By Kitty J. Lin
When you file for bankruptcy you are obligated to disclose all of your assets and all of your debts in your bankruptcy petition truthfully and under penalty of perjury. Failure to disclose may have many negative consequences such as the trustee in a Chapter 7 bankruptcy case liquidating your undisclosed asset and providing it to your creditors or the denial of a bankruptcy discharge. A debtor can also be sentenced to prison and fined. Just ask ex-Philly baseball player Lenny Dyskstra. Mr. Dykstra was sentenced to six months in federal prison and ordered to pay $200,000 in restitution in 2012. This article focuses on less substantial bankruptcy fraud.
Take the case of In re: Gronlund (No. 13-1566, B.A.P. 9th Circuit, August 2014). In this case, Mr & Mrs. Gronlund filed for Chapter 7 bankruptcy protection. They were overly detailed in listing their personal property, down to where their pots and pans were listed in their house. They did not list their interest in real estate in Mexico. The Ch. 7 trustee noticed income on their tax returns that was not disclosed in their bankruptcy petition. During their 341 meeting of creditors, Mr. Gronlund admitted to receiving $2,500 in interest only payments each month from the note derived from the Mexican property (“Mexican Note”). Mr. Gronlund testified that he did not think to list the Mexican Note because he already sold the property to a Mr. Rezai. Mr. Gronlund was not consistent on where Mr. Rezai lived. The trustee continued the meeting of creditors to give the Gronlunds an opportunity to amend his schedules. The Gronlunds never did so and the trustee filed an adversary complaint to deny the Gronlunds their bankruptcy discharge under 11 U.S.C. §727(a)(2)(A) and (a)(4)(A) indicating the Gronlunds concealed their interest in the Mexican property and making false oaths. The Gronlunds filed their amended schedules after the adversary complaint was filed. The schedules indicated that even though the Gronlunds have an interest in the Mexican Note, the Note had more encumbrances than it was worth (the Gronlunds indicated the Note was worth about $450,000 and the encumbrances were around $470,000). There were no proof of claims filed for the encumbrances and Mr. Gronlund tried to introduce documents that he believed would prove the existence of the encumbrances, but the bankruptcy court did not find the documents credible. A Special Mexican Real Estate Counsel testified for the trustee indicating that there were no encumbrances recorded against the Mexican property and that the property was actually worth about $530,000. Mr. Rezai consistently paid the Gronlunds $2,500 every month for the past four years. For the Gronlund’s defense, Mr. Gronlund indicated he was very stressed during that time due to family illnesses, supporting injured family members, had to testify as a witness in a trial that was prosecuting his friend for murder, and business losses. He hired an affordable bankruptcy attorney and asked his bookkeeper and employee to assist in his bankruptcy case rather than take care of it himself. He indicated his bankruptcy attorney received all the information and already told the attorney to fix the first two drafts. He did not review the third draft because he thought his bankruptcy attorney had everything fixed and all his schedules were accurate.
Pursuant to 11 U.S.C. §727(a)(2), a debtor will not receive a discharge if he has concealed property within one year before filing of the petition or property of the estate after filing the petition with the intent to hinder, delay, or defraud a creditor or an officer of the estate. The bankruptcy court indicated the Gronlunds concealed the Mexican Note because they failed to list the asset in the initial schedules, didn’t list the $2,500 payments, being evasive at the meeting of creditors and later claimed that the Mexican Note was over-encumbered. The bankruptcy court based their findings of the Gronlund’s intent to hinder, delay or defraud based on their conduct and circumstances surrounding the filing of the petition and how they acted afterwards. Given the Gronlunds were very sophisticated in business it was very suspicious the only thing left out of the schedules was their only asset with significant value.
Pursuant to 11 U.S.C. §727(a)(4)(A), a debtor will not receive a discharge if they “knowingly and fraudulently, in or in connection with the case made a false oath or account.” The bankruptcy court indicated that the Gronlunds failed to list the $2,500 payments received and failed to list the Mexican Note in their schedules and meeting of creditors. Since the note was a valuable asset worth between $450,000 – $530,000, the fact was very material in the case. Failure to list this as an asset was detrimental to the estate. The court believed the Gronlunds knowingly made those statements since they revised two previous drafts of the petition and just didn’t review the third one, especially when the $2,500 was a significant amount of their monthly income. The bankruptcy court also believed that the Gronlunds had the fraudulent intent to deceive their creditors and therefore denied the Gronlunds discharge. The Gronlunds appealed the bankruptcy court’s ruling but the 9th Circuit Bankruptcy Appellate Panel agreed with the bankruptcy court’s rulings.
The moral of the story is to always disclose everything to your bankruptcy lawyer and in your bankruptcy petition. You may think that an asset is not worth anything or that something is not important enough to disclose to your bankruptcy attorney. Something may seem insignificant to you but may have huge consequences in your bankruptcy case.