with." Refuse, Merriam-Webster.com Dictionary , https://www.merriam-webster.com/dictionary/refuse (last visited Oct. 5, 2021). Definitionally, these two words have different meanings as a "failure" is merely an omission whereas a "refusal" requires intent based on unwillingness. Absent this unwillingness to obey - or refusal - there is no claim. Jarrell , 129 B.R. at 33 ("Bankruptcy law recognizes that mere failure does not equal refusal where the creditor does not show wilful or intentional disobedience ...."); see also 4 William L. Norton III, Norton Bankruptcy Law and Practice 86-45 (William L. Norton III et. al. eds., 3d ed. 2019); In re Gugliada , 20 B.R. 524, 528 (Bankr. S.D.N.Y. 1982) (stating that the debtor's failure to fully comply with an order may have been due to "a break-down in communications," which would not be considered refusal.); Jordan , 521 F.3d at 433 ; Standiferd v. United States Tr. (In re Standiferd) , 641 F.3d 1209, 1212 (10th Cir. 2011) ("[T]he court may not deny discharge under § 727(a)(6)(A) unless it finds debtor's non-compliance was willful."). This Court is persuaded by the rationale that a debtor's refusal must be accompanied by something more than the mere failure to obey a court order.
To establish a refusal, there must be a showing that Defendant (1) had knowledge of the order, (2) violated the order, and (3) the violated order is "specific and definite." Yoppolo v. Walter (In re Walter) , 265 B.R. 753, 758 (Bankr. N.D. Ohio 2001) (adopting the standard used in civil contempt proceedings).
Relevant to this case is Appleby's invocation of the Fifth Amendment, which asserts, in part, that "[n]o person shall be ... compelled in any criminal case to be a witness against himself." U.S. CONST. AMEND. V. However, invoking this right is not absolute, as "[n]o fifth amendment privilege attaches in the context of a civil proceeding ...." McKinney v. Galvin , 701 F.2d 584, 589 (6th Cir. 1983). Moreover, "the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them ...." Baxter v. Palmigiano , 425 U.S. 308, 318-19, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976). Thus, adverse inferences may be drawn by the trier of fact. Id. ; Gen. Motors Co. v. Heraud (In re Heraud) , 410 B.R. 569, 575 (Bankr. E.D. Mich. 2009) ; In re Crabtree , 39 B.R. 718, 724-25 (Bankr. E.D. Tenn. 1984) ; Clark & Gregory, Inc. v. Hanson (In re Hanson) , 225 B.R. 366, 372 (Bankr. W.D. Mich. 1998).
It is undisputed that Appleby had knowledge of the orders; both orders were sent to Appleby and to his bankruptcy attorney. BNC Mailing Certificate (Doc. #35, 36). Appleby was aware of the requirements imposed on him to produce the requested documents and reveal the location of the Vehicle. It is also undisputed that the Production Order and Vehicle Order were specific and definite; Appleby had to turn over a specific enumerated list of documents, disclose the location of the Vehicle, and surrender the Vehicle by dates certain. Thus, the only element that remains is whether there was an actual violation of the orders.
Appleby was required by the Production Order to produce the requested documents, including income tax returns, CME and other loan documents, employment records, bank statements, contact information, and his divorce decree. Plaintiff conceded that some documents were produced (the divorce decree and U.S. Bank statements from 2019); however, most of the requested documents, including the most important documents relevant to Appleby's finances, were not produced. The trustee never received these documents, nor did Appleby provide an explanation for his failure to do so or request more time to do so. Specifically, as to Appleby's transaction with CME, neither Appleby nor his counsel ever contacted CME to obtain copies of the loan documents for the Vehicle.
The multitude of opportunities that Appleby had to produce the documents but failed to do so despite numerous demands by the trustee and the order entered by this Court, lends itself to be more than a mere failure. Rather, the failure to produce most of the requested documents on several occasions exemplifies a refusal. Appleby had a duty to disclose the documents before the first § 341 meeting, which he failed to do and never gave a reason why or asked for more time. Appleby then ignored the trustee's letter to produce information. Then, Appleby did not oppose the trustee's motion or produce the documents by the second § 341 meeting. Finally, Appleby failed to comply with the Court's order. Not once during this time, from the first § 341 meeting in April to the commencement of this adversary proceeding in August, did Appleby make any effort to comply with his obligations.
The same can be said for Appleby's obligation to perform his stated intention to disclose the location of the Vehicle and surrender it. Initially Appleby claimed that he had the vehicle in his possession. Later he asserted that he did not have possession since the Vehicle was in a repair shop in Texas, but Appleby provided false evidence of the Vehicle's location. Indications are that the Vehicle was never at the repair shop. Appleby's conduct rose to the level of refusal. Plaintiff met the burden of showing a violation of court orders - then the burden shifted to Appleby to show, if any, applicable defenses, including an inability to comply. Glover v. Johnson , 138 F.3d 229, 244 (6th Cir. 1998).
Appleby's refusal to comply with the Production Order and Vehicle Order is akin to someone committing fraud. "Because proof of actual intent to hinder, delay or defraud creditors may rarely be established by direct evidence, courts infer fraudulent intent from the circumstances ...." Schilling v. Heavrin (In re Triple S Rests., Inc.) , 422 F.3d 405, 416 (6th Cir. 2005) (quoting Brown v. Third Nat'l Bank (In re Sherman) , 67 F.3d 1348,1353 (8th Cir. 1995) ). It is highly unlikely that anyone will admit to committing fraud. United States Tr. v. Zhang (In re Zhang) , 463 B.R. 66, 78-79 (Bankr. S.D. Ohio 2012). Similarly, it is unlikely that Appleby would admit to intentionally avoiding his obligations to produce documents and follow through with the Statement of Intention. Instead, the Court must look at the circumstances surrounding the conduct.
During trial, Appleby had an opportunity to testify, to present evidence contrary to that of Plaintiff, to demonstrate that these documents did not exist, or to illustrate that he could not have complied with the Production Order or Vehicle Order due to fault other than his own. Appleby did none of these. In fact, Appleby had nothing to say about the documents or much of anything else. Despite Plaintiff's counsel's multiple questions on direct examination about Appleby's documents, information related to those documents, or information regarding the Vehicle and the intention to surrender it, Appleby's only responses were to plead his Fifth Amendment right against self-incrimination. The burden had shifted to Appleby to demonstrate that Plaintiff's evidence was untrustworthy or false, but Appleby simply refused to testify. While Appleby was well within his right to plead the Fifth, his assertion of this privilege permits the court to draw negative inferences. Appleby conveniently pleaded the Fifth to any questions regarding his obligations as a debtor going through the bankruptcy process. Bankruptcy relief is for an honest but unfortunate debtor. Grogan , 498 U.S. at 286-87, 111 S.Ct. 654. Appleby failed to illustrate that he meets these criteria.
B. 11 U.S.C. § 727(a)(2)(B)
Section 727(a)(2)(B) of the Code states:
The court shall grant the debtor a discharge, unless 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 property of the estate, after the date of the filing of the petition[.]
11 U.S.C. § 727(a)(2)(B). More succinctly, the party objecting to the discharge needs to establish that: "(1) the debtor transferred or concealed property, (2) such property constituted property of the estate, (3) the transfer or concealment occurred after the filing of the bankruptcy petition, and (4) the transfer or concealment was made with the intent to defraud the bankruptcy trustee." Hunter v. Sowers (In re Sowers) , 229 B.R. 151, 156 (Bankr. N.D. Ohio 1998) (citing Transamerica Premier Ins. Co. v. Chaplin (In re Chaplin) , 179 B.R. 123, 127 (Bankr. E.D. Wis. 1995) ); see also Rivera , 338 B.R. at 328.
The Court will consider these elements in order. The first element, concealment, "simply means withholding knowledge of an asset by the failure or refusal to divulge owed information." Sowers , 229 B.R. at 156 (citing In re Martin , 698 F.2d 883, 888 (7th Cir. 1983) ). As to the second element, property of the estate encompasses "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Regarding the third element, a debtor has a duty under the Bankruptcy Code and Federal Rules of Bankruptcy Procedure not to conceal property of the estate after the filing of the petition. See, e.g ., 11 U.S.C. § 341 ; FED. R. BANKR. P. 4002 ; LBR 4002-1. The fourth element requires the debtor to act with actual intent as opposed to constructive intent. Sowers , 229 B.R. at 157 (citing Bank of Pennsylvania v. Adlman , 541 F.2d 999, 1003 (2d Cir. 1976) ). Actual intent may be proved through circumstantial evidence or inferred based on the debtor's conduct, and it may only take one act to show intent. Id. (citations omitted); see also Heraud , 410 B.R. at 578 ("Because actual intent is difficult to prove directly, it may be established from circumstantial evidence or inferred from the debtor's conduct."). The totality of Appleby's actions and inactions demonstrates actual intent. In the present case, Appleby's misconduct satisfies all four elements.
Elements two and three are satisfied. The Vehicle was prepetition property, and none have disputed that it was an asset of the bankruptcy estate. Up until July 19th, 30 days after the first § 341 meeting on June 19th, the Vehicle was part of the bankruptcy estate . Appleby, as a debtor going through the bankruptcy process, had a duty not to conceal property. The current dispute arises from misconduct concealing the Vehicle arising after filing the petition while the Vehicle was property of the estate.
Appleby claimed the Vehicle as exempt, and there were no objections. Accordingly, the Vehicle ceased to be property of the estate. 11 U.S.C. §§ 522(b), (1).
As discussed above, a fact finder may make negative inferences from a party invoking the Fifth Amendment during a civil proceeding. See supra § III.A. Appleby refused to answer Plaintiff's proper questions regarding statements he made at the first § 341 meeting of creditors, the disclosures he made on his bankruptcy petition and accompanying attachments, or documents he provided or did not provide. During Plaintiff's questioning, Appleby had ample opportunity to explain any discrepancies about the Vehicle's location or the delay in surrendering the vehicle. The Court draws a negative inference based on Appleby's silence that leads the Court to conclude that Appleby had knowledge of the Vehicle's location but refused to reveal it. The Court also concludes that Appleby actually intended to conceal the location of the Vehicle and to retain the Vehicle. Thus, elements one and four are satisfied.
CME has been unable to locate the Vehicle. The Vehicle remains unaccounted for even after diligent follow-up from CME because of Appleby's untrue or misleading statements surrounding the location of the Vehicle. Appleby has not provided any explanation for the delay or lack of cooperation in the surrender of the Vehicle. Undoubtedly, Appleby concealed the Vehicle with the intent to defraud and delay CME. Accordingly, Appleby cannot be granted a discharge.
C. Trustee's Request to Amend the Complaint and Add Causes of Action Under 11 U.S.C. §§ 727(a)(3), 727(a)(4)(A), and 727(a)(4)(D).
During closing arguments counsel for Plaintiff moved the Court to amend the Complaint to add three new counts pursuant to Federal Rule of Procedure 15. These new counts would seek denial of discharge under 11 U.S.C. §§ 727(a)(3), 727(a)(4)(A), and 727(a)(4)(D). Considering the Court's findings and conclusions articulated above, the motion to amend the Complaint is denied as moot.
IV. Conclusion
For the foregoing reasons, the Court finds that the Trustee has proven that defendant, Nathan L. Appleby, should be denied a discharge pursuant to 11 U.S.C. §§ 727(a)(6)(A) and 727(a)(2)(B). A separate final judgment will be entered consistent with this Opinion.