J&R Investment v. Anthony
Filing
25
MEMORANDUM DECISION AND ORDER - The judgment of the bankruptcy court is AFFIRMED. The court directs the Clerk of Court to close the case. Signed by Judge Robert J. Shelby on 9/23/2015. (jds)
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
In re:
MICHAEL FREDERICK ANTHONY,
MEMORANDUM
DECISION AND ORDER
Debtor,
Case No. 2:14-cv-647
Judge Robert J. Shelby
J&R INVESTMENT,
Appellant,
v.
MICHAEL FREDERICK ANTHONY,
Appellee.
Michael Frederick Anthony received a Chapter 7 discharge of his debts from the United
States Bankruptcy Court for the District of Utah. J&R Investment sought in the bankruptcy court
revocation of the discharge under 11 U.S.C. § 727, arguing that Mr. Anthony made a number of
false oaths in his bankruptcy filings and withheld property from the bankruptcy estate. After a
trial on the matter, the bankruptcy court issued a Memorandum Decision dismissing J&R
Investment’s claims. J&R Investment appeals from that Memorandum Decision. Exercising
jurisdiction under 28 U.S.C. § 158(a), the court affirms.
1
BACKGROUND
Michael Anthony ran a business named Freedom Storage and rented commercial storage
space from J&R Investment. John and Rita Billinis operated J&R Investment when Mr. Anthony
began renting the space. In 2005, the Billinises’ children, Alex, Barbara, and Katherine, took
over the company. Katherine reached an agreement with her siblings in which she received
ownership of some of J&R Investment’s real properties in exchange for her interest in the
company. She used those properties to start two companies, E.Z. Storage, LLC and One Unit
Investments, LLC.
In July 2006, J&R Investment sued Mr. Anthony for unpaid rent. In December 2007, the
company obtained a judgment against Mr. Anthony for $169,743.74. The order was not certified
until August 2010. While the litigation was pending, Katherine married Mr. Anthony and hired
him to work as the property manager of E.Z. Storage and One Unit Investments. The couple
eventually divorced. Katherine retained full ownership of E.Z. Storage and One Unit
Investments, other real property that she received from J&R Investment, and a house in West
Valley City. Mr. Anthony did not receive any real property in the divorce. He continued to work
at One Unit Investments until May 2012 and still worked at E.Z. Storage at the time of the
bankruptcy proceedings.
After J&R Investment served writs of garnishment on E.Z. Storage and One Unit
Investments, Mr. Anthony filed for Chapter 7 bankruptcy. Mr. Anthony pursued the discharge
pro se. The bankruptcy court issued Mr. Anthony a general discharge of debts on December 6,
2011. On December 4, 2012, J&R Investment filed this action, seeking revocation of the
discharge under 18 U.S.C. 727(d). The bankruptcy court held a trial on the matter. Leading up
to the trial, the parties submitted a Pretrial Order containing stipulated facts. In a Memorandum
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Decision dated August 20, 2014, the bankruptcy court made findings of fact and conclusions of
law, and dismissed J&R Investment’s claims. J&R Investment now appeals the bankruptcy
court’s ruling.
J&R Investment focuses its appeal on several inaccuracies and misleading statements
contained in Mr. Anthony’s bankruptcy filings (i.e., Payment Advices Certification, Statement of
Financial Affairs, and Bankruptcy Schedules) and tax returns, including:
Mr. Anthony failed to list his income from Freedom Storage for 2009, 2010, and
2011;
the yearly incomes listed in Mr. Anthony’s bankruptcy filings conflict with the
incomes listed in his tax returns; and
Mr. Anthony failed to disclose that he received two $2,000 checks (one from
E.Z. Storage, one from One Unit Investments) in the sixty days before filing his
petition.
J&R Investment asserts that the inaccuracies and omissions, taken together, prove that Mr.
Anthony made “false oaths” for purposes of 11 U.S.C. § 727. The company also contends that
the bankruptcy court erred by suggesting that Roger Oliphant, Mr. Anthony’s tax preparer, was
responsible for the inaccuracies and omissions in the tax returns and bankruptcy filings. Lastly,
J&R Investment argues that the bankruptcy court erred in finding that Mr. Anthony and
Katherine did not have a profit-sharing arrangement.
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DISCUSSION
I. STANDARD OF REVIEW
When reviewing a bankruptcy court’s decision, the district court is “bound to accept the
bankruptcy court’s findings of fact unless they are clearly erroneous, but may examine its
conclusions of law de novo.”1 “A finding of fact is clearly erroneous if it is without factual
support in the record or if, after reviewing all of the evidence, [the reviewing court is] left with
the definite and firm conviction that a mistake has been made.”2 The court is not to “weigh the
evidence or reverse a finding because it would have decided the case differently.”3 Deference to
the bankruptcy court’s findings of fact is based on the notion that the fact-finder hears live
testimony and has the opportunity to judge the credibility of witnesses.4 In sum, “[a] bankruptcy
court’s factual determinations will not be disturbed on appeal absent ‘the most cogent reasons
appearing in the record.’”5
II. REVOCATION
Chapter 7 of the Bankruptcy Code allows a debtor, upon meeting certain conditions, to
receive a discharge of his debts. The general policy of Chapter 7 is to give debtors a “fresh
start.”6 Revocation of a Chapter 7 discharge is “an extraordinary remedy,”7 and the statutory
1
Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir. 1988).
In re Miniscribe Corp., 309 F.3d 1234, 1240 (10th Cir. 2002) (quoting In re Peterson Distrib., Inc., 82 F.3d
956, 959 (10th Cir. 1996)).
3
Bartmann, 853 F.2d at 1543.
4
See, e.g., FED. R. CIV. P. 52; United States v. Oregon State Med. Soc., 343 U.S. 326, 332 (1952); United States
v. Cope, 676 F.3d 1219, 1225 (10th Cir. 2012); Louis v. Blackburn, 630 F.2d 1105, 1109 (5th Cir. 1980); United
States v. Guebara, 202 F.3d 283 (10th Cir. 2000).
5
Bartmann, 853 F.2d at 1543 (quoting Kansas Federal Credit Union v. Niemeier, 227 F.2d 287, 291 (10th Cir.
1955)).
6
In re Jordan, 521 F.3d 430, 433 (4th Cir. 2008); In re Eckert, 375 B.R. 474, 478 (Bankr. N.D. Ill. 2007).
7
In re Osborne, 476 B.R. 284, 297 (Bankr. D. Kan. 2012); see also In re Jordan, 521 F.3d 430, 433 (4th Cir.
2008); In re Kasden, 209 B.R. 239, 241 (8th Cir. BAP 1997).
2
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provisions governing revocation “must be construed strictly against the [plaintiff seeking
revocation] and liberally in favor the Debtor.”8
J&R Investment contends that the bankruptcy court erred when it dismissed the claims
for revocation of discharge under 11 U.S.C. § 727(d)(1) and (d)(2).
A. Section 727(d)(1)
J&R Investment contends that Mr. Anthony made false oaths within the meaning of 11
U.S.C. § 727(d)(1). The provision states:
(d) On request of the trustee, a creditor, or the United States trustee, and after
notice and a hearing, the court shall revoke a discharge granted under . . . [Section
727(a)] . . . if-(1) such discharge was obtained through the fraud of the debtor, and the
requesting party did not know of such fraud until after the granting of such
discharge . . . .9
Section 727(a)(4)(A) establishes that a court must grant a debtor a discharge unless the “debtor
knowingly and fraudulently, in or in connection with the case . . . made a false oath or
account.”10 To succeed on a revocation claim, the statute requires a plaintiff to show that the
debtor knowingly and fraudulently made a material false oath.11 “A debtor will not be denied
discharge if a false statement is due to mere mistake or inadvertence. Moreover, an honest error
or mere inaccuracy is not a proper basis for denial of discharge.”12 Courts have also found that
ignorance of the law or carelessness is not grounds for revocation.13 On the other hand, reckless
8
In re Osborne, 476 B.R. at 297.
11 U.S.C. § 727(d)(1).
10
Id. at § 727(a)(4)(A).
11
In re Butler, 377 B.R. 895, 922 (Bankr. D. Utah 2006).
12
In re Brown, 108 F.3d 1290, 1295 (10th Cir. 1997).
13
In re Heil, 289 B.R. 897, 903 (Bankr. E.D. Tenn. 2003) (quoting In re Trost, 164 B.R. 740, 744 (Bankr. W.D.
Mich. 1994)).
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indifference to the truth often has “been treated as the functional equivalent of fraud for purposes
of § 727(a)(4)(A).”14
A plaintiff seeking revocation of a discharge has the burden of proof.15 If the plaintiff
makes a prima facie showing that raises “a reasonable inference of the debtor’s intentional fraud,
the burden shifts to the debtor to provide a cogent explanation for the omissions or
misstatements.”16 The burden shifting does not vitiate the plaintiff’s ultimate burden of
persuasion.17 This goes toward the well-established proposition that revocation of a Chapter 7
discharge is an extraordinary and harsh remedy, and that Section 727 should be construed against
the plaintiff seeking revocation and in favor of the debtor.18 The burden therefore remains with
the plaintiff.
J&R Investment contends that the bankruptcy court erred in concluding that it—as the
plaintiff seeking revocation—had the ultimate burden of persuasion. But retaining the ultimate
burden neither enhances a plaintiff’s prima facie burden nor lessens a debtor’s burden. If the
plaintiff meets its prima facie burden, the burden shifts and the debtor must explain the
inaccuracies and omissions. The plaintiff has the opportunity and the burden to controvert the
debtor’s explanation. If the plaintiff successfully does so, revocation is more likely to occur. If
the plaintiff fails to do so, the debtor is more likely to fend off revocation. In any event, the
plaintiff has the ultimate burden to prove its revocation claim.
14
In re Butler, 377 B.R. 895, 922 (Bankr. D. Utah 2006) (quoting In re Tully, 818 F.2d 106, 112 (1st Cir.
1987)).
15
FED. R. BANKR. P. 4005.
In re Arbaney, 345 B.R. 293, 307 (Bankr. D. Colo. 2006); see also American Nat. Bank of Denver v.
Rainguet, 323 F.2d 881, 882 (10th Cir. 1963); Johnson v. Bockman, 282 F.2d 544, 545 (10th Cir. 1960); Jones v.
Gertz, 121 F.2d 782, 783 (10th Cir. 1941); In re Butler, 377 B.R. 895, 915 (Bankr. D. Utah 2006).
17
See, e.g., FED. R. BANKR. P. 4005; In re Sieber, 489 B.R. 531, 544 (Bankr. D. Md. 2013)In re Poffenberger,
471 B.R. 807, 815 (Bankr. D. Md. 2012) In re Gardner, 384 B.R. 654, 663 (Bankr. S.D.N.Y. 2008); In re Butler, 377
B.R. 895, 915 (Bankr. D. Utah 2006); In re Mayo, 94 B.R. 315, 322 (Bankr. D. Vt. 1988).
18
See In re Jordan, 521 F.3d 430, 433 (4th Cir. 2008); In re Kasden, 209 B.R. 239, 241 (8th Cir. BAP 1997); In
re Osborne, 476 B.R. 284, 297 (Bankr. D. Kan. 2012).
16
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1. Prima Facie Case
i. Review of Factual Findings
To make a prima facie showing, a plaintiff must put forth evidence that raises “a
reasonable inference of the debtor’s intentional fraud.”19 J&R Investment contends that the
parties’ Pretrial Order was sufficient to establish a prima facie showing that Mr. Anthony made
several false statements in his bankruptcy filings that give rise to an inference of fraud. “Factual
assertions in . . . pretrial orders, unless amended, are considered judicial admissions conclusively
binding on the party who made them.”20
J&R Investment contends that the bankruptcy court made factual findings contrary to the
stipulated facts in the Pretrial Order. In its brief, J&R Investment included a section entitled “All
of The Bankruptcy Court’s Findings Which Are Contrary To The Pretrial Order, Uncontroverted
Facts Are Clearly Erroneous As A Matter Of Law.” Under the heading, J&R Investment points
to no specific factual findings and contends that the bankruptcy court erred by failing to
incorporate into its Memorandum Decision the undisputed facts from the Pretrial Order. J&R
Investment also contends in a separate section of its brief that the bankruptcy court’s findings
related to Mr. Anthony’s failure to disclose payments were contrary to the Pretrial Order.
The bankruptcy court acknowledged in its Memorandum Decision that Mr. Anthony
admitted he received but did not disclose two payments in the required reporting period of sixty
days before the bankruptcy filing. In addition, the bankruptcy court made factual findings
regarding Mr. Anthony’s explanation as to why he did not disclose them. The additional findings
concerning Mr. Anthony’s explanation were not contrary to the stipulated facts in the Pretrial
19
In re Arbaney, 345 B.R. at 307.
Christian Legal Soc. Chapter of the Univ. of California, Hastings Coll. of the Law v. Martinez, 561 U.S. 661,
716 (2010) (quoting Am. Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir. 1988)); see also Amgen Inc. v.
Connecticut Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1197 (2013).
20
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Order. J&R Investment cites no case law stating that a fact-finder cannot make additional
findings beyond the factual assertions in a pretrial order. Although the facts in a pretrial order
are part of the record, they are not the entire record. And J&R Investment points to no specific
factual findings that contradict the Pretrial Order. The court concludes that the bankruptcy
court’s findings of fact were not clearly erroneous.
ii. Review of Conclusions of Law
The question whether the factual record supports the conclusion that J&R Investment
carried its prima facie burden is separate from the question whether the bankruptcy court’s
factual findings contradicted the Pretrial Order. The latter question regarding fact finding is
reviewed for clear error; the former question regarding conclusions of law is reviewed de novo.21
The Pretrial Order includes a number of stipulated facts describing inaccuracies and
omissions in Mr. Anthony’s bankruptcy filings. For example, the Order states that Mr. Anthony
failed to disclose business income from Freedom Storage. In particular, Mr. Anthony failed to
list the income he received from Freedom Storage in 2009, 2010, and 2011. The Order also
states that Mr. Anthony did not disclose lawsuits against him and that the income listed in his
bankruptcy filings was inconsistent with the income listed in his federal tax returns. Moreover,
the Order states that Mr. Anthony received two $2,000 checks that he failed to disclosed in the
Payment Advices Certification. Considering the multiple inaccuracies and omissions, the court
concludes that J&R Investment made a prima facie showing that Mr. Anthony made false oaths.
Mr. Anthony’s repeated failure to provide accurate and complete information at least raises an
inference that he engaged in intentional fraud.
21
Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir. 1988).
8
Although the bankruptcy court found that J&R Investment failed to make a prima facie
showing, its analysis did not end there. The bankruptcy court also considered whether Mr.
Anthony put forth a cogent explanation for the misstatements in his filings, and concluded that
Mr. Anthony credibly testified that any inaccuracies or omissions were the product of mistake or
ignorance. In other words, the bankruptcy court concluded that J&R Investment’s claim failed
on alternative bases. For the reasons stated below, the court concludes that the bankruptcy court
committed no err in finding that Mr. Anthony’s filings were not fraudulent. Thus, any error in
finding that J&R Investment did not meet its prima facie burden was harmless.
2. Mr. Anthony’s Explanations
Mr. Anthony failed to make accurate and complete disclosures in multiple bankruptcy
filings. Because J&R Investment made a prima facie showing, the burden shifts to Mr. Anthony
to “provide a cogent explanation for the omissions or misstatements.”22 At trial, the bankruptcy
court concluded that the inaccuracies and omissions were not fraudulent, but were a product of
“genuine ignorance, ineptitude, and confusion.” In reviewing the bankruptcy court’s factual
findings regarding Mr. Anthony’s explanations, the court emphasizes the deferential standard of
review.23 The bankruptcy court conducted the trial and, as the fact-finder, was able to assess the
credibility of the witnesses. In view of this, the court defers to the bankruptcy court’s factual
findings absent “the most cogent reasons” to disturb them.24 The court takes up Mr. Anthony’s
explanations and J&R Investment’s arguments in turn.
22
In re Arbaney, 345 B.R. 293, 307 (Bankr. D. Colo. 2006); see also American Nat. Bank of Denver v.
Rainguet, 323 F.2d 881, 882 (10th Cir. 1963); Johnson v. Bockman, 282 F.2d 544, 545 (10th Cir. 1960); Jones v.
Gertz, 121 F.2d 782, 783 (10th Cir. 1941); In re Butler, 377 B.R. 895, 915 (Bankr. D. Utah 2006).
23
See, e.g., FED. R. CIV. P. 52; United States v. Oregon State Med. Soc., 343 U.S. 326, 332 (1952); United
States v. Cope, 676 F.3d 1219, 1225 (10th Cir. 2012); Louis v. Blackburn, 630 F.2d 1105, 1109 (5th Cir. 1980);
United States v. Guebara, 202 F.3d 283 (10th Cir. 2000).
24
Bartmann, 853 F.2d at 1543 (quoting Kansas Federal Credit Union v. Niemeier, 227 F.2d 287, 291 (10th Cir.
1955)).
9
First, Mr. Anthony failed to list his income from Freedom Storage in 2009, 2010, and
2011. In his Statement of Financial Affairs, Mr. Anthony listed Freedom Storage as a defunct
dba, but did not list its income. The bankruptcy court found that Mr. Anthony credibly testified
that he was confused and did not include income from Freedom Storage because he was no
longer receiving an income from the company. J&R Investment contends that the transcripts of
Mr. Anthony’s tax returns for 2009 through 2012 prove that Mr. Anthony operated Freedom
Storage until 2012. However, the bankruptcy court found that the transcripts do not indicate as
much and there is no cited record evidence to controvert that finding.
Second, J&R Investment points to inconsistencies between Mr. Anthony’s tax returns and
his bankruptcy filings. The bankruptcy court found that Mr. Anthony and Katherine Billinis
credibly testified about “their general practice of providing information to their accountants and
then basically washing their hands of their tax returns.” Further, the bankruptcy court
acknowledged its wariness of “self-serving denials and feigned ignorance,” but found that
discrepancies and omissions in Mr. Anthony’s tax returns and bankruptcy filings were a result of
ignorance and confusion.
Third, Mr. Anthony received two payments in the sixty days before the petition date and
did not disclose the payments in the Payment Advices Certification. He received two $2,000
checks, one from E.Z. Storage and one from One Unit Investments. The checks had no
accompanying pay stubs. The bankruptcy court found that Mr. Anthony credibly testified that he
did not know that the checks constituted payment advices and one of the checks was meant as a
wedding gift from Katherine to Mr. Anthony’s daughter. Further, there was no evidence that Mr.
Anthony possessed or controlled any of the funds as of the petition date.
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Fourth, J&R Investment argues that the bankruptcy court erred in suggesting that Mr.
Anthony’s tax preparer, Roger Oliphant, was somehow responsible for the inaccuracies in the tax
returns and bankruptcy filings. J&R Investment contends that Mr. Oliphant could not have
prepared the tax returns or bankruptcy filings at issue because he died in 2010. But J&R
Investment does not specify how the bankruptcy court suggested that Mr. Oliphant was to blame
for the inaccuracies. Although the bankruptcy court’s Memorandum Decision refers to Mr.
Anthony’s accountant, the identity of the accountant is unclear. At bottom, there is no firm basis
to conclude that factual findings related to Mr. Oliphant, if any, were clearly erroneous.
Fifth, J&R Investment contends that Katherine and Mr. Anthony had a profit-sharing
arrangement. The bankruptcy court determined that the record evidence did not conclusively
support a finding that Katherine and Mr. Anthony were sharing profits, finding that Katherine
credibly testified that she paid Mr. Anthony as she “saw fit based on the net profits for the
month.” These findings supported the bankruptcy court’s conclusion that Mr. Anthony was an
independent contractor or a salaried employee of E.Z. Storage and One Unit Investments, not an
owner.
4. Conclusion
Although Mr. Anthony’s bankruptcy filings and tax returns contained inaccuracies and
omissions, the bankruptcy court found that the inaccuracies and omissions were a result of
confusion, mistake, ignorance, and ineptitude. J&R Investment asserts that mere quantity of
inaccuracies and omissions indicates that Mr. Anthony knowingly and recklessly made false
oaths. Put differently, J&R Investment argues that the fact Mr. Anthony made repeated
inaccurate statements and omissions in his filings indicates that the bankruptcy court committed
clear error in each of its specific factual findings related to Mr. Anthony’s explanations. The
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bankruptcy court was aware of Mr. Anthony’s repeated mistakes and omissions, considered Mr.
Anthony’s explanations regarding the specific mistakes and omissions, and found that Mr.
Anthony did not engage in fraud. In the end, the court is not left with a definite and firm
conviction that a mistake has been made. What’s more, the court is left with no basis to conclude
that the harsh and extraordinary remedy of revocation is warranted. The bankruptcy court’s
dismissal of J&R Investment’s claim under Section 727(d)(1) is affirmed.
B. Section 727(d)(2)
Section 727(d)(2) provides a claim for revocation if “the debtor acquired property that is
property of the estate, or became entitled to acquire property that would be property of the estate,
and knowingly and fraudulently failed to report the acquisition of or entitlement to such property,
or to deliver or surrender such property to the trustee.”25 The bankruptcy court concluded that
this Section reaches only property that a debtor acquires after filing his petition.26 J&R
Investment argues that the Section applies to property obtained both before and after discharge.
J&R Investment’s claim for revocation under Section 727(d)(2) fails under either
interpretation. If the Section applies only to property acquired postpetition, the claim fails
because J&R Investment did not prove that Mr. Anthony acquired or became entitled to any
estate property after he filed his petition. If the Section applies to property obtained prepetition,
the claim fails because J&R Investment has failed to prove that Mr. Anthony acted fraudulently.
As stated, the bankruptcy court did not commit clear error in finding that Mr. Anthony did not
knowingly or fraudulently make omissions in his bankruptcy filings. Thus, the court affirms the
bankruptcy court’s dismissal of J&R Investment’s claim under Section 727(d)(2).
25
11 U.S.C. § 727(d)(2).
In support of this proposition, the bankruptcy court cited In re DaMaia, 217 F.3d 838 at *2 (4th Cir. 2000)
(unpublished).
26
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CONCLUSION
For the reasons stated, the judgment of the bankruptcy court is AFFIRMED. The court
directs the Clerk of Court to close the case.
SO ORDERED this 23rd day of September, 2015.
BY THE COURT:
____________________________
ROBERT J. SHELBY
United States District Judge
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