Summary of a Recent
Judicial Development in
Bankruptcy

Courts Consider Debtor's Level of Sophistication and Business
Experience in Determining Whether He Fraudulently
Concealed Assets or Made False Oaths

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Johnson v. Greene (In re Greene), 340 B.R. 93 (Bankr. M.D. Fla. 2006), the United States Bankruptcy Court for the Middle District of Florida held that a debtor did not fraudulently conceal or transfer assets to avoid his creditors, and that his inadequate record keeping and inaccurate listing of assets were due to his lack of sophistication and business experience rather than fraudulent intent.

Background

The Debtor owed the Johnsons $2,400 from a tort claim. Id. at 95. The Debtor filed for Chapter 7 bankruptcy in November 2004, and the Johnsons filed a complaint seeking denial of discharge in February 2005. Id. The Debtor listed his homestead property valued at $236,000. Id. at 96. He owned an undivided one-half interest in the property, along with his brother. Id. He also owned one-half of another parcel of property, valued at $1,882. Id. As for personal property, the Debtor owned a 1988 Toyota pickup which he did not list. Id. He also had an undivided one-half interest in four head of cattle (he incorrectly listed his wife as having the other half interest), and owned three more cow-calf pairs, but he did not list the calves. Id. He testified that he did not list the three calves he owned in his bankruptcy schedule because they were nursing at the time of filing. Id. He also testified that his income in 2004 was less than $2,400, and that he paid his cell phone bill and his wife paid all other expenses. Id. at 97. He admitted that it was actually his brother, not his wife, who held the other one-half interest in the four cows he listed, and he had been advised by his counsel to list it as owned by his wife in his schedule. Id. At trial, the Johnsons proved he earned at least $3,500 from one of his jobs in 2004. Id.

Arguments

The Johnsons argued that the court should deny the Debtor's discharge because he concealed the number of cattle he owned, he failed to keep records or record his income for 2004, and he failed to accurately list his assets on his bankruptcy schedules. Id.

The Debtor denied fraudulently concealing or misrepresenting his assets, or purposely making false oaths. Id.

Analysis and Holdings

Transferring and Concealing Assets
The court began by reviewing § 727(a)(2)(A) of the Bankruptcy code, which provides in part that the court shall grant a discharge unless "the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed . . . property of the debtor, within one year before the date of the filing of the petition . . . ." Id. The court found that the Debtor could not have transferred his brother's half ownership of the four cows to his wife like the Johnsons claim because he never purchased his brother's interest in the cattle, and likewise determined that the Debtor was not concealing the ownership of the cattle for the same reason. Id. at 98.

Failure to Maintain Records
Section 727(a)(3) of the Bankruptcy code states that the court shall grant the debtor a discharge unless he has "concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which he debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case . . . ." Id. The Johnsons argued that the court should deny the discharge because the Debtor's record keeping was inadequate. Id. The court noted that after the creditor proves the debtor's records are insufficient, the burden shifts to the debtor to justify the insufficiencies. Id. Courts may consider factors including the debtor's education, sophistication, business experience, the size and complexity of debtor's business, his personal financial structure, and any special circumstances that may exist. Id. at 99. In considering the Debtor's case, the court acknowledged that he worked odd jobs and was paid with personal checks, not payroll checks which would have stubs to keep for his records. Id. The court concluded that the Debtor's inadequate record keeping was "a result of [his] lack of sophistication and business experience," and refused to deny his discharge on that basis. Id.

Fraudulently Accounting for Assets
The Johnsons contended that the Debtor knowingly and fraudulently made false oaths or accounts by omitting assets on his bankruptcy schedules. Id. Section 727(a)(4)(A) of the Bankruptcy code states that the court shall grant a discharge "unless the debtor knowingly and fraudulently, in or in connection with the case, made a false oath or account . . . ." Id. A false oath is material if it bears a relationship to the debtor's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property. Id. The court found that the Debtor's failure to list his truck, the second parcel of real property, and the three calves were material omissions. Id. However, the court found the omissions to be "the result of oversight and inadvertence rather than fraudulent intent." Id. at 100. The court also believed his testimony that he followed his attorney's advice with respect to the manner in which he listed the ownership of the seven cattle. Id. The court concluded that his lack of sophistication rebutted an inference of fraudulent intent, and refused to deny his discharge. Id.

The case was decided on February 6, 2006.