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In re Martin

decided: January 28, 1983.


Appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. Richard L. Merrick, Bankruptcy Judge.

Cudahy and Posner, Circuit Judges, and Swygert, Senior Circuit Judge.

Author: Cudahy

CUDAHY, Circuit Judge.

This appeal arises from bankruptcy proceedings initiated in 1980 by appellee Martin seeking relief as a voluntary debtor under Title 11 of the United States Code. Appellants First Federated Life Insurance Co. and Dennis E. Quaid, the largest creditor and the trustee of the estate, respectively, filed complaints in the bankruptcy proceeding seeking a denial of discharge because of an alleged concealment of assets. Trustee Quaid also sought to have the disputed assets conveyed to Quaid, as trustee. The bankruptcy court held a consolidated adversary proceeding and, after appellees rested their case at the close of the appellants' case-in-chief, entered judgment for the appellees. The bankruptcy court subsequently granted appellee Ronald Martin a discharge in bankruptcy and this appeal followed.*fn1 We reverse and remand the judgment below.


The resolution of this case essentially rests on whether or not the appellee Ronald Martin had an interest in a condominium, occupied by Ronald Martin, but asserted to be the property of his father, Alex Martin.*fn2

At trial, the facts were developed as follows: Ronald Martin testified that, in the aftermath of a divorce in 1975, he sought to locate a place to live which would be a good investment for either him or his father. In early 1976, the property in question, a condominium located in Lincolnwood, Illinois, was purchased for $67,500 of which $15,000 was a cash down payment and the balance the proceeds of a mortgage loan. The note for the mortgage loan was signed by the debtor's parents, Alex and Josephine Martin. Title to the property was held by American National Bank and Trust Company of Chicago under an Illinois land trust of which the beneficial owner was Alex Martin. The bankruptcy court found that Ronald Martin lived in the condominium, paid all mortgage, maintenance, and insurance charges, voted as a condominium owner, and deducted the interest payments on his own federal income tax returns.

The ultimate source of the $15,000 used to make the down payment on the condominium has been a matter of some dispute. The bankruptcy court found that the down payment was made in three installments from Alex Martin's checking account. The source of the funds in the checking account was, in turn, documented to be a money market fund account owned by Ronald Martin. At this point, the further source of the funds becomes more confusing. The debtor asserts that the funds in the money market fund account were given to him by his father, Alex Martin. Alex Martin claimed that he had given the $15,000 in cash to his son for the purpose of purchasing the condominium. This transfer took place approximately three months prior to the actual purchase of the condominium. No explanation was given as to why Alex transferred the money in cash so long before the purchase. The appellants assert that the funds used to buy the condominium were, in fact, Ronald's, that the story concerning the $15,000 cash transfer was not credible, and that there was, therefore, a secret agreement between the debtor and his father for the father to hold the property in his own name and that of his wife as nominees for Ronald.

The bankruptcy court found that there was no credible proof that the $15,000 which was used to make the down payment was not entirely Ronald's. The court further noted that (referring to the debtor and his father): "Seldom has this Court observed witnesses whose credibility was lower. It was not so much that they appeared to be lying as it was that they seemed to be indifferent to the truth." Jt. Appendix at 98.

There is no suggestion that Ronald Martin was insolvent at the time of these transactions. The bankruptcy court also found that Ronald Martin had an income at that time of over $100,000 a year; his father's income, on the other hand, was found to be only approximately $6,000 a year.


It is well settled that findings of fact made in a bankruptcy proceeding will not be set aside by a reviewing court unless "clearly erroneous." Rule 810, Rules of Bankruptcy Procedure;*fn3 Carini v. Matera, 592 F.2d 378 (7th Cir. 1979); In re Woods, 561 F.2d 27 (7th Cir. 1977). This is a well-established rule of law rooted on the reasonable thesis that a trial judge is best able to appreciate the nuances of demeanor and evidentiary content that go into determinations of the credibility of witnesses. The facts of this case illustrate the merit of this rule. Due to a lack of documentary evidence, the events and transactions involved here had to be reconstructed largely from oral evidence. The bankruptcy judge, in the course of testimony by the debtor, his father, and other witnesses, was in a unique position to form judgments about what actually may, or may not, have happened. The bankruptcy judge's assessments of credibility, which are critical to the outcome of the case, are based upon personal observation and evaluation of the witnesses which are impossible for us to replicate on appeal. Thus, in a case such as this, we are extremely reluctant to disturb the findings of fact of the bankruptcy judge and would do so only if we thought them clearly erroneous. Therefore, we must conclude that the source of the funds used to buy the condominium was indeed Ronald Martin.

We think, however, that the legal principles applied to the facts as found were incorrect, and that this must change the result. There are at least two independent grounds upon which a discharge must be denied to this debtor. First, Section 727a(5) of the Bankruptcy Code provides that the court should grant the debtor a discharge, unless "the debtor has failed to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor's liabilities." 11 U.S.C. ยง 727a(5) (1980). This provision is substantially the same as Section 14c(7) of the old Bankruptcy Act. 4 Collier on Bankruptcy P 727.08 (L. King ed. 1982). Section 727a(5) is broadly drawn and clearly gives a court broad power to decline to grant a discharge in bankruptcy where the debtor does not adequately explain a shortage, loss, or disappearance of assets. Baum v. Earl Millikin, Inc., 359 F.2d 811 (7th Cir. 1966); McBee v. Sliman, 512 F.2d 504 (5th Cir. 1975); 4 Collier on Bankruptcy P 727.08 (L. King ed. 1982); Bkr.-L. Ed., Summary P 7:134 (1981).

In Baum, a case involving a bankrupt real estate broker and contractor, the court upheld the bankruptcy referee's denial of a discharge on the basis that the debtor had failed to adequately explain the shrinkage in his assets in the 21-month period prior to filing for bankruptcy. This court stated that in a case involving the predecessor provision to section 727a(5) the bankrupt's explanation "must consist of more than . . . [a] vague, indefinite, and uncorroborated hodgepodge of financial transactions." 359 F.2d at 814. This principle seems to us to be directly applicable to the case at hand. See also In ...

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