McDermott v. Davis (In re Davis)

538 B.R. 368

In re: Mark Evan Davis and Jennifer Ann Davis, Debtors.

Daniel M. McDermott, Plaintiff

v.Mark Evan Davis, et al., Defendants.

Case No. 13–55353

Adv. Pro. No. 14–2153

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus .

Signed September 30, 2015

Luther J. Mills, Delaware, OH, for Debtor

MEMORANDUM OPINION ON COMPLAINT OF THE UNITED STATES TRUSTEE SEEKING REVOCATION OF THE DEBTORS' DISCHARGE

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

The United States Trustee (the “UST”) asks the Court to revoke the Chapter 7 discharge of Mark Evan Davis and Jennifer Ann Davis,¹ alleging that they knowingly and fraudulently failed to report the acquisition of property of the estate and deliver the property to the Chapter 7 trustee, Clyde Hardesty (“Hardesty”). But Mark in fact reported his entitlement to and acquisition of the property—an inheritance he received from his father—to Hardesty. And although the Debtors used a portion of the inherited funds to pay bills and meet their family's basic needs, the UST failed to carry his burden of proving that they did so with knowledge that the funds were property of Mark's bankruptcy estate or with any intent to defraud Hardesty. The Court accordingly denies the UST's request to revoke the Debtors' discharge.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(J). Because the issue of whether a discharge should be revoked “stems from the bankruptcy itself[,]” Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011), the Court also has the constitutional authority to enter a final order on the UST's request. See Wan Ho Indus. Co. v. Hemken (In re Hemken), 513 B.R. 344, 350 (Bankr.E.D.Wis.2014) (“The Court has the authority to enter a final order as these cases involve the Debtor's discharge, a matter which is ... at the center of the adjustment of the debtor-creditor relationship.”).

III. Procedural Background and Overview

On July 4, 2013 (the “Petition Date”), the Debtors filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, and the UST appointed Hardesty as the Chapter 7 trustee in their bankruptcy case. Following the Court's entry of an order granting the Debtors a Chapter 7 discharge and the closing of their bankruptcy case, Mark became entitled to an inheritance of approximately $138,000 as a result of the death of his father, which occurred within 180 days after the Petition Date. Under the Bankruptcy Code, property of a debtor's bankruptcy estate includes “[a]ny interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date ... by ... inheritance[.]” 11 U.S.C. § 541(a)(5)(A).

Although he delayed in doing so, Mark eventually informed his bankruptcy attorney, Stacy Mills (“Mills”), of his father's passing and asked her about the implications for the Debtors' bankruptcy case. Mills, however, took nearly two months to advise Mark that he was required to turn over the inheritance to Hardesty, and in the meantime Mark used the proceeds of three inheritance checks (in the approximate aggregate amount of $18,000) to pay bills and meet living expenses. After Mills advised him that the inheritance was property of his estate, Mark reported the inheritance—and the fact that he had already cashed or deposited three checks—to Hardesty, who filed a motion to reopen the Debtors' case to administer the inheritance as an asset of the bankruptcy estate. Doc. 17 at 2.² The Court entered an order reopening the case (Doc. 18), and the UST reappointed Hardesty as the trustee. Doc. 20.

Hardesty filed a motion for turnover of the inheritance, and about a week later the UST filed a Complaint (Adv.Doc. 1) seeking revocation of the Debtors' discharge under 11 U.S.C. § 727(d)(2).³ The Debtors and Hardesty filed various papers in the bankruptcy case relating to the inheritance, leading to a Court-approved settlement under which the Debtors were required to deliver to Hardesty—and did deliver to him—nearly $120,000 of the approximately $138,000 inheritance, with Hardesty agreeing to forbear from collecting the $18,000 the Debtors had already spent. Despite the settlement, the UST continued to seek the revocation of the Debtors' discharge, contending that they had knowingly and fraudulently failed to report the inheritance and deliver $18,000 of it to Hardesty. The transcript of the day-long trial on the Complaint is located at Adv. Doc. 24 (“Tr.”). During the trial, Exhibits 1 through 9 offered by the UST and the Debtors' Exhibits A through I were admitted into evidence without objection. The Court heard the testimony of the Debtors, Hardesty and Mills.⁴

IV. Findings of Fact

Based on the evidence presented at trial, including the documentary evidence and the testimony presented, and having considered the demeanor and credibility of the witnesses, the Court makes the findings of fact set forth below.

A. Events Leading to the Debtors' Bankruptcy

Before they were married in September 2002, each of the Debtors had separately incurred substantial student-loan debt. A few years after marrying, they consolidated the student loans that they had incurred at that time, making each of them jointly liable for the debt. Tr. at 221–22. Although they both were working as much as possible, the Debtors' financial situation was such that they had difficulty making payments on the debt—all the more so after they had one child and then another. But they did not ignore the debt, instead taking the steps necessary to place the student loans into deferment or forbearance status. Tr. at 222–23. Sometime after 2008, Mark incurred additional student-loan debt as his sole obligation. Tr. at 232–33.

The Debtors first considered filing a bankruptcy case about five years before the Petition Date. But they were aware that their student-loan debt would be non-dischargeable in bankruptcy, Tr. at 222, and believed that it was not “right for [them] to go and have [their other debts] written off[,]” so they attempted to address their financial difficulties outside of bankruptcy. Tr. at 225. For example, in order to pay down their obligations, the Debtors withdrew more than $60,000 from their retirement accounts in 2011 and withdrew about $10,000 more from those accounts in order to pay debt in 2012 and early 2013. Tr. at 223–25; UST Ex. 1, Statement of Financial Affairs, Question 2. They drove vehicles that were 12 and 18 years old as of the Petition Date, lived in a house for which the mortgage payment was just slightly more than $1,000 and both worked, together earning approximately $4,800 in gross income per month. UST Ex. 1, Schedules B, I and J.

B. The Commencement of the Debtors' Bankruptcy Case

On the Petition Date, the Debtors filed their schedules of assets and liabilities and Statement of Financial Affairs as required by § 521(a)(1)(B) of the Bankruptcy Code and Rule 1007(b)(1) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rule(s)”). Despite the efforts undertaken by the Debtors to address their financial difficulties, on the Petition Date the Debtors still had $199,467.89 of unsecured, nonpriority debt, including more than $155,000 in student-loan debt.⁵ UST Ex. 1, Schedule F—Creditors Holding Unsecured Non priority Claims. The Debtors identified on Schedule F which of their debts, including their student-loan debts, were joint debts and which were the sole obligations of either Mark or Jennifer.

C. Events Occurring After the Petition Date But Before the Death of Mark's Father

After the Debtors commenced their bankruptcy case, the UST convened a meeting of their creditors under § 341 of the bankruptcy Code. During that meeting, Hardesty provided the Debtors with a one-page document entitled “Post 341 Responsibilities” (the “Trustee Handout”) (UST Ex. 7). Among other things, the Trustee Handout advised the Debtors that they “must notify [Hardesty] immediately if, within 180 days after the [Petition Date], [they] become entitled to receive any money or property ... [b]y ... inheritance [,]” clarifying that “the decedent's date of death is the date [they] become entitled to receive money or property from an estate[.]” The Debtors stipulated that they received and reviewed the Trustee Handout. Tr. at 111. In addition, around the time of the Petition Date, someone at Mills's law office gave Jennifer a “Bankruptcy Information Packet” informing the Debtors that “if [they] receive, or become entitled to receive, an inheritance ... while [their] case is pending or within six months of [their] Petition being filed, [they] must turn it over to the trustee.” UST Ex. 6; Tr. at 43–45. Jennifer testified that she read this information, but did not know whether Mark had reviewed it. Tr. at 228–29, 233–35. Mark did not remember having read the Bankruptcy Information Packet. Tr. at 156, 183. In any event, at the time they received these documents the Debtors had no expectation that either of them would soon be receiving an inheritance. Tr. at 229.

The Trustee Handout informed the Debtors that their reporting “obligations [would continue to] exist, whether or not this case has been closed or [Hardesty] has filed a no-asset report,” which is the document that Chapter 7 trustees file when debtors have insufficient non-exempt assets to fund distributions to unsecured creditors. The Debtors indeed had the responsibility to file a supplemental schedule reporting any inheritance covered by § 541(a)(5)(A) within 14 days after learning of it, a responsibility that continued even after Hardesty filed a no-asset report in the Debtors' case, even after they...