Opinion
Case No. 16-31533 HCD Adv. Proc. No. 16-3045
04-10-2018
In the Matter of: THOMAS MICHAEL ROSS Debtor HEATHER O'CONNOR Plaintiff v. THOMAS MICHAEL ROSS Defendant
Appearances: Bradley J. Adamsky, Esq., 820 Jefferson Avenue, LaPorte, IN 46350, attorney for plaintiff Heather O'Connor. R. William Jonas, Jr., Esq., 137 North Michigan Street, South Bend, IN 46601, for defendant Thomas Michael Ross.
Chapter 7 Appearances: Bradley J. Adamsky, Esq., 820 Jefferson Avenue, LaPorte, IN 46350, attorney for plaintiff Heather O'Connor. R. William Jonas, Jr., Esq., 137 North Michigan Street, South Bend, IN 46601, for defendant Thomas Michael Ross.
MEMORANDUM OF DECISION
At South Bend, Indiana, April 10, 2018.
Heather O'Connor (O'Connor) filed this adversary proceeding asking the court to bar the discharge of the debtor, Thomas Michael Ross (Ross) under 11 U.S.C. § 727(a)(2) and § 727(a)(4). On February 8, 2018, the court held a trial and heard witness testimony from Ross, O'Connor, Pamela Sue Koehn, and Joseph D. Bradley. Koehn is the mother-in-law of Ross. Bradley is the trustee administering Ross's bankruptcy, and he has been a member of the chapter 7 trustee panel in this district since 1978. The court also received documentary exhibits that included bank accounts and papers relating to certain real property. The court allowed the parties to file post-trial briefs, with an opportunity to file replies. The briefing period having run, the parties have now fully developed the record in this adversary proceeding and it is ready for consideration by the court.
Jurisdiction
The parties have affirmatively stated that this court has jurisdiction in this adversary proceeding, and that it is a core proceeding within the meaning of § 157(b)(1). The court finds it has jurisdiction pursuant to 28 U.S.C. §§ 151, 157 and 1334, and Northern District of Indiana Local Rule 200-1. The court has determined that this matter is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(J). Pursuant to 28 U.S.C. §§ 1408 and 1409(a), the court finds the venue in this court is proper.
Findings of Fact
In 2015, O'Connor hired Ross to work on her home. She was not happy with the quality of work, refused to pay his final invoice. Ross sued O'Connor in state court in March 2016. O'Connor counter-claimed against Ross in that litigation. Later, on July 2, 2016, Ross filed a voluntary petition for relief under chapter 7. Ross listed O'Connor as an unsecured creditor. Ross's original schedules of assets did not include property on G Street in LaPorte, Indiana. Before the § 341 meeting O'Connor contacted Ross's bankruptcy trustee about assets she believed Ross failed to list (G Street) or improperly valued. She also filed this adversary proceeding to bar Ross's discharge.
In response to questioning by his bankruptcy trustee at his § 341 meeting, Ross volunteered information about the G Street property. Ross testified that he did not schedule the G Street property since the property was in foreclosure. After the § 341 meeting Ross filed amended schedules that included this property. Discovering no assets to administer for the benefit of creditors, Ross's bankruptcy trustee filed a report of no distribution. Ross's trustee found no impropriety concerning the timing of the amendment to Ross's schedules or his valuation of property.
On September 30, 2016, within the time set for filing discharge objections, O'Connor filed this adversary proceeding asking the court to deny Ross a discharge pursuant to § 727(a)(2) and § 727(a)(4). In essence, her complaint asks the court to deny Ross's discharge because she alleges he concealed assets and made false oaths. She points to his failure to list the G Street house on his original schedules and his alleged under valuing or omission of other property as signifying concealment of assets. Her complaint also asserts that Ross made a false oath when, under the penalty of perjury, he signed his original schedules incorrectly verifying that he had properly listed all his assets.
The clerk issued a summons on October 3, 2016. This summons required Ross to respond by November 2, 2016. The rules of procedure required O'Connor to serve the summons and copy of the complaint on both Ross and his bankruptcy attorney within seven days of issuance. The court's record in this adversary proceeding does not include a certificate of service by O'Connor of the summons and complaint. The record does show that Ross's former bankruptcy attorney filed a motion to dismiss with prejudice on November 18, 2016, 16 days after the answer was due. Neither O'Connor nor Ross has voiced any objection to service of process or timeliness of filings at any stage of this adversary proceeding.
See Bankruptcy Rule 7012(a).
See Bankruptcy Rule 7004(e) and (g).
The record does include a certificate of mailing from the Bankruptcy Noticing Center showing that it mailed Ross only a summons on October 5, 2016. The BNC sent an electronic notice of the summons to O'Connor's attorney. The BNC did not send the summons to Ross's bankruptcy attorney. See ECF Doc. 4.
On February 21, 2017, the court held a hearing on Ross's motion to dismiss with prejudice. By minute entry dated February 22, 2017, the court denied that motion. Ross filed an answer to the complaint on February 21, 2017. Ross has never asked, nor has the court ordered, an extension of time to file an answer. Since the filing of his answer, Ross's original bankruptcy counsel has withdrawn. His new attorney participated in pretrial proceedings and represented Ross at the trial of this adversary proceeding on February 8, 2018.
Discussion
Procedural matters
The court sua sponte notes the existence of serious procedural irregularities. The record here does not show proper service of process by O'Connor on Ross and his bankruptcy attorney. Proper service of process on the defendant is the sine quo non in any litigation. The Seventh Circuit has long recognized that valid service of process is necessary to assert personal jurisdiction over a defendant. Rabiolo v. Weinstein, 357 F.2d 167 (7th Cir. 1966). Valid service of process comprises more than actual notice; it requires a legal basis for holding the defendant susceptible to service of the summons and complaint. Omni Capital International v. Rudolf Wolff & Co., Ltd., 484 U.S. 97, 103 (1987). However, where a defendant actively participates in pretrial proceedings without raising an objection to improper service, courts have found a waiver of this defense. See, e.g., Trustees of Central Laborers' Welfare Fund v. Lowery, 924 F.2d 731, 732 (7th Cir. 1991); Schmude v. Sheahan, 214 F.R.D. 487, 491 (N.D. Ill. 2003); Trust Co. of Louisiana v. N.N.P., Inc., 104 F.3d 1478, 1487 (5th Cir. 1997). Due to his participation and failure to question service, the court finds that Ross has waived any objection relating to service.
On the other side, Ross filed his first pleading, a motion to dismiss, beyond the time permitted under the rules for a response to the summons. Ross's answer, when he finally filed it, was more than three months past the summons response time. O'Connor has not objected to the timeliness of these responsive pleadings. A litigant waives an argument not presented. In re Weber, 25 F.3d 413, 415-16 (7th Cir. 1994). The court finds that O'Connor has waived any objection relating to timeliness.
Bankruptcy discharge
The primary objective of the Bankruptcy Code is to grant a fresh financial start to honest but unfortunate debtors. Marrama v. Citizens Bank, 549 U.S. 365, 367 (2007). To achieve the fresh start goal of bankruptcy, exceptions and objections to discharge are construed strictly against a creditor and liberally in favor of the debtor. In re Hudgens, 149 Fed. Appx. 480, 484 (7th Cir. 2005). Denial of discharge is a serious matter. When the court has denied discharge, a debtor can never get out from under debts existing as of the date of bankruptcy. "The consequences to a debtor whose obligations are not discharged are considerable; in many instances, failure to achieve discharge can amount to a financial death sentence. In view of these harsh consequences, exceptions to discharge are to be narrowly construed and genuine doubts should be resolved in favor of the debtor." Denton v. Hyman, 502 F.3d 61, 66 (2nd Cir. 2007), cert. denied 555 U.S. 1097 (2009); see also In re Philadelphia Rapid Transit Co., 8 F.Supp. 51, 53 (E.D. Pa. 1934).
The court begins with understanding that Bankruptcy Rule 4005 governs this adversary proceeding: "At the trial on a complaint objecting to discharge, the plaintiff has the burden of proving the objection." Here O'Connor has the burden of proof by a preponderance that the court should withhold Ross's discharge. Peterson v. Scott, 172 F.3d 959, 966-67 (7th Cir. 1999).
Section 727 of the Bankruptcy Code requires a bankruptcy court to grant a discharge to a chapter 7 debtor unless the objector proves, by a preponderance of the evidence, one of the twelve exceptions listed in § 727. "Consistent with the Code's 'fresh start' policy, courts have required that exceptions to discharge should be construed strictly against the creditor and liberally in favor of the debtor." In re Hensley, 381 B.R. 699, 703 ( Bankr. N.D. Ind. 2007) (citing In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1996)). In order for this court to deny Ross a discharge, O'Connor must prove each element of the objection by a preponderance of the evidence. See, e.g., Peterson, 172 F.3d at 966-67; Cantwell & Cantwell v. Vicario, 464 B.R. 776, 788 (N.D. Ill. 2011). O'Connor seeks to deny discharge under two subsections of § 727(a). As the elements under these subsections differ, the court will review them separately.
Section 727(a)(2)(A)
To prevail under § 727(a)(2)(A), the objector must prove by a preponderance of the evidence that the debtor (1) transferred, removed, destroyed or concealed, (2) the debtor's property, (3) with actual intent to hinder, delay, or defraud a creditor, (4) within one year of bankruptcy. "The exception to discharge in § 727(a)(2)(A) essentially 'consists of two components: an act (i.e., a transfer or a concealment of property) and an improper intent (i.e., a subjective intent to hinder, delay, or defraud a creditor).' ...' The party seeking to bar discharge must prove that both these components were present during the one year before bankruptcy; anything occurring before that one year period is forgiven.' " In re Kontrick, 295 F.3d 724,737 (7th Cir. 2002) (emphasis in original). The evidence O'Connor presented at trial did not show by a preponderance that Ross acted to intentionally defraud creditors by concealing his property.
Evidence and testimony at trial established that Ross did not include the G Street property on his initial bankruptcy schedules. O'Connor asserts Ross's failure to initially schedule the G Street property serves as a reason to deny his discharge because he tried to hide this property. O'Connor's argument that an amendment to add an overlooked asset signifies fraud and an intent to conceal is overly broad and misplaced. Ross's bankruptcy trustee testified that in the many years of his experience as a trustee, five to ten percent of debtors will omit listing some asset. According to the trustee, such mistakes typically occur as the result of a debtor's losing track of the property, or the belief the property had no value.
O'Connor's argument ignores Ross's general right to amend his statements and schedules under Bankruptcy Rule 1009(a). As relevant here, Rule 1009(a) provides that a "voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before a case is closed." After discussing the G Street property at his § 341 meeting, Ross's quick action to amend his schedules discredits any assertion that he was trying to hide property. At trial Ross offered credible testimony showing this omission was not part of a scheme to intentionally hinder or defraud his creditors. O'Connor failed to show Ross's bad faith in amending his schedules. Upon reviewing the totality of the circumstances here, the court does not find any reason to deny Ross's discharge because he amended his schedules.
O'Connor wants this court to infer evil intent from Ross's failure to originally schedule the G Street property. Were the court to adopt O'Connor's interpretation of an amendment, any debtor who amends schedules to include omitted property ought to have their discharge barred. The court does not read the statute in such a mechanical way. The court recognizes, and Rule 1009 confirms, that human memory and judgment are neither perfect nor infallible. Under the facts of this bankruptcy the court does not find it reasonable to categorize Ross's amendment to his schedules, an amendment perhaps prompted by the discussion at his § 341 meeting, as a discovered attempt to conceal assets for which the court should penalize him. Quite the opposite: The court finds Ross's voluntary amendment a sign of an honest debtor cooperating with this bankruptcy trustee and attempting to fulfill his obligation, under the statute and rules, to list all his assets and liabilities. Nothing in the record of this adversary proceeding, or in Ross's underlying bankruptcy case, supports the supposition that Ross was trying to conceal assets.
See § 521(a)(1)(B)(i), Bankruptcy Rules 1007(b)(1)(A), 4002(a), and 1009(a). --------
An actual intent to hinder or defraud a creditor is a necessary element under § 727(a)(2)(A). Apart from the issue of intent—which O'Connor has not shown—O'Connor's pleadings and presentation at trial failed to identify any particular creditor who Ross hindered, delayed, or defrauded by his failure to list the G Street property on his original schedules. Under the facts of this case the court is also unable to identify any creditor harmed by an omission.
O'Connor also questions Ross's valuation of the G Street property and other assets. O'Connor points to the undervaluing of property, along with the failure to initially list G Street as an asset, as indicative of knowing and fraudulent intent by Ross. Property valuation is a difficult issue, often devolving to a "he-said-she-said" situation. The valuation of property in bankruptcy schedules is an academic exercise. Until a willing buyer and a willing seller come together and there is cash on the table, the precise value of property is only conjectural. The record in this adversary proceeding does not persuade the court that Ross intentionally provided unrealistically low value estimates on his schedules. The fact that Ross's experienced bankruptcy trustee did not question the values Ross assigned to his property, and that he did not find Ross's omission of the G Street property from this original schedules as an indicator of possible nefarious intent, reinforces the court's conclusion that the court should not deny Ross's discharge.
Section 727(a)(4)
To prevail on a claim under § 727(a)(4)(A), O'Connor must prove by a preponderance of the evidence that (1) Ross made a statement under oath; (2) the statement was false; (3) Ross knew the statement was false; (4) Ross made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case. Stamat v. Neary, 635 F.3d 974, 978 (7th Cir. 2011). Like the denial of a discharge under § 727(a)(2)(A), a denial of discharge under § 727(a)(4) requires proof that the debtor acted with wrongful intent. O'Connor has not carried her burden of proof on the intent element. Ross is a credible witness and the court finds a complete absence of fraud in his statements and unintentional omissions in his filings. Looking at the totality of the circumstances, O'Connor has not convinced the court the omission of the G Street property was a material omission warranting denial of discharge. Ross's bankruptcy trustee knew of this property and still filed a report of no distribution. The trustee's actions here strongly indicate that even if Ross originally included the property on this schedules, it would have made no difference to the administration of his bankruptcy estate.
Conclusion
O'Connor has not met each requirement necessary to validate a denial of discharge. She has not convinced the court that Ross knew his schedules were inaccurate and he intended to hide assets in an attempt to hinder creditors at the time he filed the schedules with the court; that Ross's schedules were intentionally fraudulent statements; or that any omission hindered or delayed a creditor. Nothing in the record presented by O'Connor leads the court to plausibly infer fraudulent intent by Ross or the concealment of assets. The court must strictly construe exceptions to discharge against a creditor and in favor of the debtor. In sum, the court finds O'Connor failed to meet her burden of proof under any part of § 727(a). The court dismisses her complaint.
SO ORDERED.
/s/ HARRY C. DEES, JR.
HARRY C. DEES, JR., JUDGE
UNITED STATES BANKRUPTCY COURT