Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: September 23, 2010
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. RS 09-23096-CB. Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding.
Glenn Ward Calsada of the Law Offices of Glenn Ward Calsada appeared for Appellant Agnes B. Cregar.
Yosina Lissebeck of Solomon Ward Seidenwurm & Smith, LLP appeared for Appellee Christopher R. Barclay, Chapter 7 Trustee.
Before MARKELL, HOLLOWELL and KIRSCHER, Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
INTRODUCTION
Debtor Agnes Cregar (" Cregar") filed bankruptcy schedules that omitted certain assets and undervalued others. After the chapter 7 trustee (" Trustee") discovered the inaccuracies in Cregar's schedules, and demanded turnover of the unreported assets, Cregar amended her schedules to claim the assets as exempt. The Trustee objected to Cregar's amended exemption claims on the basis of bad faith, asserting that Cregar had attempted to conceal the assets. Cregar, in response, requested an evidentiary hearing and submitted declaration testimony claiming that she filed inaccurate schedules by mistake or inadvertence. The bankruptcy court disallowed Cregar's amended exemption claims based on Cregar's bad faith without holding an evidentiary hearing. We VACATE AND REMAND, so that the bankruptcy court can hold the required evidentiary hearing.
Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and all " Rule" references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. All " Civil Rule" references are to the Federal Rules of Civil Procedure.
FACTS
Cregar is a certified registered nurse anesthetist, with over 25 years of experience. Cregar filed her current chapter 7 bankruptcy on June 15, 2009, and on June 29, 2009, she filed her bankruptcy schedules. On her Schedule B list of personal property, Cregar swore under penalty of perjury that she had $5,000 in " checking accounts, " and she claimed this entire amount as exempt on her Schedule C list of property claimed as exempt. Cregar's Schedule B did not list any accounts receivable or any contingent or unliquidated claims for wages earned but not yet paid.
Cregar has two prior bankruptcy filings. She filed a chapter 7 bankruptcy in 1994 and a chapter 13 bankruptcy in 1996.
The Trustee first examined Cregar pursuant to § 341(a) on July 24, 2009. The Trustee continued the examination from time to time, with the last date of examination occurring on January, 6, 2010. Neither party has provided us with a record of the examinations, but the Trustee apparently requested, and Cregar apparently produced, various documents pertaining to her financial condition.
Based on the examinations and Cregar's documents, the Trustee sent Cregar a demand letter on October 29, 2009. According to the Trustee, Cregar's actual bank account balances on the date of her bankruptcy filing were more than double what Cregar represented on her Schedule B. Whereas Cregar had listed $5,000 as the aggregate amount held in her bank accounts, the actual aggregate amount was $10,235.79. In addition, the Trustee asserted that Cregar had failed to disclose on her schedules $21,236.25 in accounts receivable that, at the time of her bankruptcy filing, she was owed on account of prepetition anesthetist services.
The so-called accounts receivable, in part, consisted of $10,736.25 that Saint Mary's Medical Center owed Cregar for services rendered in May 2009. Saint Mary's Medical Center paid this amount to Cregar by check on June 15, 2009. According to the Trustee, Cregar deposited Saint Mary's check on June 22, 2009, after she filed her bankruptcy but before she filed her bankruptcy schedules. The remainder of the unreported receivables consisted of monies that Sung O. Hyun, MD, a professional corporation (" Hyun"), owed Cregar for services rendered in May and June 2009. Hyun paid Cregar $21,000 by check dated July 12, 2009, but the Trustee only attributed 50% of the $21,000 to Cregar's prepetition services (apparently because Cregar filed her bankruptcy halfway through June 2009). The Trustee's October 29, 2009, demand letter requested that Cregar turnover to the Trustee within ten days the unreported portion of Cregar's bank account balances ($5,235.79) and the unreported prepetition accounts receivable ($21,236.25).
In response to the Trustee's October 29, 2009, demand letter, Cregar filed amended bankruptcy schedules on November 18, 2009. Cregar's Amended Schedule B listed the full $10,235.79 that Cregar held in her bank accounts on the date of her bankruptcy filing, and also listed $21,236.25 in " Earned Wages received post petition." Whereas the Trustee characterized the $21,236.25 as accounts receivable, the Debtor asserted that this amount actually constituted wages from employment. Cregar's Amended Schedule C claimed all of the above amounts as exempt under Cal Code of Civil Procedure § § 703.140(b)(1), (b)(5) and 706.050, and under 15 U.S.C. § 1673. As additional legal support for her claimed exemptions, Cregar cited to an unreported bankruptcy case, In re Lantz, Case No. 0713481-A-7K (Bankr. E.D. Cal. January 13, 2009).
On February 5, 2010, the Trustee timely filed an objection to Cregar's amended exemption claims. The Trustee reiterated the points that he had made in his October 29, 2009, demand letter. In essence, he asserted that Cregar's undervaluation of her bank accounts and her failure to report amounts owed to her for prepetition services amounted to bad faith that should result in disallowance of her exemption claims as amended. The Trustee also argued that Cregar's service agreements, her work history as an anesthetist, and disclosures that she made in her bankruptcy filings and in her tax returns all established that the monies she was paid for her May and June services were business income, or receivables, and were not wages from employment.
The Trustee filed his exemption claim objection within thirty days of the January 6, 2010 conclusion of Cregar's § 341(a) examination, and thus the objection was timely under Rule 4003(b).
On February 23, 2010, Cregar filed her response and her declaration in opposition to the Trustee's exemption claim objection. Cregar did not dispute that she had undervalued her bank accounts by 50%, or that she had failed to list $21,236.25 in wages/receivables. However, she argued that these inaccuracies were the result of her inadvertence or mistake, rather than bad faith. Cregar argued that, because she historically accounted for her income and expenses on a cash basis, she initially believed that her earned but unpaid wages/receivables did not count as assets that needed to be reported on her bankruptcy schedules. As for the bank accounts, according to Cregar, as a result of the financial pressure she was experiencing at the time, she just plain forgot to add in all of the balances from her three bank accounts into her schedules. Cregar further asserted that, at all times, she cooperated with the Trustee's examination and his requests for documents, and that her cooperation negated any inference that she initially attempted to conceal some of her assets by not listing them in her schedules.
The balance of Cregar's response was devoted to the issue of whether the receivables/wages should be properly characterized as receivables or wages, and whether they qualify for exemption under California law. Finally, Cregar requested an evidentiary hearing, as she contended that an evidentiary hearing was necessary to resolve disputed material questions of fact. While Cregar's response indicated a dispute as to a number of facts concerning the characterization issue, the only apparent disputed fact relevant to Cregar's aelleged bad faith was the ultimate fact of her subjective state of mind.
Cregar also had asserted the need for an evidentiary hearing in a letter she sent to the Trustee in November 2009.
The bankruptcy court held oral argument on the Trustee's exemption claim objection on March 10, 2010. Prior to the hearing, the court issued a bare-bones tentative ruling sustaining the Trustee's objection; the tentative ruling did not offer any findings or legal analysis in support of the court's ruling.
Neither of the parties included the tentative ruling in excerpts of record, but we retrieved it from the bankruptcy court's public website, www.cacb.uscourts.gov. We can take judicial notice of its contents. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mrtg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
Cregar primarily argued at the hearing that there was insufficient evidence that she intentionally attempted to conceal assets by omitting or understating assets in her original schedules. The bankruptcy court disagreed. According to the court:
And it's really inconceivable to me that somebody who is under this time of extreme financial pressure can forget that they worked for someone, maybe they don't have the contract, and know that some money is going to be coming in and just kind of forget about it. $21,000 is a lot of money to anyone I think and to have to be asked by the trustee I see that as bad faith in general with regard to the bankruptcy system.
The CD [one of Cregar's three so-called bank accounts] if it were just one thing maybe not but the $21,000 that's a lot of money. She may not have known exactly how much it was going to be, but she knew she had a big receivable coming in and she just happens to file bankruptcy right at the time that money is about to come in. I see that as having badges of bad faith all over the place.
Hearing Transcript (March 10, 2010) at 7:18-8:6. The court also found it significant that Cregar did not amend her schedules until after the Trustee confronted her on the omitted/undervalued items and demanded turnover of funds.
Cregar reiterated her request for an evidentiary hearing, but the court expressed its intention to abide by its tentative. The bankruptcy court thereafter entered an order sustaining in full the Trustee's objection to Cregar's amended exemption claims, and Cregar timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court abuse its discretion when it declined to hold an evidentiary hearing on the Trustee's exemption claim objection?
The parties also have briefed on appeal issues concerning the sufficiency of the evidence tending to show bad faith, the proper characterization of the receivables/wages, and the extent to which the receivables/wages are exempt under California law. In light of our holding, below, we decline to reach these issues.
STANDARDS OF REVIEW
The bankruptcy court's decision not to conduct an evidentiary hearing is subject to review under the abuse of discretion standard. See Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 629 (9th Cir. BAP 2010). Under this standard, we apply a two-part test. First, we consider de novo whether the bankruptcy court identified the correct law to consider in light of the relief requested. United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009). Second, we review the bankruptcy court's factual findings, and its application of those findings to the relevant law, to determine whether they were either " (1) 'illogical, ' (2) 'implausible, ' or (3) without 'support in inferences that may be drawn from the facts in the record.'" Id . (quoting Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 577, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)).
DISCUSSION
A. Generally applicable law on exemptions, amendments to bankruptcy schedules and bad faith.
Upon filing, all of Cregar's legal and equitable interests in property became part of her bankruptcy estate, subject to her exemption rights. § § 541(a) and 522; Schwab v. Reilly, 130 S.Ct. 2652, 2657, 177 L.Ed.2d 234 (2010). Property of the estate also includes all " [p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." § 541(a)(6). A debtor must list her assets on her bankruptcy schedules whether or not she claims them as exempt. See § § 521(a)(1)(B)(i), 522(l).
Amendments to a debtor's schedules, including exemption claims, are liberally permitted at any time before the case is closed. See Rule 1009(a). However, a bankruptcy court may disallow an amended exemption claim if the trustee or another party in interest timely objects and shows that the debtor has acted in bad faith or that the creditors have been prejudiced. In re Nicholson, 435 B.R. at 630; Arnold v. Gill (In re Arnold), 252 B.R. 778, 784 (9th Cir. BAP 2000). In order to prevail on the bad faith issue, the objecting party must establish bad faith by a preponderance of the evidence. In re Nicholson, 435 B.R. at 634.
The bankruptcy court must consider the totality of the circumstances in determining whether the debtor acted in bad faith. In re Nicholson, 435 B.R. at 634. An intentional attempt to conceal estate assets is a recognized basis for finding bad faith. See id.; In re Arnold, 252 B.R. at 785. A finding of intentional concealment is sufficient to support a court's decision to disallow an exemption claim on bad-faith grounds because our bankruptcy system cannot effectively function unless debtors honestly report their financial condition. See In re Yonikus, 996 F.2d 866, 872 (7th Cir. 1993). The debtor's subjective state of mind is an important factor in determining debtor's intent and alleged bad faith. See Nicholson, 435 B.R. at 635 (citing Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994)).
The bankruptcy court must make sufficient findings to support its determination of bad faith. Cogliano v. Anderson (In re Cogliano), 355 B.R. 792, 801 (9th Cir. BAP 2006) (citing Garner v. Shier (In re Garner), 246 B.R. 617, 623 (9th Cir. BAP 2000)); Magallanes v. Williams (In re Magallanes), 96 B.R. 253, 256 (9th Cir. BAP 1988); see also Rule 9014(c) (incorporating the provisions of Rule 7052, which in turn incorporates Civil Rule 52). Civil Rule 52 provides in relevant part:
(a) Effect. In all actions tried upon the facts without a jury . .., the court shall find the facts specially and state separately its conclusions of law thereon, and judgment shall be entered pursuant to Rule 58. . . . It will be sufficient if the findings of fact and conclusions of law are stated orally and recorded in open court following the close of the evidence or appear in an opinion or memorandum of decision filed by the court.
The bankruptcy court here made no formal written findings, but a fair reading of the transcript from the March 10, 2010 hearing indicates that the court found that Cregar had intentionally concealed earned but unpaid wages/receivables, and had intentionally undervalued her bank accounts, at the time she filed her original bankruptcy schedules, and thus her amended exemption claims should be disallowed on the grounds of bad faith.
B. Absence of requested evidentiary hearing.
Two competing rules control the requirement of an evidentiary hearing in bankruptcy cases. On the one hand, in " motion practice" bankruptcy courts generally enjoy broad discretion to determine whether to hold an evidentiary hearing at which live testimony can be presented. See Civil Rule 43(c) (made applicable in bankruptcy cases by Rule 9017). On the other hand, Rule 9014 (which governs " contested matters") was amended in 2002 to add a provision specifying that " [t]estimony of witnesses with respect to disputed material factual issues shall be taken in the same manner as testimony in an adversary proceeding." Fed.R.Bankr.P. 9014(d). The Advisory Committee Note accompanying this amendment explains:
[s]ubdivision (d) is added to clarify that if the motion cannot be decided without resolving a disputed material issue of fact, an evidentiary hearing must be held at which testimony of witnesses is taken in the same manner as testimony is taken in an adversary proceeding or at a trial in a district court civil case. Rule 43(a), rather than Rule 43(e) [now Rule 43(c)], F.R.Civ.P. would govern the evidentiary hearing on the factual dispute. Under Rule 9017, the Federal Rules of Evidence also apply in a contested matter. Nothing in the rule prohibits a court from resolving any matter that is submitted on affidavits by agreement of the parties.
2002 Advisory Committee Note to Fed.R.Bankr.P. 9014(d) (emphasis added).
Simply put, Civil Rule 43(c) (incorporated by Rule 9017) affords a bankruptcy court with discretion to not hold an evidentiary hearing on motions, and Rule 9014(d) limits that discretion. However, we need not attempt to reconcile Rule 9014(d) with Civil Rule 43(c) (as applied in bankruptcy cases). For our purposes, it suffices for us to say that the need for an evidentiary hearing on the issue of Cregar's intent was clear and compelling, and it was an abuse of discretion under either of the above-cited rules for the bankruptcy court to not hold an evidentiary hearing on the issue of Cregar's subjective state of mind.
As stated above, a debtor's subjective state of mind is an important factor in determining the debtor's intent and alleged bad faith. See Nicholson, 435 B.R. at 635. Furthermore, a court's consideration of a litigant's state mind, for purposes of determining intent, largely turns on the court's assessment of that litigant's credibility. See, e.g., Hernandez v. New York, 500 U.S. 352, 364, 111 S.Ct. 1859, 114 L.Ed.2d 395 (1991); Batson v. Kentucky, 476 U.S. 79, 98, 106 S.Ct. 1712, 90 L.Ed.2d 69 & n.21 (1986). In turn, a bankruptcy court abuses its discretion when it refuses to hold an evidentiary hearing on disputed questions of fact that hinge on the credibility of a witness. See Svob v. Bryan (In re Bryan), 261 B.R. 240, 247-48 (9th Cir. BAP 2001) (citing United Commercial Ins. Serv. v. Paymaster Corp., 962 F.2d 853, 858 (9th Cir. 1992)). Similarly, a trial court cannot make credibility determinations as part of summary judgment proceedings. See Hauk v. JP Morgan Chase Bank USA, 552 F.3d 1114, 1118 (9th Cir. 2009).
Here, Cregar raised a disputed material issue of fact regarding her intent. She asserted in her declaration testimony that she initially filed inaccurate schedules by mistake or inadvertence. Moreover, she did not consent to resolution of the intent issue without an evidentiary hearing. To the contrary, at every conceivable point she asserted her right to offer live testimony: she requested an evidentiary hearing in her responsive papers, and she reiterated that request at the bankruptcy court's non-evidentiary hearing. She also asserted the need for an evidentiary hearing in correspondence to the Trustee. Under these circumstances, the court abused its discretion by not holding an evidentiary hearing.
In re Nicholson, 435 B.R. at 635-37, makes a number of pronouncements on the discretion of the bankruptcy court to not hold an evidentiary hearing to determine the debtors' alleged bad faith. However, Nicholson is distinguishable because, unlike Cregar, the debtor in Nicholson did not request an evidentiary hearing in a manner that complied with the requirements of the applicable local bankruptcy rules. Furthermore, all of Nicholson's statements on this topic are dicta. Nicholson already had determined that the order on appeal had to be vacated because the bankruptcy court had applied the wrong standard of proof. Consequently, it was unnecessary for Nicholson to address the evidentiary hearing issue, and we decline to follow its statements on this issue.
We are not holding that questions of intent always turn on the court's direct assessment of witness credibility. Sometimes, the written record can fully resolve the issue of intent, and contrary statements of the witness are wholly not credible on their face. For instance, if a debtor neglected to list on her schedules a two million dollar house in which she lived, and later claimed she forgot she owned it, an evidentiary hearing to determine her credibility would not be necessary, absent some relevancy of mental defect. But the circumstances here presented a much closer factual issue, and one in which Cregar should have had the opportunity to present live testimony.
Accordingly, we hold that the bankruptcy court abused its discretion when it declined to hold an evidentiary hearing on the Trustee's exemption claim objection.
CONCLUSION
For the reasons set forth above, we VACATE the bankruptcy court's order sustaining the Trustee's objection to Cregar's amended exemption claims, and REMAND for further proceedings.