§ 727(a)(2)(A) - What constitutes concealment

In re Swegan, --- B.R. ----, 2008 WL 761081 (B.A.P. 6th Cir. 2008). Prior to the debtor’s bankruptcy filing, the creditor had begun state court proceedings to collect on a judgment obtained against the debtor. The creditor obtained an order for the debtor to appear for a debtor’s examination, requiring the debtor to testify regarding his property but not ordering him to testify regarding income or to produce any documents. An informal request was made of the debtor, however, to produce a number of documents at the examination.

During the examination, the creditor’s counsel asked the debtor whether he had received proceeds of a life insurance policy as a result of his late wife’s death. He also was asked whether he had any policies insuring his own life. The debtor answered “no” to both questions. By instruction of his lawyer, the debtor did not respond to a number of questions regarding his income and employment.

When the debtor subsequently filed bankruptcy, his schedules listed a life insurance policy valued at $58,900.00 and an annuity death benefit. The creditor filed a complaint to deny the debtor’s discharge pursuant to 11 U.S.C. § 727(a)(2)(A). The creditor alleged that the debtor had concealed property with the intent to hinder, delay, or defraud because at the debtor’s examination, the debtor had denied receiving the proceeds of his wife’s life insurance policy and of having a policy on his own life.

The B.A.P. applied the test set forth in Kaler v. Craig (In re Craig), 195 B.R. 443, 449 (D.N.D. 1996) to determine whether the debtor’s actions required the denial of the debtor’s discharge under § 727(a)(2)(A). The Craig test requires that: (1) the debtor conceal assets within one year of the petition date; (2) the act of concealment be performed by the debtor; (3) the act consist of a transfer, removal, destruction, or concealment of the debtor’s property; and (4) the act be done with the intent to hinder, delay and/or defraud either a creditor or officer of the debtor’s estate. The B.A.P. stated that the third element, which turns on the meaning of concealment, was the matter at issue. The term “concealment” is not defined in the Bankruptcy Code, and it has not been defined by the 6th Circuit Court of Appeals. The B.A.P. concluded that concealment, as used in § 727(a)(2)(A), includes the withholding of knowledge of an asset by the failure or refusal to divulge information required by law to be made known. Applying this standard, the Court found that the debtor was required by law to answer correctly any questions he had answered when he was under oath at the state court debtor’s examination. His false answers to the questions of whether he had received any life insurance proceeds as a result of his wife’s death and whether he had any policies insuring his own life constituted concealment under § 727(a)(2)(A).

As to whether the debtor’s actions constituted concealment, the B.A.P. found that a genuine issue of material fact existed as to whether the debtor had the requisite intent to hinder, delay, or defraud, therefore, the B.A.P. reversed the lower court’s order granting the debtor’s motion for summary judgment and remanded the case for a trial on the issue of intent.

§ 707(b)(2) - Deduction of Mortgage Obligation from Means Test Calculation

In re Ballard, Case No. 07-61486 (Bankr. N.D. Ohio March 25, 2008) (J. Kendig). The United States Trustee filed a Motion to Dismiss the Debtors’ bankruptcy case pursuant to 11 U.S.C. § 707(b). The issue presented arose under § 707(b)(2) and concerned the Debtors’ mortgage obligation. Prior to the Debtors’ bankruptcy filing, their residential real property had gone into foreclosure and a judgment of foreclosure was issued by the state court. Thus, the issue presented was whether the Debtors could take a deduction for the mortgage expense from their means test in light of the foreclosure judgment. Through the following analysis, the Court concluded that they could not.

When the Debtors filed their bankruptcy petition, they deducted a mortgage expense of $1,083 on line 42a. of Official Form B22A. Since the mortgage was in default, the Debtors also claimed a $133.33 deduction as a cure amount on line 43a. of Form B22A. Although they were no longer residing at the real property, they did not take a deduction for the rental amount of their new residence.

Picking up on the UST’s argument that the foreclosure judgment merged the Debtors’ obligation on the underlying promissory note into the judgment and that there no longer existed a contractual amount due under the note, the Court discussed the doctrine of merger and its applicability. In section 42 of Form B22A, a debtor may take an expense deduction for “[f]uture payments and secured claims.” The average monthly payment is then scheduled in the means test. The term “average monthly payment” is a defined term under § 707(b)(2)(A)(iii)(I), and the definition references amounts “contractually due.” Thus, the UST contended that since the contract merged into the judgment, there were no longer amounts contractually due.

In general, the doctrine of merger provides that when a valid and final personal judgment is rendered in favor of a plaintiff, plaintiff then cannot maintain a subsequent action on any part of the original claim. Thus, the original claim merges into the final judgment. The effect of the merger is that the old debt ceases to exist, and the new judgment debt takes its place. Therefore, at the time of the Debtors’ bankruptcy filing, their liability to the mortgage company was not based upon the contract but upon the judgment. The contract ceased to exist upon the entry of the judgment. Thus, the Debtors were liable on the judgment and their liability remained secured by the real estate, however, since their liability was no longer contractual, the debt could not be “scheduled as contractually due” pursuant to § 707(b)(2)(A)(iii)(I) and was not an acceptable expense in section 42 of Form B22A.

COMMENT: Although the Court’s application of the doctrine of merger is a creative and seemingly logical way to resolve the issue of whether debtors who have indicated that they are surrendering their residence in their bankruptcy proceeding after a judgment has been issued in a foreclosure action concerning that property may be able to deduct their mortgage expense on line 42a. of Official Form B22A, this commentator disagrees with the Court's conclusion in this case.

The Court did not consider the effect of the language in § 707(b)(2)(A)(iii)(II), which provides that a debtor's average monthly secured payments may include "any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's primary residence . . . ." Section 1322 allows a debtor to cure a default on his or her residence and to continue to make monthly mortgage payments along with an additional amount necessary to pay off the mortgage arrearage within a reasonable time. The amount necessary to cure the default is determined in accordance with the underlying agreement and state law. Even if § 1322 does not somehow revive a contract that was destroyed by the doctrine of merger, it certainly creates additional payments to be made to secured creditors that will allow the debtor to maintain his or her residence. The plain language of § 707(b) dictates that mortgage payments, whether obligated by contract or judgment, are to be included in the 707(b) calculation.

Aaron Ridenbaugh