Bankruptcy Law

Editor:
David N. Gunn, Esquire

Debtor’s intentional omission of material disclosures in bankruptcy statements and schedules is not excused by the debtor’s alleged misunderstanding of the applicable legal standard required for such disclosures in an objection to discharge filed under 11 U.S.C. § 727(a)(4)(A). Lincoln Savings Bank v. Jay Freese (In re Freese), case 11-6055, (B.A.P. 8th Circuit December 14, 2011), Schermer, with Venters and Saladino, JJ.

Debtor filed a Chapter 7 bankruptcy listing two secured and one unsecured creditors. Secured creditor Lincoln Savings Bank filed an objection to discharge in the debtor’s bankruptcy under § 727(a)(4)(A), which states that a debtor shall be denied discharge if he knowingly and fraudulently makes a false oath or account regarding his bankruptcy.

At trial the bankruptcy court determined that the debtor had failed to disclose the existence of a hog business operated by the debtor and the income received by that business, to disclose several transfers of property that constituted collateral of Lincoln Savings’ secured claim, and to disclose a vehicle jointly owned with the debtor’s spouse. The debtor explained these omissions by stating that he did not adequately understand what the official bankruptcy forms had asked him to disclose and therefore he did not have the requisite intent to deceive.

The trial court found the debtor’s testimony not credible in light of the scope of the debtor’s hog farming operation and the debtor’s selective understanding of the required disclosures and therefore entered judgment in favor of Lincoln Savings Bank.

Held: Judgment of the trial court affirmed.
  The  appellate court ruled that a debtor’s alleged misunderstandings as to the required disclosures by the official bankruptcy forms cannot justify a failure to disclose a business endeavor as large as the debtor’s operation. Essentially the business in question was not a “hobby farm” as the debtor claimed, but was in fact the debtor’s primary livelihood. The court also concluded that the bankruptcy system cannot function if every debtor can subjectively determine for themselves what disclosures are necessary. In any event, the appellate court found the trial court’s determination as to the debtor’s credibility plausible and supported by the record as a whole, thus supporting the trial court’s determination that the debtor’s omissions were intentional.

The appellate court also concluded that the debtor’s omissions were material even though such disclosures, if they had been made, would have apparently borne little fruit for the bankruptcy estate. The court concluded that a disclosure is material if it bears a relationship to the debtor’s business transactions, income, or disposition and existence of property. The court further stated that even an asset of minimal value may be material.