Appeal from the U.S. Bankruptcy Court Central District of Illinois Hon. Mary Gorman, presiding Bankruptcy No. 07-72602 Adversary No. 08-7035.
The opinion of the court was delivered by: Jeanne E. Scott, U.S. District Judge
Appellant, Chapter 7 Bankruptcy Trustee Jeffrey D. Richardson, filed an adversary proceeding to deny a discharge to Debtor Chaddrick Raymond Carver. Richardson alleged that Carver fraudulently transferred money to hinder and delay creditors, and made intentionally false statements under oath in the bankruptcy process. Bankruptcy Code §§ 727(a)(2)(A) & (a)(4)(A), 11 U.S.C. §§ 727(a)(2)(A) & (a)(4)(A). The Bankruptcy Court entered an order in favor of Carver. Richardson now appeals. For the reasons set forth below, this Court affirms in part, reverses in part, and remands for further proceedings. This Court affirms the Bankruptcy Court's decision with respect to the Trustee's § 727(a)(2)(A) claim, but reverses with respect to the § 727(a)(4)(A) claim. The Bankruptcy Court clearly erred in finding that Richardson failed to prove that Carver intentionally made false statements regarding his income during the year before filing bankruptcy. The Court remands this case for the Bankruptcy Court to determine whether these false statements were material.
Carver became a licensed real estate broker in the year 2000. In 2006, he was the sole owner of a limited liability company named Carver Properties, LLC. Carver Properties owned 22 rental properties in the Decatur, Illinois, area. Carver financed the purchase of these properties with loans secured by mortgages on the properties. Many of these loans had adjustable interest rates. According to Carver, the interests rates on many of these loans increased in 2006, and as a result, he was unable to service the loans. Record on Appeal (d/e 1) (Record), at 145.
In late 2006, Carver sought alternate financing. Carver was introduced to a man named Nick Muscato of Orlando, Florida. Muscato arranged a short term loan of $200,000.00 to Carver from the Muscato Family Limited Partnership #2 (Muscato Loan). The loan was due in 60 days, with interest that accrued at 25 percent per annum. In addition, Carver paid an origination fee of $20,000.00. In the spring of 2007, Carver defaulted on the Muscato Loan. By then, Carver also had defaulted on several mortgage loans.
Carver was married to Tammy Carver (Tammy). In 2007, Tammy and Carver had two children under the age of 10 and owned a home on Autumn Ridge Court in Decatur, Illinois (Autumn Ridge Home). Tammy was a kindergarten teacher and was not involved in Carver's business affairs. She was not obligated on any of his business loans, including the Muscato Loan. Carver had also kept his business financial problems from her.
By May 2007, Carver decided to tell Tammy about his financial problems. On May 29, 2007, Carver and Tammy went to see an attorney, Andrew Bourey. They paid Bourey a retainer of $1,000.00. At that time, Tammy learned of the extent of Carver's financial problems. Tammy was horrified when she learned of Carver's financial problems. Record, at 129. At that time, Tammy and Carver discussed Carver's options with Bourey.
The discussion included the option of bankruptcy. Record, at 103. After the meeting with Bourey, Tammy and Carver decided to put the Autumn Ridge Home up for sale.
Carver listed the Autumn Ridge Home with Markwell Weatherford Realty (MW). Carver was an agent with MW, and was the listing agent for the Autumn Ridge Home. In July 2007, Tammy and Carver sold the Autumn Ridge Home for $505,000.00. The sale closed on July 26, 2007. The settlement sheet showed that Tammy and Carver received $206,969.10 in net proceeds from the sale (Sale Proceeds). Separate Appendix of Appellant (d/e 3) (Appendix), at 141. In addition, the settlement sheet showed that real estate commissions of $30,300.00 were paid. According to the settlement sheet, half of the commissions, or $15,150.00, was paid to MW. Appendix, at 142. As the listing agent for MW, Carver was entitled to approximately half of this amount, or approximately $7,500.00, as his commission on the sale (Commission). Record, at 107-08, 152. Carver, however, received a commission check for approximately $6,000.00 to $7,000.00 because MW deducted some overdue dues. Record, at 107.
Carver endorsed the check for the Sale Proceeds and gave it to Tammy. Tammy deposited half of the Sale Proceeds into her personal checking account (Tammy Account). She then deposited the rest of the Sale Proceeds into a new account (New Account). Carver also endorsed his commission check to Tammy. She deposited the Commission into the New Account. The New Account had approximately $110,000.00 in it, representing half of the Sale Proceeds, plus the Commission. Tammy was listed as the sole owner of both accounts. Carver was not listed on either account.
After the closing, in August 2007, Tammy paid $4,600.00 to Bourey from the New Account. This sum represented a $2,000.00 retainer for filing bankruptcy for Carver and $2,000.00 for filing bankruptcy for Carver Properties. Tammy paid the remaining $600.00 to cover $300.00 in filing fees for each bankruptcy. Tammy and Carver made additional payments to Bourey from August to December. Record, at 154; Appendix, at 110. All tolled, Carver paid Bourey approximately $8,000.00 from May 2007 until he filed bankruptcy in December 2007. Record, at 127.
In July 2007, Carver's main concern was Muscato. Muscato had threatened Carver's family, and Carver wanted to make sure that he was paid. See Record, 146-49. Muscato had hired an attorney in Decatur to collect the Muscato Loan. Bourey represented Carver in negotiations with Muscato's counsel. He also represented Carver in foreclosure actions filed by secured lenders. In September 2007, Carver negotiated a settlement of the Muscato Loan. Under the settlement, Carver paid the Muscato Family Limited Partnership #2 $85,000.00, and Carver Properties conveyed to Muscato a rental property located at 1313 W. Main, Decatur, Illinois. In return, Muscato agreed to release the remainder of any claim against Carver as long as Carver did not file bankruptcy for 90 days. After 90 days, the payment and transfer of property to Muscato could not be recovered in bankruptcy as a preference. 11 U.S.C. § 547. See Record, at 111. The settlement of the debt closed in September. On September 10, 2007, Tammy disbursed the $85,000.00 from the New Account to the Muscato Family Limited Partnership #2. Appendix, at 139. Carver then waited until December 17, 2007, to file this Chapter 7 bankruptcy.
In connection with the bankruptcy, Carver filed the required Statement of Financial Affairs. Appendix, at 15-23; see Bankruptcy Rule 1007(b), Official Form 7, Statement of Financial Affairs. Carver answered the questions on the Statement of Financial Affairs under oath. The first question asked Carver to state, among other things, his income from January 1, 2007, to the date that he filed bankruptcy. Carver answered this question, "0.00." Appendix, at 15.
The ninth question asked:
List all payments made or property transferred by or on behalf of the debtor to any persons, including attorneys, for consultation concerning debt consolidation, relief under the bankruptcy law or preparation of a petition in bankruptcy within one year immediately preceding the commencement of this case.
Appendix, at 19. In response, Carver stated that on November 14, 2007, Carver paid $2,000.00 in fees and $299.00 in expenses to the Bourey Law Office. Id.
The tenth question asked Carver to list all transfers of property out of the ordinary course of his business or financial affairs that occurred within one year prior to the filing of the bankruptcy. In response, Carver listed a number of properties transferred to lenders in lieu of foreclosure. Carver also listed the sale of the Autumn Ridge Home. Carver stated:
Sold real estate located at 6323 Autumn Ridge Court, Decatur, IL 62521 for $505,000.00. Mortgage company was paid $248,752.38. Debtor received approximately $100,000 from the proceeds of the sale and paid $85,000 to Muscato Family Limited Partnership, #2.
Appendix, at 20. Carver did not disclose that he had transferred the Commission and his portion of the Sale Proceeds to Tammy and that she paid the $85,000.00 to Muscato out of the New Account.
After the case was filed, Richardson asked Carver for another sworn statement regarding his income. In response, Carver executed an Affidavit in which he stated: "I, Chaddrick R. Carver, state on oath that I have not received any income from any source from January 1, 2007 through November 30, 2007." Appendix, at 102.
On March 14, 2008, Richardson commenced this adversary proceeding to object to Carver's discharge. Richardson alleged that Carver received $110,000.00 from the Sale Proceeds and the Commission and transferred those funds to Tammy to hinder and delay creditors in violation of § 727(a)(2)(A). Record, at 6-7. Section 727(a)(2)(A) states:
(a) The court shall grant the debtor a discharge, unless --. . . .
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed --
(A) property of the debtor, within one year before the date of the filing of the petition; . . . .
11 U.S.C. § 727(a)(2)(A).
The Bankruptcy Court held the trial on the objection to Carver's discharge on October 22, 2008. Carver and Tammy testified. Richardson and Carver had the following colloquy about the Commission:
Q: If you go to the second page at the top [of the settlement sheet] on line 701, you've got a realty fee of $30,300.
Q: Now the way the realty fee worked in this case, as I understand, Mr. Carver, is another realty company actually brought the buyer to the table, so the $30,000 was split between Markwell Weatherford and that other realty.
A: The other broker. Yes.
Q: So each got a little over 15,000.
Q: And as the listing agent on the sale of your own home, you would have gotten half of what Markwell Weatherford got, or a little more than $7,500.
A: Somewhere around there. I'm sure I had dues, overdue dues, that came out of that, but you're probably right. Six, seven, somewhere around there.
Q: Okay. (Pause) But you did earn the $7,500 commission.
A: It -- yeah, I guess so.
Q: All right. How does that jive, Mr. Carver, with your schedules that say you had no income, your bankruptcy schedules in 2 -- for 2007, and what I'll call your affidavit that said you had no ...