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Neary v. Stamat

September 2, 2009


On appeal from: Adv. Pro. No. 07 A 01278 and Case No. 07 B 13379.

The opinion of the court was delivered by: Judge Joan B. Gottschall


Appellants Nicholas Stamat and Penny Stamat filed a joint voluntary Chapter 7 Bankruptcy Petition on July 26, 2007. Dr. Stamat is a medical doctor, and Mrs. Stamat has a bachelor's degree in math and accounting and handled the billing for her husband's medical practice. Appellee William T. Neary, as United States Trustee, filed a complaint objecting to the discharge of the Stamats' debt under 11 U.S.C. §§ 727(a)(2), (4), and (5). After a bench trial, the Bankruptcy Court found that the Stamats' debt was not dischargable pursuant to each of the three bases advanced by the Trustee. Neary v. Stamat (In re Stamat), 395 B.R. 59 (Bankr. N.D. Ill. 2008). The Stamats appeal that ruling.

The Stamats have a heavy burden. They must show that each of the three statutory bases for denying the discharge were legally erroneous, for only one basis is necessary to deny discharge. § 727(a); In re Krehl, 86 F.3d 737, 744 (7th Cir. 1996). A district court has appellate jurisdiction under 28 U.S.C. §§ 158(a)(1) and (c)(1). Questions of fact are reviewed under a clearly erroneous standard, while questions of law are reviewed de novo. Fed. R. Bankr. P. 8013; Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir. 2004). Because the Stamats have not met their burden in showing that the Bankruptcy Court's ruling under section 727(a)(4) was erroneous, the other bases need not be considered.

Under section 727(a)(4)*fn2 the Trustee must establish by a preponderance of the evidence that

(1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case. Clean Cut Tree Serv. v. Costello (In re Costello), 299 B.R. 882, 899 (Bankr. N.D. Ill. 2003); see also Lee Supply Corp. v. Agnew (In re Agnew), 818 F.2d 1284, 1290 (7th Cir. 1987).

"A debtor's petition, schedules, statement of financial affairs, statements made at a § 341 meeting,*fn3 testimony given at a Federal Rule of Bankruptcy Procedure 2004 examination,*fn4 and answers to interrogatories all constitute statements under oath for purposes of § 727(a)(4)."

Structured Asset Serv. v. Self (In re Self), 325 B.R. 224, 245 (Bankr. N.D. Ill. 2005) (citations omitted, footnotes added). Where schedules or other materials contain omissions or representations with an intent to mislead creditors as to the debtor's financial condition, the requirements of section 727(a)(4) are satisfied. See John Deere Co. v. Brohom (In re Broholm), 310 B.R. 864, 880 (Bankr. N.D. Ill. 2004). The debtor must disclose all ownership interests in any property, for Trustees and creditors "are entitled to honest and accurate signposts on the trail showing what property has passed through the debtor's hands during the period prior to his bankruptcy." Costello, 299 B.R. at 899 (citations omitted). "Complete financial disclosure is 'a condition precedent to the privilege of discharge.'" Cohen v. Olbur (In re Olbur), 314 B.R. 732, 745 (Bankr. N.D. Ill. 2004) (quoting Glucona Am., Inc. v. Ardisson (In re Ardisson), 272 B.R. 346, 359 (Bankr. N.D. Ill. 2001)).

Every failure to disclose will not necessarily justify a bar to discharge under § 727(a)(4), for the disclosure must be material. Yet as the number of individually insignificant omissions mounts, "there comes a point when the aggregate errors and omissions cross the line past which a debtor's discharge should be denied." Costello, 299 B.R. at 899. Furthermore, "[t]he cumulative effect of a number of false oaths by the debtor with respect to a variety of matters establishes a pattern of reckless and cavalier disregard for the truth by the debtor." Cmty. Bank of Homewood-Flossmoor v. Bailey (In re Baily), 145 B.R. 919, 928 (Bankr. N.D. Ill. 1992) (citations omitted). "[I]f a debtor's bankruptcy schedules and statements indicate that the debtor is recklessly indifferent to the truth, the objecting creditor does not have to offer any additional evidence of fraud." Costello, 299 B.R. at 900. "The intent determination often will depend upon a bankruptcy court's assessment of the debtor's credibility, making deference to the [bankruptcy] court's finding particularly appropriate." Krehl, 86 F.3d at 743 (citations omitted); see also In re Weber, 892 F.2d 534, 538 (7th Cir. 1989) ("Special deference must be accorded to credibility determinations 'for only the trial judge can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener's understanding of and belief in what is said.'") (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 575 (1985)); Carini v. Matera (In re Matera), 592 F.2d 378, 380 (7th Cir. 1979) (reckless disregard finding reviewed under clearly erroneous standard).

The Bankruptcy Court cited numerous omissions from the Stamats' petition and schedules filed in support of their bankruptcy. The omissions included relatively minor assets and interests, including the ownership of two service revolvers and that Dr. Stamat was employed part-time as a police officer (although the income from the part-time job was indirectly disclosed as an aggregate report of business income). Stamat, 395 B.R. at 73--74, ¶ 20. The Bankruptcy Court ruled that these omissions were neither material nor intentionally omitted, id., though it also noted that these examples were part of a broader and inexcusable pattern of omissions. See id. at 74.

The Bankruptcy Court also referenced omissions of "unidentified and undisclosed assets and the disposition of the Defendants' property, especially the disappearance of equity from their second home during the two years before the bankruptcy." Id. at 74, ¶ 25(a). Examples of unidentified and undisclosed assets included the failure to list the following in response to Question 18 of their Statement of Financial Affairs, which inquires about business interests possessed within the past six years:*fn5 (1) an interest in Dr. Stamat's medical practice, Stamat Pediatrics, LLC, f/k/a DeStefano and Stamat LLC, id. at 65 ¶ 21; (2) an interest in On Time Billing LLC, a billing practice maintained by Mrs. Stamat, id. at 65 ¶ 22;*fn6 (3) a former interest in Meyer Medical Physician Group Ltd., with which Dr. Stamat had practiced medicine until approximately 2001 when Meyer Medical filed for bankruptcy, id. at 65 ¶ 23, 69 ¶ 65; (4) a former interest in 4425 E. 63rd Medical Center, which was an investment that held title to the building where Meyer Medical operated, and which was sold in 2003, id. at 65 ¶ 24, 69 ¶¶ 66, 67; (5) a former interest in Hoffman/Elk Grove Physicians Group Ltd., which was an investment made shortly before Meyer Medical filed for bankruptcy, id. at 65 ¶ 25, 69 ¶¶ 68--69; and (6) a former interest in Trailhead Land Investment, LP, and Eagle Crest Gold Club, Ltd. Partnership, id. at 66 ¶¶ 37--38.

The Stamats object that the Trailhead Land Investment, LP, and Eagle Crest Gold Club, Ltd. Partnership investments should not be considered because although these were both limited partnerships, the Stamats owned less then five percent of the voting equity in these investments. The Stamats make this argument by ignoring the plain language of Question 18, which states that any business in which the debtor was a "partner" must be listed regardless of the amount of voting equity owned, and pointing instead to a general definition of "in business" found in the first page of the Statement of Financial Affairs Official Form, which explicitly prohibits a "limited partner" status from the definition of being "in business."*fn7*fn8 This argument is erroneous. First, the Official Form directs that this definition of "in business" is to be used to determine whether a debtor must answer questions 19 to 25. See Stmt. of Fin. Affairs Official Form 7 at 1 ("Debtors that are or have been in business, as defined below, also must complete Questions 19 - 25."). The allegation is that the Stamats omitted these limited partnerships from Question 18, not from Question 19 to 25. Second, the phrase "in business" does not appear in Question 18, although the title of Question 18 is similar: "Nature, location and name of business." Third, the "in business" definition appearing on the first page of the Official Form states that for the purposes of the phrase "in business," (which again, is used to identify whether the debtor needs to answer questions 19 to 25), a debtor is to include any situation where the debtor is "a partner, other than a limited partner, of a partnership." This "other than a limited partner" qualifier indicates what is otherwise obvious: the term "partner" would normally be assumed to include the status of being a limited partner. If this were not so, then there would be no reason to insert the qualifier "other than a limited partner" in the definition. Yet when the text of Question 18 is considered, there is no such caveat altering the normal meaning of the term partner. Rather, Question 18 directs the debtor to "list [information for] all business in which the debtor was [a]... partner, or... partner in a partnership...."*fn9 Because no caveat was included, the plain meaning would encompass limited partners.

The Stamats also object that the Bankruptcy Court appeared to assume that some of these investments should have been listed on the Stamats' Schedule B, and that this assumption served as a rationale to diminish the Bankruptcy Court's concerns over the ambiguity of the meaning of Question 18 and the "in business" definition. See Stamat, 395 B.R. at 76.*fn10 Schedule B requires debtors to list only personal property, and there is nothing in the Schedule which indicates that personal property no longer in the debtor's possession or control must also be listed. Since many of these businesses were disposed of or lost prior to the bankruptcy petition being filed, the businesses must be listed in response to Question 18 (because Question 18 inquires into businesses in which the debtor had an interest over the past six years, but not necessarily currently), but would not have to be listed on Schedule B (because the investment is no longer a personal property).

The Stamats' argument regarding the inapplicability of Schedule B appears correct, yet no consequence flows from this observation. The Bankruptcy Court equivocated regarding the failure to list these limited partnerships in response to Question 18, and shored up its resolve by noting the failure to list them on the Schedule B; it did not, however, hold that it would have reached a contrary result absent its interpretation of Schedule B. See id. Furthermore, the Bankruptcy Court was considering only two limited partnerships in this context; there were four other businesses that the Stamats failed to disclose in response to Question 18, as identified above. And most important, on ...

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