Opinion
Case No. 00-73433; Adversary No. 01-7085
July 8, 2002
OPINION
The issue before the Court is whether the Debtors should be denied a discharge pursuant to 11 U.S.C. § 727(a)(3) and 11 U.S.C. § 727(a)(4)(A). More specifically, it is alleged that the Defendants concealed their interests in certain real estate and a corporation and that they failed to maintain financial records.
The Debtors, Glenn and Dorothy Heiserman, filed a petition pursuant to Chapter 7 of the Bankruptcy Code on November 1, 2000. This is the Debtors' second excursion into bankruptcy. They filed a Chapter 12 proceeding in 1986; the case was voluntarily dismissed by the Debtors a year later.
The Debtors reside in a house and on 10 acres in Shelby County, Illinois. They used to own the property, but they sold it on contract to one of their sons, Glenn "Butch" Heiserman, in 1985 for $5,000. The Debtors testified that Butch paid them $5,000 between 1985 and 1990, and they gave Butch a warranty deed to the property in 1990. The Debtors paid rent to Butch of $250 a month for four years. The Debtors have not paid rent since 1994. The Debtors stated that Butch lets them live on the property, and in return, they take care of the property and keep it up.
The Debtors work for Heiserman Home and Commercial Construction, Inc. Mr. Heiserman manages Cowden Lumber, which is owned by Heiserman Home and Commercial Construction; Mrs. Heiserman is a bookkeeper for Heiserman Home and Construction. The Debtors denied any ownership interest in Heiserman Home and Construction. Heiserman Home and Construction was incorporated in 1995 by Butch Heiserman. Testimony at trial indicated that the shareholders of the corporation are the three Heiserman sons — Butch, Jeremy, and John — although there is no evidence of any stock being actually issued.
The Debtors did not file tax returns for 1992 to 2001. Neither Debtor offered an explanation for their failure to file tax returns or pay the taxes due for ten years. When this proceeding was originally called for trial on December 5, 2001, the Debtors appeared with the missing returns for 1999 and 2000. The returns were unsigned and unfiled. They had been prepared a couple of weeks before trial and had not been produced prior to trial. The Court continued the trial and sanctioned the Debtors for their conduct. When the trial resumed on April 1, 2002, the Debtors produced an entirely new set of tax returns.
The Plaintiff, Agribank, FCB, has a large deficiency judgment against the Debtors relating to a farm loan from the 1980s. Prior to the filing of this case, Agribank secured a state court garnishment lien on $14,643.98 which the Debtors had on deposit in a savings account in Shelbyville. The only other assets included in the Debtors' bankruptcy schedule were clothing, $1,187.69 in a checking account, $1,000 in household goods, and a 1990 Lincoln automobile. The Debtors answered "None" to questions in the schedules and Statement of Financial Affairs concerning whether either Debtor was associated with any business as an officer, director, partner, or self-employed professional. Mr. Heiserman listed his occupation as "yard manager and sales" for Cowden Lumber. He stated that he had been employed there for six months. Mrs. Heiserman is shown as a "housewife" with no income. Both Debtors denied any interest in real estate or life insurance.
A meeting of creditors pursuant to 11 U.S.C. § 341(a) was conducted on December 12, 2000. The Debtors were requested to produce copies of their tax returns and supporting tax schedules so that gaps in information supplied by the Debtors could be filled in and that representations made on the schedules, Statement of Financial Affairs, and at the meeting of creditors could be verified. The Debtors agreed to the request, but never supplied the returns. It was subsequently learned that there were no tax returns to be produced because the Debtors had no filed tax returns for nine years.
Agribank filed a timely Objection to the Debtors' Discharge. Agribank asserts that the Debtors actually owned or at least held an interest in 10 acres of Shelby County real estate where they lived and that the Debtors concealed their interest from the creditors in their sworn schedules and testimony to the Court. Agribank contends that the Debtors also concealed a proprietary interest in Heiserman Home and Commercial Construction, Inc. Finally, Agribank argues that the Debtors failed to maintain adequate records of their financial transactions.
A discharge provided by the Bankruptcy Code is to effectuate the "fresh start" goal of bankruptcy relief. In exchange for that fresh start, the Bankruptcy Code requires debtors to accurately and truthfully present themselves before the Court. A discharge is only for the honest debtor. In re Garman, 643 F.2d 1252, 1257 (7th Cir. 1980), cert. denied, 450 U.S. 910, 101 S.Ct. 1347, 67 L.Ed.2d 333 (1981). Consequently, objections to discharge under 11 U.S.C. § 727 should be liberally construed in favor of debtors and strictly against objectors in order to grant debtors a fresh start.
In re Johnson, 98 B.R. 359, 364 (Bankr.N.D.Ill. 1988) (citation omitted). Because denial of discharge is so drastic a remedy, courts may be more reluctant to impose it than to find a particular debt nondischargeable. See Johnson, supra, 98 B.R. at 367 ("The denial of discharge is a harsh remedy to be reserved for a truly pernicious debtor.") (citation omitted). The plaintiff has the burden of proving the objection. See F.R.Bankr.P. 4005; In re Martin, 698 F.2d 883, 887 (7th Cir. 1983) (the ultimate burden of proof in a proceeding objecting to a discharge lies with the plaintiff). The objector must establish all elements by a preponderance of the evidence. In re Scott, 172 F.3d 959, 966-67 (7th Cir. 1999).
Section 727(a)(4)(A) of the Bankruptcy Code provides as follows:
(a) The court shall grant the debtor a discharge unless —
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account(.)
The purpose of § 727(a)(4) is to enforce a debtor's duty of disclosure and to ensure that the debtor provides reliable information to those who have an interest in the administration of the estate. In re Carlson, 231 B.R. 640, 655 (Bankr.N.D.Ill. 1999), aff'd 250 B.R. 366 (N.D.Ill. 2000), aff'd 263 F.3d 748 (7th Cir. 2001). In order to prevail under § 727(a)(4), the Plaintiff must establish five elements: (1) the Defendants made a statement under oath; (2) the statement was false; (3) the Defendants knew that the statement was false; (4) the Defendants made the statement with intent to deceive, and (5) the statement related materially to the bankruptcy case. In re Bailey, 147 B.R. 157, 163 (Bankr. N.D. Ill. 1992). If made with the requisite fraudulent intent, a false statement, whether made in the schedules or orally at a § 341 creditors' meeting, is sufficient grounds for denying a discharge provided it was knowingly made and is material. In re Lunday, 100 B.R. 502, 508 (Bankr.D.N.D. 1989). It is a debtor's role to consider the questions posed on the schedules and at the creditors' meeting carefully and answer them accurately and completely. Id.
A debtor's petition and schedules constitute a statement under oath for purposes of a discharge objection under § 727(a)(4). In re Gannon, 173 B.R. 313, 320 (Bankr.S.D.N.Y. 1994). In addition, a debtor's testimony at the meeting of creditors is under oath. Thus, the Plaintiff has established that the Defendants made a statement under oath.
The focus in this proceeding is whether the Debtors' testimony was false. The Plaintiff introduced evidence which suggested that the Debtors owned the 10 acres in Shelby County. Mr. Heiserman testified in a 2000 state court proceeding that he owned the farm where he lived. Both Debtors took the homeowners deduction on their state taxes. This tax credit is only available to individuals who live in a home that they own. The Debtors have not paid rent to the record owner of the property for eight years. In addition, they pay the real estate taxes on the property.
Notwithstanding the foregoing, the Court finds that the Debtors do not own the property. The property was sold to Butch on a contract for deed in 1985 and he received a warranty deed in 1990. Both documents were filed with the Shelby County Recorder of Deeds. There are no deeds or any other instruments which show that the Debtors own the property. The Debtors live in the property because Butch, the owner of the property, allows them to live there in exchange for maintaining the property.
The Plaintiff further argues that the Debtors concealed an ownership interest in Heiserman Home and Commercial Construction, Inc. Heiserman Home and Commercial Construction, Inc. was incorporated by Butch in 1995. All of the testimony indicated that the shareholders of the corporation are the Debtors' three sons — Butch, Jeremy, and John. There are no documents showing the Debtors as having a proprietary interest in the corporation.
The Plaintiff suggests that Mr. Heiserman demonstrated indicia of ownership by earning the same salary as his three sons. The Plaintiff argues that further evidence of the Debtors' ownership interest was demonstrated by the Debtors' decision to cut Mr. Heiserman's salary in half and allocate the remaining half to Mrs. Heiserman. Both salaries of the Debtors added together equaled the salary of each of the sons. The Plaintiff suggests that only an owner could make such a decision. Both Debtors have check writing authority for the corporation. Finally, the Plaintiff notes that the office of Heiserman Home and Commercial Construction, Inc. was located in the Debtors' home since the corporation was founded.
The Plaintiff failed to prove that the Debtors had an ownership interest in the corporation. At most, the Plaintiff has shown that the Debtors' sons provided their parents with employment at good wages. Because Mrs. Heiserman was the bookkeeper for the corporation, it is not unusual for the books and records of the corporation to be located in the Debtors' home where Mrs. Heiserman can do her bookkeeping business. Further, the Debtors' positions with the corporation — manager of Cowden Lumber and bookkeeper — would normally call for check writing authority.
The Debtors' schedules did contain a number of false statements. The Debtors stated that they did not own life insurance. In fact, they did own life insurance — their tax returns showed it and they admitted it in their testimony. Mrs. Heiserman stated in her schedules that she was a housewife with no income. In fact, she was and had been for a number of years the bookkeeper for Heiserman Home and Commercial Construction. Mr. Heiserman stated in his schedules that he was "yard manager and sales" for Cowden Lumber for six months. In fact, he had been employed by the Heiserman corporation for a number of years. The Debtors stated in their schedules that they paid monthly rent of $375. In fact, they paid no rent.
The Plaintiff chose not to focus on the above false statements in its argument under § 727(a)(4)(A). In light of the Court's disposition of the § 727(a)(3) claim, the Court will not dwell on these false statements other than to note that the Debtors have a knack for saying whatever is most beneficial to them at the time regardless of the facts. This family trait has descended to their sons, who claimed in a corporate filing with the State of Illinois that the corporation was 51% female owned. None of the sons could explain this statement.
Section 727(a)(3) of the Bankruptcy Code provides as follows:
(a) the court shall grant the debtor a discharge unless —
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the 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.
The statute places an affirmative duty on the debtor to create books and records accurately documenting his business affairs. In re Juzwiak, 89 F.3d 424, 429 (7th Cir. 1996) ("The debtor has the duty to maintain and retain comprehensible records.") (citations omitted). To prevail under a complaint, the plaintiff must prove that the debtor failed to keep adequate records. In re Martin, 141 B.R. 986, 995 (Bankr.N.D.Ill. 1992); In re Calisoff, 92 B.R. 346, 356 (Bankr.N.D.Ill. 1988). "Section 727(a)(3) does not require proof of criminal or quasi-criminal conduct; rather, a transfer or removal of assets, a destruction or other wasting of assets, or a concealment of assets is all the trustee must prove." Scott, supra, 172 F.3d at 969. Intent is not an element of proof under § 727(a)(3). Juzwiak, supra, 89 F.3d at 430. ("creditors do not need to prove that the debtor intended to defraud them in order to demonstrate a § 727(a)(3) violation"). Every debtor has a duty to take reasonable precautions to maintain and preserve records of their financial transactions and affairs. In re Carlson, 231 B.R. 640, 654 (Bankr.N.D.Ill. 1999), aff'd sub nom Carlson v. Brandt, 250 B.R. 366 (N.D.Ill. 2000) (citation omitted), aff'd 263 F.3d 748 (7th Cir. 2001). The purpose of § 727(a)(3) is "to make the privilege of discharge dependent on a true presentation of the debtor's financial affairs." Scott, supra, 172 F.3d at 969. This statute ensures "that trustees and creditors will receive sufficient information to enable them to `trace the debtor's financial history; to ascertain the debtor's financial condition; and to reconstruct the debtor's financial transactions.'" Juzwiak, supra, 89 F.3d at 427-28 (quoting Martin, supra, 141 B.R. at 995) (citations omitted). The creditors and the trustee are not required to accept a debtor's oral recitations or recollections of his transactions; rather to qualify for a discharge in bankruptcy, a debtor is required to keep and produce written documentation of all such transactions. Id. at 429-30. "Records are not `adequate' if they do not provide the trustee or creditors with enough information to ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present." Martin, supra, 141 B.R. at 995 (citations omitted). The completeness and accuracy of a debtor's records are to be determined on a case-by-case basis, considering the size and complexity of the debtor's business. In re Bailey, 145 B.R. 919, 924 (Bankr.N.D.Ill. 1992) (citations omitted). The court should consider the sophistication of the debtor, his business experience, and other relevant circumstances. Calisoff, supra, 92 B.R. at 356 (citation omitted).
It has been observed that "[i]ncome tax returns are quintessential documents `from which the debtor's financial condition or business transactions might be ascertained' in the words of subsection (3)." In re Wolfson, 152 B.R. 830, 833 (S.D.N.Y. 1993). "Without tax returns, the trustee would be forced to accept the uncorroborated statements of the debtors, as contained in their schedules. Tax returns are essential to the orderly administration of the debtor's estate, and necessary for the debtors to make a full presentation of the financial affairs to the trustee." In re Hall, 174 B.R. 210, 215 (Bankr.E.D.Va. 1994). Courts have uniformly denied discharges to debtors who do not file tax returns. In re Beshears, 196 B.R. 468, 474 (Bankr.E.D.Ark. 1996); In re Wolfson, supra; In re Hall, supra; In re Bujak, 86 B.R. 30, 33 (Bankr.W.D.N.Y. 1988). See In re Vines, 200 B.R. 940, 944-45 (M.D.Fla. 1996).
The Debtors did not file tax returns for ten years. The Debtors offered no explanation or justification for this failure. The Debtors knew that tax returns were due; they simply chose not to file them.
The facts in this case are similar to the facts of Wolfson, supra. The Wolfsons filed bankruptcy on January 23, 1990. The trustee requested their tax returns for the years 1983 through 1989 in a letter dated March 20, 1990. The 1989 return was produced.
In a letter dated January 11, 1991, the Wolfsons stated that there would be a short delay in producing the 1983 through 1988 returns because of problems resulting from a move to new offices:
In point of fact, the 1983-1988 tax returns were not produced until March 1991, shortly before a scheduled pre-trial conference. The returns when produced, which do not support the scheduled tax liability, were not duplicates of contemporaneous tax returns; on the contrary, each return was signed and dated February 27, 1991. Accordingly it is fair to say that an aroma of fraud surrounds Wolfson's failure to keep, preserve, or previously produce the promised tax returns.
Wolfson, supra, 152 B.R. at 833.
In this case, as in Wolfson, the Debtors led the trustee and creditors to believe that the tax returns were filed when in fact they had not been filed. The Wolfsons produced their freshly-prepared tax returns shortly before the pre-trial; the Debtors in this case did not produce their newly-prepared tax returns until shortly after the start of the trial and shortly before the continued trial date. As in Wolfson, the tax returns which were finally produced in this case were not duplicates of contemporaneous tax returns. Moreover, as in Wolfson, there is "an aroma of fraud" surrounding the Debtors' "failure to keep, preserve, or previously produce the promised tax returns."
Moreover, the testimony of the Debtors at trial raised questions about the accuracy of the filed tax returns. The Debtors admitted that they are not entitled to the Illinois homestead credit which they claimed in their returns. The mileage deduction on the filed returns were substantially different than the mileage deductions claimed on the unfiled returns which the Debtors brought to Court in December, 2001. The Debtors could not explain why they were higher on the filed returns. Mrs. Heiserman had a bookkeeping business in her house, but somehow claimed that she drove 18,000 miles for work. She said that she had a mileage log, but she did not know where it is. The mileage was exactly the same on two of the returns; Mr. Heiserman admitted that he was just guessing on this mileage. Neither Debtor could explain the deductions for meals and entertainment. The Debtors represented at their deposition that there was a "big box" of materials in the office of their former accountant which contained all the necessary information. The accountant testified that there was no such box of records, big or small.
It is clear from the foregoing that the Debtors failed to keep adequate records regarding their financial conditions. The tax returns which were finally produced were based on mere speculation. The Debtors simply picked numbers out of the air which would result in the lowest taxable income.
For the foregoing reasons, the Debtors' discharge is denied pursuant to 11 U.S.C. § 727(a)(3).
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons set forth in an Opinion entered this day,
IT IS HEREBY ORDERED that the Objection to Discharge be and is hereby allowed, and the Debtors' discharge be and is hereby denied pursuant to 11 U.S.C. § 727(a)(3).