United States Trustee v. Thein

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 06-41474 TT
Chapter 7
RACHEL THEIN,
Debtor.
___________________________/
SARA L. KISTLER, ACTING 	A.P. No. 07-4166 AT
UNITED STATES TRUSTEE,
Plaintiff,
vs.
RACHEL THEIN,
Defendant.
___________________________/
MEMORANDUM OF DECISION AFTER TRIAL
In the above-captioned adversary proceeding, the United States
Trustee (the “UST”) seeks denial of the chapter 7 discharge of Rachel
Thein (the “Debtor”) pursuant to 11 U.S.C. § 727(a). 	The proceeding
was tried to the Court on October 14 and 30, 2008. 	At the conclusion
of 	the 	trial, 	the 	Court 	took 	the 	matter 	under 	submission. 	Having
considered 	the 	evidence 	presented 	and 	the 	argument 	of 	the 	parties,
Signed: November 20, 2008
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 21, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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the Court now concludes that the Debtor’s discharge should be denied.
The reasons for the Court’s decision are set forth below.
SUMMARY OF FACTS
The 	Debtor 	is 	the 	Chief 	Financial 	Officer 	and 	fifty 	percent
owner 	of 	Bay 	Construction 	Company 	(“BayCon”), 	a 	closely 	held
construction corporation located in the San Francisco Bay Area. 	The
other fifty percent owner-–Daryl Simmons--serves as President. 	Prior
to 	2003, 	the 	Debtor 	and 	her 	husband 	owned 	a 	home 	in 	Pleasanton,
California 	(the 	“Pleasanton 	Home”) 	and 	also 	a 	home 	in 	Montana 	(the
“Old Montana Home”). 	In or about 2003, the Debtor’s husband retired
and moved to Montana. 	The Debtor continued to reside and work in the
Northern California, renting a room in a relative’s house located in
Hayward. 	She 	visited 	her 	husband 	in 	Montana 	as 	frequently 	as 	she
could.
Shortly before her husband moved to Montana, the Debtor and her
husband sold the Pleasanton Home, netting approximately $782,000 from
the sale. 	Using some of these proceeds, the Debtor and her husband
purchased unimproved real property in Montana. 	They entered into a
contract 	with 	Blueridge 	Homes, 	Inc. 	(“Blueridge”) 	for 	the
construction 	of 	a 	new 	home 	on 	the 	real 	property 	(the 	“Grey 	Wolf
Property”). 	In 	2004, 	they 	sold 	the 	Old 	Montana 	Home, 	netting
approximately $80,000 from the sale.
Disputes with Blueridge arose during construction which led to
litigation and ultimately to a jury trial. 	The jury found in favor
of 	Blueridge. 	Judgment 	was 	entered 	against 	the 	Debtor 	and 	her
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1Judgment was entered against both the Debtor and her husband
for $146,800 in compensatory damages plus attorneys’ fees in an
amount that had not been determined at the time the Debtor’s
bankruptcy petition was filed. 	Judgment on a defamation claim was
entered solely against the Debtor’s husband for $458,700, including
$41,700 in punitive damages.
2The Debtor’s husband did not join in the petition.
3Schedule B22C, setting forth the Debtor’s current monthly
income and expenses (as defined by the 2005 amendments to the
Bankruptcy Code) stated that the Debtor’s gross monthly income was
$6,910. 	Since this put the Debtor’s income over the applicable
median income, she completed the form, listing her expenses as
approved by the Internal Revenue Service (“IRS”) guidelines. 	The
resulting disposable income figure was a negative.
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husband on or about August 11, 2006. 1 	On August 25, 2006, the Debtor
filed 	a 	voluntary 	petition 	seeking 	relief 	under 	chapter 	13 	of 	the
Bankruptcy 	Code. 2 	In 	2006, 	the 	Debtor’s 	husband 	moved 	back 	to
Northern California.
On 	October 	10, 	2006, 	the 	Debtor 	filed 	her 	Schedules 	of 	Assets
and 	Liabilities 	(the 	“Schedules”), 	Statement 	of 	Financial 	Affairs
(the “SOFA”), and Chapter 13 plan (the “Plan”). The Schedules valued
the Grey Wolf Property at $699,000. 	The Plan stated that the Debtor
would 	pay 	the 	chapter 	13 	trustee 	$296 	per 	month 	and 	that 	she 	would
sell 	the 	Grey 	Wolf 	Property 	within 	six 	months 	from 	confirmation 	or
the 	case 	would 	be 	dismissed. 3 	The 	Plan 	estimated 	that 	unsecured
creditors would receive approximately 87 percent of their claims.
An objection to confirmation of the Plan was filed by Blueridge
on 	November 	7, 	2008. 	In 	its 	objection, 	Blueridge 	contended, 	among
other 	things, 	that: 	(1) 	the 	Debtor’s 	debts 	exceeded 	the 	chapter 	13
debt 	limits 	and 	(2) 	the 	Debtor 	had 	undervalued 	the 	Grey 	Wolf
Property. 	Blueridge 	contended 	that, 	in 	its 	opinion, 	the 	Grey 	Wolf
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4Blueridge also objected to the Debtor’s claim of a homestead
exemption in the Grey Wolf Property. 	On January 15, 2007, shortly
before the confirmation hearing, the Debtor filed a declaration
stating under penalty of perjury that until 2006 she had lived in
Montana. 	Based on the evidence presented at trial, this statement
was clearly false.
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Property was worth $1.5 million. 4 	On November 28, 2006, an objection
to 	confirmation 	was 	filed 	by 	Garth 	and 	Carolyn 	Sime 	(the 	“Simes”),
who had sold the Grey Wolf Property to the Debtor and her husband and
held a security interest in the property to secure the balance of the
purchase 	price. 	In 	their 	objection, 	the 	Simes 	also 	contended 	that
the Grey Wolf Property had been undervalued in the Schedules. 	They
noted that on November 6, 2006, the Debtor had listed the Grey Wolf
Property for sale for $1.2 million.
A confirmation hearing was conducted on January 19, 2007. 	Given
the 	unresolved 	disputes, 	the 	Plan 	could 	not 	be 	confirmed 	at 	that
time, 	and 	the 	hearing 	was 	continued 	to 	February 	16, 	2007. 	On
February 	7, 	2007, 	Blueridge 	withdrew 	its 	objection. 	An 	order 	was
entered on February 21, 2007 confirming the Plan.
In April 2007, the Debtor filed a motion to sell the Grey Wolf
Property 	free 	and 	clear 	of 	liens. 	The 	motion 	stated 	that 	the 	sale
price 	was 	insufficient 	to 	pay 	all 	the 	liens 	against 	the 	Grey 	Wolf
Property. 	The 	motion 	stated 	that 	the 	Debtor 	had 	entered 	into 	a
contract with Barbara Campbell for the sale of the Grey Wolf Property
for 	$1.2 	million. 	It 	proposed 	to 	pay 	closing 	costs 	and 	commission
and the undisputed liens but for Blueridge’s judgment lien, which it
characterized as disputed, to attach to the sale proceeds. 	A hearing
on 	the 	motion 	was 	conducted 	on 	April 	25, 	2007. 	Blueridge 	filed 	an
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opposition to the motion. 	On April 24, 2007, the Debtor withdrew the
motion 	and 	moved 	to 	convert 	her 	case 	to 	chapter 	7. 	The 	case 	was
converted the following day.
On July 16, 2007, the UST filed a motion to extend the deadline
for filing objections to October 16, 2007. 	This adversary proceeding
was filed within the extended deadline.
DISCUSSION
In the complaint, the UST seeks denial of the Debtor’s discharge
based on three separate subsections of 11 U.S.C. § 727(a): i.e., 11
U.S.C. 	§ 	727(a)(3)(failure 	to 	keep 	or 	preserve 	adequate 	books 	and
records), 11 U.S.C. § 727(a)(4)(false oath or account), and 11 U.S.C.
§ 727(a)(5)(failure to satisfactorily explain loss or deficiency of
assets). 	The 	UST 	has 	the 	burden 	of 	proof 	on 	all 	three 	claims. 	It
must 	prove 	every 	element 	of 	its 	claim 	by 	a 	preponderance 	of 	the
evidence. 	In 	re 	Scott, 	172 	F.3d 	959, 	966 	(7 th 	Cir. 	1999); 	In 	re
Khalil, 379 B.R. 163, 172 (Bankr. 9 th Cir. 2007). 	The claim based on
11 U.S.C § 727(a)(4) will be discussed first.
A. 	FALSE OATH OR ACCOUNT
Section 727(a)(4) of the Bankruptcy Code provides, in pertinent
part, 	that 	the 	Court 	shall 	grant 	an 	individual 	debtor 	a 	discharge
unless:
(4) the debtor knowingly and fraudulently, in or
in connection with the case–
(A) made a false oath or account...[.]
The 	UST’s 	claim 	under 	11 	U.S.C. 	§ 	727(a)(4) 	was 	based 	primarily 	on
the Debtor’s alleged undervaluation of the Grey Wolf Property.
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It is undisputed that, on or about August 12, 2006, the Debtor
obtained 	Comparative 	Market 	Analysis 	of 	the 	Grey 	Wolf 	Property,
valuing the Grey Wolf Property at $1,050,0000. 	Nevertheless, in the
Schedules, which were filed on October 10, 2006 and were signed under
penalty 	of 	perjury, 	she 	valued 	the 	Grey 	Wolf 	Property 	at 	$699,000.
Then, in November 2006, the Debtor listed the Grey Wolf Property for
sale at $1,200,000. 	In or about April 2007, she received an offer to
purchase 	the 	Grey 	Wolf 	Property 	for 	this 	amount. 	The 	UST 	contends
that the Debtor knowingly and fraudulently undervalued the Grey Wolf
Property in the Schedules.
At 	trial, 	the 	Debtor 	attempted 	to 	explain 	the 	discrepancy
between 	the 	Comparative 	Market 	Analysis 	obtained 	prior 	to 	the
bankruptcy 	filing 	and 	the 	value 	that 	she 	placed 	on 	the 	Grey 	Wolf
Property in the Schedules. 	She introduced into evidence two forms of
a letter to her from Chase Natalie (“Natalie”), the real estate agent
who performed the Comparative Market Analysis, each dated August 27,
2006.
In 	the 	first 	version 	of 	the 	letter, 	Natalie 	stated 	that 	the
$1,050,000 valuation did not take into account various deficiencies
in the construction or, as “described to him” that the construction
was 20 percent incomplete. 	The second version of the letter stated
that the deficiencies would reduce the value by at about $221,000 and
the portion of the construction that was incomplete by about $95,000.
The letter concludes with the statement that, based on these factors,
the Grey Wolf Property would not sell for over $734,000 and that he
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would 	be 	willing 	to 	list 	it 	for 	$699,900. 	The 	Debtor 	offered 	only
the second version of the letter into evidence.
For 	several 	reasons, 	notwithstanding 	this 	evidence, 	the 	Court
was 	persuaded 	that 	the 	Debtor’s 	low 	valuation 	of 	the 	Grey 	Wolf
Property 	in 	the 	Schedules 	was 	knowing 	and 	fraudulent. 	First, 	no
evidence 	was 	presented 	that 	Natalie 	had 	inspected 	the 	Grey 	Wolf
Property, 	either 	in 	performing 	the 	Comparative 	Market 	Analysis 	or
writing 	the 	two 	August 	27, 	2006 	letters. 	Most 	likely, 	the 	Debtor
requested 	the 	valuation 	on 	a 	“what 	if” 	basis. 	No 	evidence 	was
presented 	at 	trial 	that 	there 	were 	any 	deficiencies 	in 	the
construction 	or 	that 	the 	construction 	was 	incomplete. 	To 	the
contrary, the Montana litigation, which presumably raised contentions
concerning 	the 	workmanship 	of 	the 	construction, 	was 	concluded 	in
favor of Blueridge.
Second, 	if 	Natalie’s 	opinion 	was 	that, 	even 	with 	these
deficiencies, 	the 	Grey 	Wolf 	Property 	might 	sell 	for 	as 	much 	as
$734,000, 	it 	would 	make 	no 	sense 	to 	list 	it 	for 	sale 	for 	$699,000.
Normally, 	a 	listing 	price 	is 	higher 	than 	the 	intended 	sale 	price.
Natalie’s statement that he would be willing to list it for less than
the 	probable 	sale 	price 	suggests 	strongly 	that 	the 	Debtor 	asked
Natalie for a letter that would support her desired valuation of the
Grey 	Wolf 	Property 	but 	that 	Natalie 	could 	not, 	in 	good 	faith, 	even
assuming 	the 	described 	deficiencies 	existed, 	value 	it 	for 	as 	low 	a
figure as $699,000.
Finally, and most compelling, shortly after filing the Debtor’s
Schedules, 	valuing 	the 	Grey 	Wolf 	Property 	at 	$699,000 	and
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notwithstanding 	Natalie’s 	agreement 	to 	list 	the 	Grey 	Wolf 	Property
for 	that 	amount, 	the 	Debtor 	listed 	the 	Grey 	Wolf 	Property 	for 	sale
for 	$1,200,000. 	Moreover, 	as 	noted 	above, 	in 	or 	about 	April 	2007,
she 	received 	an 	offer 	to 	purchase 	the 	Grey 	Wolf 	Property 	for 	that
amount. 	Although 	the 	sale 	did 	not 	close, 	its 	failure 	to 	close
appears to have been due to the fact that the liens exceeded the sale
price, not that the buyer concluded that the Grey Wolf Property was
worth less than the proposed purchase price.
Based on the foregoing, the Court finds and concludes that the
Debtor’s 	valuation 	of 	the 	Grey 	Wolf 	Property 	in 	Schedule 	A 	of 	the
Debtor’s 	Schedules 	constituted 	a 	knowing 	and 	fraudulent 	false 	oath
within the meaning of 11 U.S.C. § 727(a)(4), warranting denial of her
discharge. 	The Court bases this conclusion both on the circumstances
recited 	above 	and 	the 	Debtor’s 	demeanor 	as 	a 	witness. 	The 	Court
found the Debtor’s testimony in general to be lacking in credibility.
There were other instances of false oaths. 	The Debtor listed a
promissory 	note 	(the 	“Note”) 	as 	a 	personal 	property 	asset, 	without
identifying 	the 	obligor 	and 	valuing 	the 	note 	at 	zero. 	At 	trial,
evidence 	was 	presented, 	which 	the 	Debtor 	did 	not 	dispute, 	that 	the
obligor 	on 	the 	Note 	was 	BayCon, 	the 	Debtor’s 	employer, 	that 	the
Debtor received regular interest payments on the Note, and that the
Debtor had received a total of $15,000 in principal payments in 2004
and 2005. 	The Court is persuaded that the Debtor’s failure to list
the 	obligor 	of 	the 	Note 	and 	her 	valuation 	of 	the 	Note 	at 	zero 	was
knowing and fraudulent, also warranting denial of her discharge under
11 U.S.C. § 727(a)(4).
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Finally, 	the 	Debtor 	also 	omitted 	from 	Schedule 	B 	of 	the
Schedules, requiring all personal property assets to be listed, her
50 	percent 	interest 	in 	BayCon. 	She 	provided 	no 	meaningful
explanation 	for 	her 	failure 	to 	list 	this 	asset. 	Self-serving
evidence was presented by the Debtor and Simmons that BayCon was not
operating 	at 	a 	profit 	and, 	having 	few 	assets, 	had 	no 	liquidation
value.
To the contrary, Crom testified that BayCon was solvent in 2006,
was 	doing 	a 	substantial 	business, 	and 	had 	been 	paying 	the 	two
officers 	substantial 	salaries. 	The 	Court 	found 	this 	evidence 	more
persuasive 	than 	the 	evidence 	presented 	by 	the 	Debtor. 	Moreover,
whether 	or 	not 	the 	interest 	in 	BayCon 	had 	a 	ready 	market 	value, 	it
was clearly a substantial asset which should have been listed. 	Based
on its observation of the Debtor’s financial sophistication, based on
her position at BayCon and her demeanor at trial, the Court finds and
concludes that her omission of this asset was knowing and fraudulent,
also 	warranting 	a 	denial 	of 	her 	discharge 	under 	11 	U.S.C. 	§
727(a)(4).
B. 	FAILURE TO SATISFACTORILY EXPLAIN LOSS OF ASSETS
Section 727(a)(5) of the Bankruptcy Code provides, in pertinent
part 	that 	the 	Court 	shall 	grant 	an 	individual 	debtor 	a 	discharge
unless:
(5) 	the 	debtor 	has 	failed 	to 	explain
satisfactorily, 	before 	determination 	of 	denial
of 	discharge 	under 	this 	paragraph, 	any 	loss 	of
assets 	or 	deficiency 	of 	assets 	to 	meet 	the
debtor’s liabilities...[.]
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5In Schedule I, the Debtor stated under penalty of perjury
that her gross salary was $1,500 per month. 	However, Crom stated
that, according to BayCon’s books and records, the Debtor had
received approximately $94,000 during the fiscal year ending June
2006: i.e., approximately $7,800 per month.
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It 	is 	undisputed 	that, 	in 	2003, 	the 	Debtor 	and 	her 	husband
netted approximately $782,000 from the sale of the Pleasanton Home in
2003 and in 2004, netted approximately $80,000 from the sale of the
Old Montana Home. 	It is also undisputed that the bulk of these funds
were used to purchase the Grey Wolf Property and to pay Blueridge for
construction 	costs. 	However, 	the 	UST 	contends 	that 	these 	do 	not
adequately explain the disposition of the sale proceeds. 	In support
of this claim, the UST called as an expert witness Jay Crom (“Crom”),
a certified public accountant. 	Crom testified that he had reviewed
a variety of third party documents relating to the Debtor’s finances:
e.g., bank statements, closing statements, tax returns, and BayCon’s
business 	records. 	He 	testified 	that 	approximately 	$150,000 	of 	the
real property sale proceeds was unaccounted for.
In 	defense 	of 	this 	claim, 	the 	Debtor 	offered 	into 	evidence 	a
summary 	of 	the 	amounts 	received 	from 	the 	sales 	and 	those 	expended
during the relevant period. 	According to the summary, the Debtor’s
costs, including the purchase of the Grey Wolf Property, exceeded the
sale proceeds from both properties by January 10, 2005. 	Ultimately,
according to the Debtor, the costs exceeded the funds received from
the sale of the Pleasanton Home and the Old Montana Home by $204,201.
However, as the UST pointed out, the Debtor’s summary did not include
the 	Debtor’s 	salary 	as 	CFO 	of 	BayCon 5 	nor 	her 	husband’s 	$4,000 	per
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month pension. 	In addition, the Debtor’s summary did not include the
proceeds 	from 	the 	sale 	of 	two 	vehicles: 	i.e., 	a 	2003 	Hummer 	and 	a
2003 Dodge truck.
Based on the foregoing, the Court finds and concludes that the
UST 	has 	carried 	its 	burden 	of 	proof 	on 	its 	claim 	under 	11 	U.S.C. 	§
727(a)(5) 	as 	well 	and 	that 	this 	subsection 	provides 	an 	adequate
alternative basis for denial of the Debtor’s discharge.
C. 	FAILURE TO KEEP OR PRESERVE ADEQUATE BOOKS AND RECORDS
Section 	727(a)(3) 	provides 	that 	the 	Court 	shall 	grant 	an
individual debtor a discharge unless:
(3) 	the 	debtor 	has 	concealed, 	destroyed,
mutilated, 	falsified, 	or 	failed 	to 	keep 	or
preserve 	any 	recorded 	information, 	including
books, 	documents, 	records, 	and 	papers, 	from
which 	the 	debtor’s 	financial 	condition 	or
business 	transactions 	might 	be 	ascertained,
unless such act or failure to act was justified
under all of the circumstances of the case...[.]
The plaintiff has the initial burden of proving that the debtor has
concealed, 	destroyed, 	mutilated, 	falsified, 	or 	failed 	to 	keep 	or
preserve 	books 	and 	records 	from 	which 	her 	financial 	condition 	or
business transactions might be ascertained. 	Once that burden is met,
the burden of proof shifts to the debtor to prove that her action or
failure 	to 	act 	was 	justified 	under 	all 	of 	the 	circumstances 	of 	the
case. 	In re Cox, 41 F.3d 1294, 1296-97 (9 th Cir. 1994).
At 	trial, 	the 	UST 	established 	that, 	in 	June 	2007, 	it 	had
obtained 	an 	order 	for 	a 	Rule 	2004 	examination 	of 	the 	Debtor,
requesting production of all documents relating to the Debtor’s bank
accounts for the three year period preceding the bankruptcy filing.
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The Debtor failed to produce bank statements or accounts for 2003 or
2004 showing deposits and disbursements of the proceeds from the sale
of the Pleasanton Home and the Old Montana Home.
The 	UST 	established 	further 	that, 	in 	connection 	with 	the 	Rule
2004 examination, it requested production of all documents relating
to transfers of real or personal property with a value in excess of
$500 	made 	by 	the 	Debtor 	or 	her 	spouse 	within 	the 	five 	year 	period
preceding 	the 	bankruptcy 	filing. 	It 	established 	that 	the 	Debtor
failed 	to 	produce 	any 	documents 	relating 	to 	the 	sale 	of 	the
Pleasanton Home, the Old Montana Home, or the New Montana Home.
Finally, 	the 	UST 	established 	that 	it 	had 	requested 	production 	of
all financial documents relating to BayCon and that the Debtor failed
to 	produce 	any 	such 	documents. 	From 	the 	foregoing, 	the 	Court
concludes 	that 	the 	UST 	met 	its 	initial 	burden 	of 	proving 	that 	the
Debtor failed to maintain or preserve adequate books and records from
which 	her 	financial 	condition 	and 	business 	transactions 	could 	be
ascertained.
The 	Debtor’s 	evidence 	that 	her 	failure 	to 	preserve 	books 	and
records 	was 	justified 	was 	unpersuasive. 	With 	respect 	to 	the 	bank
statements, 	she 	testified 	that, 	while 	her 	husband 	was 	living 	in
Montana, she picked up her mail infrequently at a post office box and
placed all financial documents in a mailing packet and mailed them to
her husband without looking at them. 	She explained that, since she
was 	living 	in 	a 	rented 	room, 	she 	had 	no 	space 	to 	store 	them. 	She
testified that her husband, who had since moved back to California,
was unable to locate the records. 	However, in her deposition, taken
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in 	preparation 	for 	trial, 	the 	Debtor 	testified 	that 	she 	routinely
shredded all of her bank statements after receiving them.
The Court did not believe either explanation. 	It found much of
the Debtor’s testimony lacking in credibility, both in substance and
based on her demeanor on the stand. 	Thus, the Court concludes that
the Debtor has failed to carry her burden of proof on this issue and
that her discharge should be denied pursuant to 11 U.S.C. § 727(a)(3)
as well.
CONCLUSION
For 	the 	reasons 	stated 	above, 	the 	Court 	finds 	in 	favor 	of 	the
UST 	on 	all 	three 	claims 	for 	denial 	of 	the 	Debtor’s 	discharge.
Counsel for the UST is directed to submit a proposed form of judgment
in accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Margaret H. McGee
Office of the U.S. Trustee
1301 Clay St. #690N
Oakland, CA 94612-5217
Marc Voisenat
Law Offices of Marc Voisenat
1330 Broadway #1035
Oakland, CA 94612
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