Thomas F. Miller v. Kenneth L. Kasden ( 1997 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 97-6018
In re: *
*
Kenneth L. Kasden, *
*
Debtor. *
*
* Appeal from the United
Thomas F. Miller, Trustee * States Bankruptcy Court
of the Bankruptcy Estate of * for the District of
Kenneth L. Kasden, * Minnesota
*
Plaintiff-Appellee, *
v. *
*
Kenneth L. Kasden, *
*
Defendant-Appellant. *
Submitted: May 16, 1997
Filed: June 20, 1997
Before HILL, KOGER and SCOTT, Bankruptcy Judges
KOGER, Chief Bankruptcy Judge
Kenneth L. Kasden, pro se, (hereafter “Debtor”) has appealed the
order entered by the bankruptcy court for the District of Minnesota,
revoking his discharge pursuant to 11 U.S.C. § 727(d)(2)and ordering Debtor
to turn over to the estate certain funds Kasden has obtained.1 The
judgment of the bankruptcy court is affirmed.
1
The Honorable Robert J. Kressel, United States Bankruptcy
Judge, District of Minnesota.
STANDARD OF REVIEW
In reviewing a judgment following a trial, we review the bankruptcy
court’s findings of fact for clear error and its legal conclusions de novo.
Four B. Corp. v. Food Barn Stores, Inc. (In re Food Barn Stores, Inc.), 107
F.3d 558, 561 (8th Cir. 1997). Findings of fact shall not be set aside
unless clearly erroneous, and due regard shall be given to the opportunity
of the bankruptcy court to judge the credibility of the witnesses. Fed.
R. Bankr. P. 8013.
REVOCATION OF DISCHARGE
The purpose of a discharge in bankruptcy is to relieve an honest
debtor from his financial burdens and to facilitate the debtor’s
unencumbered “fresh start.” See Local Loan Co. v. Hunt, 292 U.S. 234, 244,
54 S. Ct. 695, 699 (1934). In limited circumstances, however, the debtor’s
discharge may be revoked; but revocation is an extraordinary remedy. See
Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 924 (B.A.P. 9th
Cir. 1994). The grounds for revocation of a debtor’s discharge are set
forth in § 727(d),2 which provides:
On request of the trustee, a creditor, or the United States
trustee, and after notice and a hearing, the court shall revoke
a discharge granted under subsection (a) of this section if--
* * *
(2) the debtor acquired property that is
property of the estate, or became entitled to
acquire property that would be property of the
estate, and knowingly and fraudulently failed
2
Unless otherwise indicated, all statutory references are to
the United States Bankruptcy Code, 11 U.S.C. §§ 101 - 1330 (1994).
2
to report the acquisition of or entitlement to such property,
or to deliver or surrender such property to the trustee. . . .
11 U.S.C. § 727(d)(2).
After conducting a trial on the trustee’s complaint to revoke the
debtor’s discharge under § 727(d)(2), the bankruptcy court found the
following sequence of events, all performed by the debtor in the few days
before and in contemplation of his filing a petition for bankruptcy:
July 27, 1994 - Debtor received a check from Indian River Distr
ibuti
o n
Compa
ny in
t h e
amoun
t of
$7,50
0.00.
August 1, 1994 - Debtor cashed the $7,500.00 check from Indian
River.
August 1, 1994 - Debtor made a $2,500.00 payment to All American
Recreation toward the purchase of a $6,000 hot tub.
He had already made a $1,000.00 payment to All
American toward the hot tub on July 21.
August 1, 1994 - Debtor paid Knox Lumber $1,384.50 as prepayment
for roof trusses which he did not pick up until
after he filed bankruptcy.
August 2, 1994 - Debtor paid $2,000.00 cash to Jay Roshay as
prepayment for labor to be provided at Debtor’s
home.
August 3, 1994 - Debtor received another check from Indian River
Distribution Company in the amount of $2,700.00
from the sale of a skidloader. That same day,
Debtor endorsed that check over to the Fire Place
Center as well as paying an additional $853.13 in
cash, for a total payment of $3,553.13, as
prepayment for fireplace equipment. The check
showed a deposit date of August 5, 1994, one day
after Debtor filed his bankruptcy petition.
August 3, 1994 - Debtor paid $1,800.00 in cash as an advance
3
payment for 600 feet of marble tile which he did
not pick until after filing bankruptcy.
August 3, 1994 - Debtor purchased paint from Knox Lumber for
$777.02.
August 4, 1994 - Debtor filed his petition in bankruptcy.
Neither the payments to the debtor from Indian River nor the payments
made by Debtor for the home improvement materials and services were
reported on any of Debtor’s bankruptcy schedules. In fact, while several
other prepetition transfers were disclosed in the schedules, these were
not. The debtor openly admits he performed all of these transactions with
the intent of preventing his creditors from receiving the proceeds of the
checks from Indian River. He maintains he did so on the advice of his
attorney and under the belief that he was properly and legally protecting
that money from his creditors by investing it into his homestead which he
thought would be exempt.
The bankruptcy court concluded that had the trustee found out about
these transfers within the applicable limitations period, they would have
constituted the making of a false oath and the concealing of transfers,
providing grounds for the denial of discharge under §§ 727(a)(4)(A) and
727(a)(2). The court also declared that the assets purchased (the hot tub,
the prepaid lumber and tile, etc.) were all assets of the estate which the
debtor did not list on his Schedule B, thereby providing further grounds
for denial of discharge under §§ 727(a)(2) or 727(a)(4). Additionally, the
debtor falsely stated to the court that he was unemployed, that he had no
income, and did not reveal the two payments from Indian River, all
providing grounds for denial of discharge for making a false oath.
The trustee did not discover these omissions until after the
4
time had passed for objecting to discharge, which under Fed. R. Bankr. P.
4004(a), is not later than 60 days following the first date set for the
first meeting of creditors. In fact, the trustee did not discover the
omissions until after the debtor received his discharge on January 24,
1995.3
After the discharge was entered, and during his investigation, the
trustee discovered the sale of the skidloader to Indian River Distribution
Company, leading him to make inquiries of Jon Heidinger, a former officer
of Indian River Distribution Company who was, at the time of the inquiry,
winding up Indian River’s affairs. The trustee asked Heidinger to provide
him with a copy of the check which reflected the payment by Indian River
Distribution Company to Debtor for the purchase of the skidloader.
Heidinger, a friend of the debtor, notified the debtor of the trustee’s
inquiry regarding the check. Debtor met with Heidinger and altered the
check to remove the debtor’s endorsement of the check to the Fire Place
Center as well as the deposit stamp indicating it had been deposited into
the Fire Place Center’s bank account. Heidinger submitted a copy of the
check to the trustee in the altered form. The bankruptcy court found that
“[t]he purpose of this alteration was to prevent the [trustee] from
discovering the transfer to the Fire Place Center which the [debtor]
rightly feared would lead the [trustee] to uncover the series of
prepetition transfers.”
The trustee, however, was able to obtain another copy of the check
from Indian River’s bank which contained the endorsement, thus leading the
trustee to discover the alteration of the check and the other transfers.
According to Heidinger’s testimony, when
3
The trustee filed this adversary complaint to revoke the
debtor’s discharge pursuant to § 727(d)(2) on June 6, 1996. The
case had not yet been closed, so the time requirements of §
727(e)(2)(B) for bringing an action to revoke discharge are met.
5
Debtor heard that the trustee was inquiring about the check, Debtor became
“panicked” or “agitated.” Debtor testified he feared that if the trustee
saw the endorsement to the Fire Place Center, the trustee would start
making inquiries into the other transfers and that would cause new
litigation over those transfers. As a result, he testified he altered the
check to prevent the trustee from instituting more litigation and incurring
more fees for himself.
The trustee not only discovered the series of transfers to the Fire
Place Center and other home improvement businesses, but also discovered
that on January 26, 1995, and February, 22, 1995, the debtor returned some
of the fireplace equipment to the Fire Place Center and obtained refunds
in the amounts of $1,402.15 and $660.83, totaling $2,062.98. The debtor
also did not report these refunds to the bankruptcy court or the trustee.
The trustee brought an adversary complaint seeking to have the
debtor’s discharge revoked pursuant to § 727(d)(2) because the debtor
acquired property that was property of the estate and knowingly and
fraudulently failed to report the acquisition of the property and to
deliver or surrender such property to the trustee.
The bankruptcy court entered an order revoking the debtor’s
discharge, also ordering the debtor to turn over to the trustee $2,062.98
representing the fire equipment refunds.4 The bankruptcy court ordered the
debtor to turn over only those refunds because in another adversary
proceeding, the trustee was able to obtain a refund for the hot tub from
All American Recreation. Also, the rest of the home improvement items
obtained by the debtor as a result of the prepetition transfers went to
improve the debtor’s home which was found to be non-exempt. In re Kasden,
186 B.R. 667
4
The bankruptcy court also awarded to the trustee the costs
of bringing the adversary, $120.00.
6
(D. Minn. 1995), aff’d 84 F.3d 1104 (8th Cir. 1996). Consequently, the
improvements that the debtor made to the home actually went to improve the
property of the estate which the trustee subsequently sold. Thus, the
only property of the estate that the debtor still possessed was the
$2,062.98 in refunds from the Fire Place Center.
Clearly, both the prepayments on the fireplace equipment and the cash
refunds for the equipment were property of the estate under § 541(a). That
section provides a very broad definition of property of the estate, namely
all legal or equitable interests of the debtor in property as of the
commencement of the case, wherever located and by whomever held. Debtor
does not dispute his acquisition of the fireplace equipment or the refunds,
and he does not dispute his failure to report them. It follows, then, as
the bankruptcy court stated, the only remaining question is whether or not
the debtor knowingly and fraudulently failed to report his acquisition of
the funds.
Debtor declares that he did not know that the refunds were property
of the estate or that he had any obligation to report them to the trustee.
Debtor asserts he was acting on the advice of counsel and under a mistaken
belief that his prepetition expenditures were legitimate investments in his
homestead, but the subsequent events, as the bankruptcy court noted, do not
support that contention. First, none of the transfers were reported on his
original schedules or his amended schedules, despite the fact that other
prepetition transfers and payments were listed. Debtor’s assertion that
he did not think he had to list them in his schedules does not excuse the
omission. To the contrary, “[d]ebtors have an absolute duty to report
whatever interests they hold in property, even if they believe their assets
are worthless or are unavailable to the bankruptcy estate.” In re Yonikus,
974 F.2d 901, 904 (7th Cir. 1992); see also Mertz v. Rott, 955 F.2d 596,
598 (8th Cir. 1992) (holding that where a debtor believes an
7
asset is exemptible, he cannot simply omit it from his schedule; rather,
he must list the asset on his schedules and then claim the exemption).
At 11 U.S.C. § 522, the Bankruptcy Code permits debtors to
claim certain property as exempt from the bankruptcy estate.
However, Bankruptcy Rule 4003 and § 522(l) of the Bankruptcy
Code dictates that debtors who claim exemptions must list such
exempt property on the required schedule of assets. All
property the debtor owns at the time the bankruptcy petition is
filed becomes property of the bankruptcy estate. Rather than
withholding property from the estate, the debtor actually seeks
a return of the property from the estate by filing the claim
for exemption. The bankruptcy court, not the debtor, decides
what property is exempt from the bankruptcy estate.
In re Yonikus, 974 F.2d at 905 (citations and footnote omitted).
Moreover, and very significantly, immediately upon learning that the
trustee was investigating the skidloader check, the debtor intentionally
set out to delete the endorsement which would lead the trustee to discover
the other transactions, particularly the dealings with the Fire Place
Center and the refunds he had received. The trial court properly found
this to be very strong evidence that the debtor purposely failed to report
the refunds and then took deliberate steps to prevent the trustee from
discovering them. Debtor’s explanation for altering the check did not
convince the bankruptcy court.
Debtor testified at trial that he believed the trustee wanted to see
the check for the sole purpose of establishing ownership of the skidloader.
Although not discussed by the partes or the bankruptcy court, this
statement by the debtor to be revealing because it was the discovery of the
skidloader in Debtor’s garage after discharge that led the trustee to
inquire of Jon Heidinger about it. Debtor was still in possession of a
skidloader he allegedly sold many months prior. That he thought the
trustee only
8
wanted to establish ownership of it does not make sense and raises even
more questions as to the debtor’s course of conduct.
Finally, Debtor offered in his own defense evidence that he took the
proceeds of the first refund, the check for $1,402.15, and converted the
funds into a cashier’s check which he simply retained in his possession in
that form for some five months without using the funds. He offered this
to show that he ultimately used the money represented by that cashier’s
check for other improvements to his home that all along he thought
represented legitimate investments in his homestead. The bankruptcy court
concluded that this scenario proved more than disproved his fraudulent
intent because rather than depositing the money with the trustee or into
an identifiable account, he secretly converted the money into a form
unlikely to be discovered and then held onto it for five months without
informing anyone he had it. This admission by the debtor provides further
support for the bankruptcy court’s conclusion that he knew the funds should
have gone to the estate and that he intentionally prevented the trustee
from finding out about them.5
Debtor’s fraudulent intent may be established by showing that the
debtor knowingly made an omission that misleads the trustee or that the
debtor engaged in a fraudulent course of conduct. See In re Yonikus, 974
F.2d at 905; In re Walters, 176 B.R. 835, 876 (Bankr. N.D. Ind. 1994). A
debtor’s fraudulent intent may be inferred from all the surrounding
circumstances where the debtor’s pattern of conduct supports a finding of
fraudulent intent. See In re Van Horne, 823 F.2d 1285, 1287 (8th Cir.
1987); Walters, 176 B.R. at 876. The focus is on whether the debtor’s
actions “appear
5
Debtor held onto the cashier’s check until July 14, 1995,
and thereafter allegedly used the money to improve his homestead.
On July 19, 1995, however, the District Court of Minnesota held
that the Debtor’s homestead was not exempt.
9
so inconsistent with [his] self-serving statement of intent that the proof
leads the court to disbelieve the debtor.” Van Horne, 823 F.2d at 1287
(quoting In re Hunt, 30 B.R. 425, 441 (M.D. Tenn. 1983)). The trustee may
also prove the debtor’s fraudulent intent by showing that the debtor acted
so recklessly that fraud can be implied. See Owens v. United States, 98
F. Supp. 621, 627 (W.D. Ark. 1951), aff’d, 197 F.2d 450 (8th Cir. 1952); see
also Walters, 176 B.R. at 876.
Debtor argues that the bankruptcy court’s determination as to his
intent is error because “Judge Kressel had not walked in the [debtor’s]
shoes for the last five years, and has absolutely no idea whatsoever what
the state of mind was of the [debtor] during that period of time.” This
is the very reason, absent an admission of intent to defraud, that the
trial court must look at the circumstantial evidence and the events that
occurred to try to determine intent from that evidence. See Van Horne, 823
F.2d at 1287; Owens, 98 F. Supp. at 627.
The bankruptcy court properly applied this principle and we can find
no error in the bankruptcy court’s credibility determination and factual
findings and the conclusion that the debtor knowingly and fraudulently
failed to report and turn over property that belonged to the estate.
ORDER TO TURN OVER THE REFUNDS
Having found that the debtor was in possession of property of the
estate, it was proper for the bankruptcy court to order the debtor to turn
over those funds to the estate under § 542(a), which enables a trustee to
recover the value of property of the estate from any party holding that
property during the pendency of the
10
case.6
DUE PROCESS
Debtor also argues he is entitled to a new trial because he was
denied due process. He points to several rulings and occurrences during
the trial which he asserts were either error or claims the bankruptcy court
should have given him special consideration because he appeared at the
trial, pro se.7
First, Debtor contends the bankruptcy court erred in refusing to
admit a particular letter he sought to introduce. The transcript reveals
that while Kasden was testifying on his own behalf (in ”direct examination”
of himself), he sought to introduce a letter written by his former attorney
to the trustee’s attorney. The attorney represented Debtor in this
bankruptcy case and adversary until a couple of months before trial.
Debtor contends the letter supported his belief that the property was
exempt. The trustee’s attorney objected not only on hearsay grounds, but
also because a paragraph of the letter had been redacted. The bankruptcy
court sustained both objections.
On appeal, Debtor argues:
Judge Kressel should have informed the [debtor] that just by
stating the letter is a true and exact copy with the
6
It was not necessary for the Court to order the debtor to
turn over any of the other items because they were incorporated
into the house and, after Debtor lost his homestead exemption, the
trustee sold the house with the improvements. Consequently, the
estate benefitted from those items.
7
Some of these points are raised in the portion of Debtor’s
brief regarding the revocation of discharge argument rather than
the due process portion of the brief. Nevertheless, the Court
addresses all of the trial error arguments here.
11
exception of paragraph 1, that letter would have been entered
into evidence. The [debtor] believes it was the obligation of
the Honorable Judge Kressel to assist him in his pro se
representation in order the find the truth and justice served.
By definition, a document is not a true and accurate copy if it has been
altered. The bankruptcy court correctly found the letter to be hearsay and
Debtor offers no exception to the hearsay rule which would make it
admissible, even if it had been introduced in proper form. See Fed. R.
Evid. 801 and 802.
Next, Debtor argues that the bankruptcy court erred in quashing a
subpoena Debtor served on the trustee’s attorney. The court quashed the
subpoena because it had not been signed by an attorney or officer of the
court as required by the rules. Debtor contends he was given incorrect
information by bankruptcy court personnel and that, in any event, the
trustee’s attorney should have been required to testify regardless of the
subpoena because he was in court to represent the trustee and he was listed
on the debtor’s witness list. The debtor, however, never called him to
testify at trial. So, even assuming he could have testified, the
bankruptcy court merely quashed an improper subpoena; it did not refuse to
allow the debtor to call him as a witness. The bankruptcy court’s ruling
to quash the subpoena was not error. Since the court never had a chance
to rule on whether the trustee’s attorney could testify, there can be no
error. Furthermore, Debtor offers no indication what this witness would
have testified about or how the testimony may have “vindicated” him as he
contends.
Debtor also points to another portion of his own direct testimony
where he asked the bankruptcy court for permission to leave the witness
stand to retrieve a document from the counsel table where he had been
sitting. The bankruptcy court asked his purpose and the debtor replied,
“for my notes.” The court told the
12
debtor, “Well, you can’t read from your notes. You have to testify from
your memory.” Debtor without objection then continued with his testimony
without his notes. He now complains that he could not adequately remember
everything and thus could not conduct his complete defense, was
intimidated, and interpreted the court’s statement to mean that he could
not use notes at all. The transcript reveals otherwise. The fact that
Debtor misinterpreted the bankruptcy court’s seemingly clear statement does
not constitute error. Second, Debtor does not now offer any indication as
to what he would have testified to had he had his notes and whether or how
it would have changed the outcome.
Finally, Debtor asserts the bankruptcy court erred in refusing to
admit, on relevancy grounds, certain receipts Debtor sought to introduce.
The receipts were for additional home improvement items which the debtor
purchased post-petition. Debtor sought to introduce these receipts,
totaling some $4,500.00, to show that he used the fireplace refunds to
improve his homestead. This, he contends, would have demonstrated that he
did not intend to defraud his creditors but rather that he honestly
believed the money belonged to him as part of his homestead.
The bankruptcy court correctly concluded that the receipts were not
relevant. If the receipts show that the debtor invested an additional
$4,500.00 into his homestead post-petition, it would make no difference.
CONCLUSION
The bankruptcy court properly found that Debtor had a duty to report
the transactions related to the home improvements and particularly the
refunds on the fireplace equipment, and that Debtor knowingly and
fraudulently failed to report his acquisition of those funds. Accordingly,
the bankruptcy court did not err in
13
revoking the debtor’s discharge pursuant to 11 U.S.C. § 727(d)(2). Because
the refunds were property of the estate, it was proper for the bankruptcy
court to order the debtor to turn those funds over to the trustee pursuant
to 11 U.S.C. § 542. Accordingly, we affirm.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
14