Houghton v. Marcella et al

1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
WESTERN DIVISION
________________________________
)
In re: 	)
)
FRANCIS A. MARCELLA, II, 	)
& JANICE F. MARCELLA, 	) 	Chapter 7
) 	Case No. 05-50261-HJB
Debtors. 	)
)
________________________________)
________________________________
)
JACK E. HOUGHTON, JR., 	)
CHAPTER 7 TRUSTEE, 	)
)
Plaintiff, 	)
)
v. 	)
) 	Adversary Proceeding
) 	No. 07-04158-HJB
FRANCIS A. MARCELLA, II, 	)
& JANICE F. MARCELLA, 	)
)
Defendants. 	)
________________________________)
MEMORANDUM OF DECISION
Before the Court is a complaint (the “Complaint”) filed by Chapter 7 trustee Jack E.
Houghton, Jr. (the “Trustee”) against Francis A. Marcella, II (“Francis”) and Janice F.
Marcella (“Janice”) (together, the “Debtors”), by which the Trustee asks the Court to order
the Debtors to turn over property of their bankruptcy estate and to revoke the Debtors’
discharge. This is one of those hard cases where an appropriate result can not be derived
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2
from a robotic examination of the facts and application of the law without administering a
fair dose of equity. 	The Court has considered carefully the Debtors’ testimony, the
admitted exhibits, and applicable law in determining whether the Debtors’ admitted failures
to report and turn over estate property to the Trustee were knowing and fraudulent or
whether the Debtors were simply victims of sub-par and misguided legal advice. Employing
the discretion which is the fundamental inventory of all courts, this Court makes the
following findings of fact and conclusions of law, pursuant to Federal Rule of Bankruptcy
Procedure 7052.
I. 	FACTS AND TRAVEL OF THE CASE
On February 2, 2009, the Court held a trial on the Trustee’s Complaint. 	Two
witnesses – the Debtors – testified, and fifteen exhibits were admitted. 	Both Debtors
testified credibly, with some exceptions. Francis Marcella, aged sixty-one at the time of
trial, noticeably struggled with clarity of recollection. The Court concludes, however, that
his difficulties stemmed not from evasive or misleading motives, but from a prolonged
illness, accompanied by a series of small strokes, that have left him with a poor memory
of specifics. 	He was able to recall events, but had difficulty placing them in a coherent
timeline. He candidly admitted that his memory was at times vague and unreliable and that
he depended almost exclusively on his wife, Janice, to maintain the household’s day-to-day
and long-term financial affairs. Janice was forthright in her testimony, and the Court found
that she, too, was credible; the few ambiguities and discrepancies in her testimony
appeared to result only from memory lapses caused by the passage of time.
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1 The Debtors had filed a previous bankruptcy case in the 1990's when their business failed
and the Debtors were left with a large deficiency after foreclosure of the business assets. Both
Debtors testified that the previous bankruptcy filing was largely uneventful, having closed fairly
quickly with no court appearances required.
2 The Debtors’ bankruptcy case was filed prior to the effective date of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, title III, § 302, 119 Stat. 23 (2005).
Accordingly, all references to the “Bankruptcy Code” or the “Code” are to the Bankruptcy Reform
Act of 1978, as amended prior to April 20, 2005, 11 U.S.C. §§ 101, et seq.
3
On October 15, 2005 (the “Petition Date”), the Debtors filed a voluntary bankruptcy
petition1 under Chapter 7 of the Bankruptcy Code, 2 a decision precipitated by extended
unemployment and serious illness. In 2003, Francis, a licensed electrician with thirty-five
years of work experience, found himself unemployed. Janice was also not working at the
time, having left her employment in early 2002. When unemployment assistance ran dry,
the Debtors turned to existing credit lines to make ends meet, expecting to pay off their
mounting debt upon Francis’s anticipated re-employment.
Francis regained employment in the latter half of 2004, but shortly after returning to
work, he became seriously ill with Legionnaires’ disease, lapsing into a coma and ultimately
unable to ever work again. 	Having had no income for nearly a year, and realizing that
Francis would not be returning to work, the Debtors necessarily began planning for a
financial future that did not rely on ever-increasing debt. In late 2004 or early 2005, Francis
applied for payments from his union pension benefits. At the time, the Debtors were told
that Francis would not receive any payments until he was officially deemed disabled by the
Social Security Administration – a process, they were informed, that could delay receipt of
benefits for a year or more.
In November 2004, Janice retained attorney Richard Mulhearn (“Attorney Mulhearn”)
to prosecute a wrongful termination claim against her former employer, TD Banknorth, NA
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3 This spelling is taken from the Trustee’s proposed findings of fact, as nowhere else is the
name identified. The Debtors refer only to Francis’s “sister” in their pleadings.
4 In fact, Francis testified that they had hoped to use some funds from the lump-sum pension
payment if they received it. Trial Tr. 20.
4
(“Banknorth”). 	After many years of work as a bank teller and customer service
representative, Janice had not been promoted and believed the decision was fueled by
discriminatory 	motives. 	After 	her 	pro 	se 	complaint 	filed 	with 	the 	Massachusetts
Commission Against Discrimination was unsuccessful, she hired Attorney Mulhearn to bring
suit against Banknorth in the federal district court (the “Banknorth Claim”). According to
Janice, however, Attorney Mulhearn informed her that the risk of loss was very high, and
as a result, she had no expectation of receiving compensation on her claim in the short-
term, if ever at all.
In January 2005, Janice met with attorney Anthony Doyle (“Attorney Doyle”) to
discuss the possibility of filing a bankruptcy case. 	For reasons not explained, no
bankruptcy case was then filed, and the Debtors continued to struggle financially. 	In
August 2005, Francis’s sister, Maureen Chadbourne (“Chadbourne”), 3 loaned the Debtors
$10,000 to ease their financial burden. Despite still contemplating a bankruptcy case filing,
the Debtors pledged to repay the loan. 4
Sometime before the fall of 2005, the plan to file a bankruptcy case was revived.
Using information provided to him by the Debtors, Attorney Doyle prepared their bankruptcy
petition, schedules, statements, and other 	documents necessary for a Chapter 7
bankruptcy filing (the “Schedules and Statements”). 	In early October, Janice went to
Attorney Doyle’s office to retrieve the documents for review. Francis had been physically
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5 The Debtors’ signatures on the bankruptcy petition, statements, and schedules are
“unsworn declarations made under penalty of perjury and are, according to federal law, the
equivalent of a verification under oath.” JP Morgan Chase Bank v. Koss (In re Koss), 403 B.R. 191,
212 (Bankr. D. Mass. 2009) (quoting Poliquin v. Cox (In re Cox), No. 05-15357, 2009 WL 57523,
at *2 (Bankr. D.N.H. Jan. 6, 2009); In re Grondin, 232 B.R. 274, 276 (1st Cir. BAP 1999)).
6 The amount of the Pension Award was high because it represented payments for the
preceding months while Francis awaited official disability status from the Social Security
Administration.
7 According to Janice, she withdrew the money to make the payment because she did not
think the repair person would accept a personal check from the Debtors. Ultimately, the repairs
cost the Debtors $3,500, which they were able to pay by check. In November, Janice re-deposited
$3,500 into the Checking Account to cover the cost of the repairs and spent the remaining $1,500.
5
unable to meet in Attorney Doyle’s office in person, so Janice took the papers home for
them to review, sign, and return to Attorney Doyle. Both Francis and Janice signed the
Schedules and Statements on October 5, 2005.5
Francis testified that he read the documents, and would have asked questions about
anything he did not understand. Trial Tr. 33. Janice conceded that she did not read the
Schedules and Statements “word for word,” but did review “all the dollar amounts.” She
felt she understood everything she read and did not recall asking Attorney Doyle any
questions about the documents. Trial Tr. 107.
Meanwhile, and unbeknownst to the Debtors, the long-awaited pension award was
finalized (the “Pension Award”). 	On October 3, – two days before they signed the
bankruptcy Schedules and Statements – $8,037.46 was electronically deposited into the
Debtors’ checking account (the “Checking Account”). 6 They did not become aware of the
deposit until some days after. By October 14, however, they had learned of the Pension
Award, and on that date, Janice withdrew $5,000 from the Checking Account by cashier’s
check, intending to pay for long-needed furnace repairs.7
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8 Both Debtors testified credibly that they did not then know of, and never have ascertained
the reason for, the delay between the execution of the Schedules and Statements on the 5th and
the filing of the petition on the 15th. 	Copies of the Debtors’ voluntary petition, schedules, and
statements that Attorney Doyle provided to the Trustee in the course of discovery (admitted as
Plaintiff’s Exhibit 1) have the Debtors’ “real” (as opposed to electronic) signatures and are dated
October 5, 2005. On the docket in the Debtors’ bankruptcy case, however, the same documents
contain electronic signatures (i.e., the Debtors’ names are typed in the signature spaces and
preceded by “/s/”) and are dated October 15, 2005. At trial, Francis recalled signing documents at
home, but also vaguely remembered going to Attorney Doyle’s office at some point. He indicated
that this was “towards October.” 	Trial Tr. 31-33. 	But this recollection, like others at trial, was
ambiguous and difficult to credit as to timing. Janice did not testify to visiting Attorney Doyle’s office
with Francis in order to sign documents after the 5th. And neither the Trustee nor the Debtors’
current attorney questioned the Debtors regarding the discrepancy between the dates and types
of signatures.
9 Schedule A instructs debtors to “list all real property in which the debtor has any legal,
equitable, or future interest . . . .”
10 Schedule D discloses two mortgages on the Property: a first mortgage held by Chase
Home Finance in the amount of $114,834.40 and a second mortgage held by Bank of America in
the amount of $55,562.98.
11 Under the Bankruptcy Code in effect as of the Petition Date, the maximum joint exemption
the Debtor’s could claim in their residence was $36,900. See 11 U.S.C. § 522(b)(1); 11 U.S.C. §
6
Although the Debtors signed the Schedules and Statements on October 5th, their
case was not actually filed until October 15, 2005. 8 The balance in their Checking Account
on the Petition Date was $3,958.39. 	In addition, they held the $5,000 cashier’s check,
having not yet paid for the furnace repairs.
a. 	The Bankruptcy Schedules and Statements
On Schedule A-Real Property 9 (“Schedule A”), the Debtors disclosed joint ownership
of their residence in Dalton, Massachusetts (the “Property”), which they valued at
$200,000. Both Schedule A and Schedule D-Creditors Holding Secured Claims (“Schedule
D”) show secured claims against the Property totaling $170,397.38. 10 On Schedule C-
Property Claimed as Exempt (“Schedule C”), the debtors elected under 11 U.S.C.
§ 522(b)(1) to claim the remaining equity in the Property as exempt.11
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522(d)(1).
12 Schedule B instructs debtors to “list all personal property of the debtor of whatever kind.”
13 Arguably, the Debtors could, and should, have disclosed the lawsuit on Schedule B at
number 20: “other contingent and unliquidated claims of every nature . . . .” or number 33: “other
personal property of any kind not already listed.”
7
On Schedule B-Personal Property (“Schedule B”), 12 the Debtors disclosed their joint
ownership of the Checking Account at Greylock Federal Credit Union (“Greylock”),
indicating that the balance in the account was $200.00. Schedule B also indicated that the
Debtors had no cash on hand. 	On October 15, however, the actual Checking Account
balance was $3,958.39 and the Debtors still retained possession of the $5,000 cashier’s
check. 	The Trustee says the under-reporting of the balance in the Checking Account
resulted from the Debtors’ belief that $200 “was all that was allowed under the bankruptcy
law.” Pl.’s Req. Findings Fact & Concl. Law ¶ 44. Janice testified that she had, indeed,
discussed with Attorney Doyle the amount the Debtors would be “allowed” in their Checking
Account when they filed for bankruptcy relief. 	Janice stated that Attorney Doyle had
chosen the figure $200. She further testified that, unaware that the Pension Award had
been deposited, she did not dispute Attorney Doyle’s entry because she believed that $200
was a fair approximation of the Checking Account balance when the Schedules and
Statements were signed. 	Trial Tr. 112-13. Francis testified that he was not personally
aware of the account balance since he relied entirely on Janice to manage the account.
Trial Tr. 37.
Schedule B also disclosed various other assets, consisting mainly of two IRA’s, two
vehicles, and various household goods and items, all of which were claimed as fully exempt
on Schedule C. Schedule B did not disclose the pending Banknorth Claim. 13 In paragraph
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14 Paragraph 4 instructs debtors to “[l]ist all suits and administrative proceedings to which
the debtor is or was a party within one year immediately preceding the filing . . . .”
15 The admitted bank statements contain account information from August 31, 2005 through
December 31, 2005. There is no activity in the “Primary Share” account on any of the statements,
with the balance reported each month as $5.00.
8
4 of the Debtors’ Statement of Financial Affairs, 14 however, the Debtors did disclose the
lawsuit. 	There, they indicated that Janice had filed suit against Banknorth for wrongful
termination and that the case was still pending. Further, the case caption, case number,
and court where the case was pending were all disclosed. No exemption in any possible
recovery on the Banknorth Claim was taken on Schedule C.
Schedule B also did not disclose the Debtors’ interest in any bank accounts other
than the Checking Account. The Trustee says the Debtors’ Schedule B omitted additional
accounts they held at Greylock. In response to the Trustee’s examination at trial, Janice
testified that they probably did have other accounts at Greylock, but that two undisclosed
accounts existed only because of loans made by Greylock, which loans were disclosed on
the Schedules and Statements. 	According to Janice, “every time you did a loan or did
anything, they made you open an account, . . . . but they didn’t have anything in them. It’s
just they made you open one when you did a loan with them or anything. Anything you did
with them you had to open an account.” Trial Tr. 112. Her testimony is corroborated by
the bank account statements admitted as Plaintiff’s Exhibit 8. Those statements reference
the Checking Account and two installment loan accounts. Janice further testified that she
believed they also held a savings account at Greylock with a $5.00 balance. Trial Tr. 112.
Again, her testimony coincides with Exhibit 8, which identifies a “Primary Share” account
with a $5.00 balance. 15
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16 Janice did not testify as to whose idea it was to “report” the pension payment in this
manner. 	Francis, however, recalled contacting his union to find out what the monthly pension
stipend would be once received, because Janice needed the information to give to Attorney Doyle
to include in the Schedules and Statements. Trial Tr. 27, 75.
9
On Schedule F-Creditors Holding Unsecured Nonpriority Claims (“Schedule F”), the
Debtors listed $82,152.28 in unsecured debts. Most of the debts are identified as credit
card or store credit debts. The $10,000 unsecured loan from Chadbourne, however, was
not listed. Both Francis and Janice testified that Attorney Doyle was told about the loan,
Trial Tr. 34, 108, and Janice said that she had noticed that it was not included on the
Schedules and Statements. 	She assumed that the loan was omitted because it was a
personal loan from a family member, but did not question Attorney Doyle about the
omission and never precisely understood why it was omitted. Trial Tr. 109.
On Schedule I-Current Income of Individual Debtors (“Schedule I”), the Debtors
reported a total monthly income of $2,853, consisting of a $1,702 monthly social security
payment to Francis, an $826 pension payment to Francis, and Janice’s $325 monthly
income for housekeeping services. According to Janice, the monthly pension income was
included on Schedule I as the anticipated amount for the pension payment. 	Instead of
reporting the possible receipt of the Pension Award on Schedule B, Janice testified that it
was included “as part of our income.” Trial Tr. 116.16
The final identified error is in the Debtors’ Statement of Financial Affairs. Paragraph
11 instructs debtors to “[l]ist all financial accounts and instruments held in the name of the
debtor or for the benefit of the debtor which were closed, sold, or otherwise transferred
within one year immediately preceding the commencement of this case. Include checking,
savings, or other financial accounts . . . .” 	Listed there is “Legacy Banks, checking, fall
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17 Neither the recording nor the transcript from the 341 Meeting were offered or admitted into
evidence. Nor did the Trustee testfy.
10
2004.” But the Debtors did not have an account at Legacy Banks (“Legacy”) prior to filing
for bankruptcy. They did, however, have an account at Banknorth that was closed in late
2004 or early 2005. 	The Debtors could not explain why the closed account was
misidentified as a Legacy Banks, as opposed to Banknorth, account.
b. 	Postpetition Events
The meeting of creditors required by § 341 of the Bankruptcy Code was held on
December 2, 2005 (the “341 Meeting”). At the 341 Meeting, the Trustee questioned the
Debtors regarding the Banknorth Claim. According to the Trustee, he told Janice that “she
should not proceed with her discrimination claim without the express permission of the
Bankruptcy Court and/or the Chapter 7 Trustee.” Pl.’s Req. Findings of Fact & Concl. of
Law ¶ 37. The Debtors testified differently. According to both, the Trustee told them that
Janice should inform the Trustee if the case were to settle and that if the amount of
settlement were not significant, they would not need to worry about it. 17 The Trustee does
not dispute the Debtors’ further assertion that, after the 341 Meeting, Attorney Doyle told
Janice that all she needed to do was to provide the Trustee with Attorney Mulhearn’s name
and contact information (which she did) and call Attorney Mulhearn to tell him about the
bankruptcy case and provide him with the Trustee’s information (which she also did). Trial
Tr. 123, 125, 141-42. Neither Attorney Mulhearn nor the Trustee, however, ever contacted
the other. According to the Trustee’s answers to interrogatories, he has never discussed
the Banknorth Claim with Attorney Mulhearn. Def.’s Ex. B.
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11
On December 9, 2005, the Trustee entered a notice on the docket in the main case
that the 341 Meeting had been held as scheduled. 	The Trustee did not file a report
indicating that there were no assets available for distribution to creditors (a “No-Asset
Report”). But neither did he indicate that assets were potentially available for distribution
or request that the Court establish a date by which creditors should file claims in the event
of a distribution. 	And he also did not request an extension of the deadline to file an
objection to the Debtors’ discharge (the “Discharge Deadline”). Instead, the docket reflects
that no activity was taken in the case after the December 9 entry. The Discharge Deadline
having passed with no objection or request for extension filed, the Court issued an order
discharging the Debtors on February 8, 2006 (the “Discharge”). In the normal course, the
case would have closed promptly thereafter. It remained open, however, because a No-
Asset Report was never filed.
In March 2006, approximately five months after the Petition Date, Janice agreed to
settle the Banknorth Claim for $17,000. 	On April 11, 2006, Attorney Mulhearn mailed
Janice a check in the amount of $11,334 – her net share of the settlement proceeds after
deducting attorney’s fees of $5,666 (the “Settlement Proceeds”). Janice testified that she
paid Chadbourne $5,000 from the Settlement Proceeds. The remainder of the Settlement
Proceeds, she explained, were used to pay property taxes, repairs to the sewer line,
miscellaneous bills, and the mortgage. Trial Tr. 126. Janice did not consult with Attorney
Doyle or the Trustee prior to settling the case, and she did not tell Attorney Doyle or the
Trustee that she received the Settlement Proceeds. According to Janice, since she had
provided the Trustee and Attorney Mulhearn with the information she was instructed to and
had heard nothing further from the Trustee or Attorney Doyle regarding the Banknorth
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Claim, she believed that she was free to settle the case. 	Trial Tr. 125. 	At trial, Janice
testified that she had not understood, during and after the settlement, that the Settlement
Proceeds belonged to the bankruptcy estate. Trial Tr. 143. Believing she had dispensed
with her obligations regarding the claim, she took Attorney Doyle at his word and concluded
that nothing further was required. Trial Tr. 125.
Francis testified similarly. 	At trial, he recalled the discussion at the 341 Meeting
relative to the Banknorth Claim and remembered his wife providing contact information to
both the Trustee and Attorney Mulhearn. Trial Tr. 38. Francis, like Janice, believed that
the Trustee was responsible for contacting Attorney Mulhearn and stated that Attorney
Doyle did not explain to them their responsibilities in the event of a settlement. Trial Tr. 54,
69. He testified that “at no time did anyone ever say to me or my wife, until I hired Attorney
Ford, that all monies had to go through [the Trustee]. We honestly were not aware of that,
and it wasn’t anything done intentionally . . . . Just ignorance of it.” Trial Tr. 40.
Eight months passed with no activity in the Debtors’ bankruptcy case, and still the
case remained open. On October 30, 2006, the Court issued a Notice of Inactivity to the
Trustee, noting that the case had been inactive for over six months and requesting a
response by November 30. 	Activity in the case then resumed in early December. 	On
December 4, 2006, the Trustee requested that the Court issue a deadline by which
creditors should file claims. He also filed a motion for authority, pursuant to Federal Rule
of Bankruptcy Procedure 2004, to examine the Keeper of Records for Fleet Bank, seeking
information relative to the Debtors’ refinance of their home in January 2003. The next day,
December 5, the Court issued a Notice of Assets, setting the deadline by which creditors
should file proofs of claim.
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18 Though not directly stated, the Court infers that the documents were provided. 	The
Trustee alleges nowhere that the Debtors were recalcitrant in their response and later
acknowledged in a letter to Attorney Doyle that documents had been provided in January 2007.
13
Contemporaneous with his December 4 filings, the Trustee sent a letter to Attorney
Doyle, requesting certain documents from the Debtors, including copies of tax returns from
2004 and 2005, copies of documents related to the 2003 refinancing, copies of bank
statements from 2005, and copies of documents related to the Banknorth Claim. He also
separately requested written advice regarding the status of the Banknorth Claim. Pl.’s Ex.
2.
In response, Attorney Doyle replied by letter dated December 5. In the letter, he
acknowledged the December 4 filings and the Court’s December 5 notice to creditors. But
he enclosed a copy of the Debtors’ Discharge and questioned “how [the Trustee’s] recent
mailings and requests may be allowed after the discharge . . . .” Pl.’s Ex. 3. Unimpressed
with this response, the Trustee responded by letter dated December 8, stating that the
Debtors’ Discharge was irrelevant to the Trustee’s asset investigation and requesting,
again, that the documents be provided to him by January 4, 2007. 	Pl.’s Ex. 4. 	Several
days later, in the absence of any objections, the Court granted the motion to conduct the
Rule 2004 examination of Fleet Bank. And, in January of 2007, the Debtors provided the
requested documents and information. 18
Months passed. There was no activity in the Debtors’ case, and no further
communication from the Trustee. 	The Debtors’ case remained open. 	According to the
Debtors, they were still struggling to maintain mortgage and car payments in early 2007
and began to inquire into a possible refinancing of the Property in order to consolidate their
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19 Although Greylock’s unsecured loan had been listed on the Debtors’ bankruptcy petition
(and, therefore, subject to the Discharge), the Debtors had continued to make payments on the
loan, a decision expressly contemplated by the Bankruptcy Code. See 11 U.S.C. § 524(f) (“Nothing
contained in [the provisions providing for reaffirmations of prepetition debts] prevents a debtor from
voluntarily repaying any debt.”).
14
secured debts, pay off the unsecured debt owed to Greylock, 19 and lower their payments
by securing an interest rate lower than the interest rate on their home equity loan, which
had recently been adjusted upward. Trial Tr. 127-28. Janice believed that she would not
be able to obtain traditional refinancing due to the bankruptcy case filing and turned to
Kathy Daury (“Daury”), a friend who was employed by Legacy Banks (“Legacy”). Daury
agreed to help the Debtors obtain a new loan from Legacy to pay off their existing
mortgages and other debts. 	Trial Tr. 127. 	Aware of the Debtors’ bankruptcy filing,
however, she was concerned about closing the loan if the Debtors had not received their
discharge. There was no testimony regarding whether Daury inquired into the closing of
the bankruptcy case or whether she asked or provided information to the Debtors regarding
the need for court approval of the transaction while the case remained open.
Janice then called Attorney Doyle regarding the status of the bankruptcy case and
told him they were considering a refinance. Doyle told her that, inasmuch as the Debtors
had received the Discharge, they were free to refinance the Property. In fact, he was so
assured of the propriety of the action that he offered to act as closing attorney for the
transaction and the closing took place at Attorney Doyle’s office. The only parties present
were the Debtors and Attorney Doyle. Trial Tr. 61, 73.
The new loan from Legacy (the “Refinance”), totaling $200,000, closed in April 2007.
The proceeds were used to pay off the two existing mortgages, the balance of the loan
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15
from M&T Bank used to purchase the Debtors’ truck, and the Greylock unsecured loan.
The Debtors received net proceeds of $6,618.64 from the Refinance. 	Of this amount,
$5,000 was used to pay the remainder owed to Chadbourne. The rest the Debtors spent.
Neither the Debtors nor Attorney Doyle sought court approval for the transaction, nor did
they inform the Trustee of the Refinance or receipt of the proceeds.
On August 2, 2007, eight months after the Debtors had provided the documents
requested by the Trustee in December 2006, the Trustee sent another letter to Attorney
Doyle. It stated:
. . .
I have had an opportunity to review this case again, as well as the
documents which you supplied me with back in January of 2007. I have the
following comments:
• 	I note from the Statement of Financial Affairs that the Debtor Janice
Marcella had a wrongful termination case against Banknorth, upon
which no exemption was taken. 	From the documents which were
supplied to me, on April 11, 2006 the Debtor received a total
settlement of $17,000 on account of said claim from which she
received a check for $11,334. . . . There are numerous problems with
this payment. 	For one, . . . 	the wrongful termination claim was an
asset of the estate. There was no exemption taken against same so
that the entire proceeds belong to the estate. Attorney Mulhern’s [sic]
employment needed to approved [sic] by the Bankruptcy Court in
order to obtain his fees; however, that was not done. At a minimum,
the Debtor’s net settlement proceeds of $11,334.00 should be turned
over to me, forthwith. 	Demand is hereby made for the Debtors to
turnover to me that amount sometime within the next ten (10) days.
• 	There is the issue about the bank account(s). 	The Debtor listed
having one bank account with Greylock. In fact, the Debtors have two
bank accounts, both at Greylock. . . . 	On October 14, 2005, the
Debtors wrote a check for $5,000, thereby reducing their account to
$3,958.39. I would like to have a copy of both sides of this check and
an explanation from the Debtors as to: 1) Why they wrote the check
when they did and 2) what the monies were used for. In any event,
at a minimum, the resulting balance in the account as of the date of
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16
the filing of the Chapter 7 Petition was $3,958.39, more than
$3,758.00 than what was indicated on the Bankruptcy Petition. The
Debtors only claimed an exemption for $200 from said checking
account. 	Accordingly, at least $3,758.39 of the account is estate
monies which should be turned over to me forthwith. 	Demand is
hereby made of the turnover to me of those funds of $3,758.39 within
the next ten (10) days. 	In doing so, I do not waive or release the
Debtors from the $5,000.00 withdrawal that was made the day before
the Bankruptcy filing.
• 	Then there is the house. The Debtors listed the fair market value of
the house as of the date of the filing of the Petition to be $200,000.00.
Some 	of 	the 	data 	bases 	indicate 	a 	value 	of 	approximately
$225,000.00. 	The Debtors claimed an exemption against same of
$29,602.62. 	I note, now, that the Debtors, notwithstanding the fact
that the case is still open, refinanced their house in April of 2007 with
Legacy Bank, obtaining a mortgage of $200,000.00. 	The refinance
was done without my approval, and Bankruptcy Court permission.
Please forward me copies of all documents from the closing . . .
sometime within the next thirdy [sic] (30) days. I reserve the right to
claim resulting equity in the house once I have had an opportunity to
review these documents.
I need the Debtors full and complete attention to this matter, as well
as their cooperation in turning over to me the demanded funds. 	I am
considering filing a complaint for revocation of their discharge based on the
above actions.
Pl’s Ex. 5 (emphasis added). 	At trial, the Debtors testified that, after discussing the
Trustee’s demands with Attorney Doyle, Attorney Doyle told them not to turn over the
requested funds. 	Trial Tr. 69. 	According to the Debtors, Attorney Doyle reacted with
surprise toward the Trustee’s tone, particularly believing that the Settlement Funds rightfully
belonged to the Debtors since the Trustee had never followed through with Attorney
Mulhearn. According to Janice, she was similarly surprised by the Trustee’s demands, as
she had provided all the information and documentation previously requested. She testified
that, when the Trustee requested information in January of that year, Attorney Doyle urged
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17
them not to worry about the inquiries. She stated at trial: “So I really, all the while this was
going on, I thought it was nothing. I just figured they were trying to clarify that I hadn’t done
anything, you know, wrong, that I had said something or hid something, which I didn’t. I
never intended to; we told [Attorney Doyle] everything that, you know, we possibly could.”
Trial Tr. 140.
Following another letter from the Trustee (which was not admitted into evidence),
Attorney Doyle responded to the Trustee on October 5, 2007. In his letter, Attorney Doyle
requested a meeting between himself, the Debtors, and the Trustee, hoping to clarify what
had happened during the case. In that letter, he also attempted to address the Trustee’s
contentions. Pl.’s Ex. 6. Not satisfied with that response, the Trustee filed the present
adversary proceeding on October 12, 2007, demanding turnover of property of the
bankruptcy estate and asking the Court to revoke the Debtors’ Discharge.
After the suit was filed, the Debtors obtained new counsel, attorney Terry Ford
(“Attorney Ford”), who has since represented the Debtors in their main bankruptcy case
and in the adversary proceeding. 	On June 3, 2008, the Trustee filed a motion seeking
court approval of a settlement between the Trustee and the Debtors. 	Pursuant to the
proposed settlement, the Debtors had agreed to pay $25,000 to the Trustee in satisfaction
of all claims. But in open court, the Court expressed reluctance to approve the settlement
in light of the facts as described by the Trustee at the hearing. The hearing on approval
of the settlement was continued, but then canceled when the Trustee thereafter withdrew
his settlement approval request. The $25,000 remains in escrow with the Trustee pending
the outcome of this adversary proceeding.
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18
On November 7, 2008, the Debtors moved to amend their Schedule B in the main
bankruptcy case. The amended schedule disclosed the Checking Account balance, as well
as the Debtors’ possession of the $5,000 cashier’s check, as of the Petition Date. It also
included a potential legal malpractice claim against Attorney Doyle. According to Janice,
the schedules were not previously amended because Attorney Doyle had never discussed
it with them. Trial Tr. 140. The Trustee objected to Debtors’ request to amend Schedule
B. At the hearing on the motion to amend, the Debtors expressed their desire to have full
disclosure of assets filed on the docket, and emphasized that they were not moving to
amend their exemptions in light of the circumstances of the case. The Court allowed the
Debtors to amend Schedule B, while specifically noting that the allowance did nothing to
excuse 	any 	otherwise 	inexcusable 	omissions 	from 	the 	originally-filed 	schedules.
Thereafter, the Court conducted a trial in the adversary proceeding and took the matter
under advisement.
II. 	POSITIONS OF THE PARTIES
The Complaint contains three counts. 	In Count II, the Trustee seeks an order
requiring the Debtors to turn over property of the bankruptcy estate. 	Specifically, the
Trustee seeks turnover of the Settlement Proceeds, the undisclosed and non-exempt
Checking Account funds, and the $5,000 separately held by the Debtors on the Petition
Date. 	The Trustee also demands turnover of undisclosed, non-exempt equity in the
Debtors’ real and personal property. With regard to the real property, the Trustee asserts
that the Property was undervalued on Schedule A. The Trustee contends that the Property
was actually worth $220,000 on the Petition Date – $20,000 more than the Debtors’
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19
valuation and claimed exemptions. 	Accordingly, he requests an order compelling the
Debtors to turn over $20,000 representing the value of that non-exempt equity. He also
contends that the Debtors had excess, non-exempt value in personal property that must
be turned over. 	In Count III, the Trustee asks the Court to surcharge the Debtors’
exemptions to the extent they are unable or unwilling to satisfy any of the turnover
demands.
The Debtors concede that they have an obligation to turn over property of the estate,
and note that $25,000 is currently being held in escrow to satisfy their obligations in that
regard. 	They dispute, however, the Trustee’s valuation of their residence and personal
property. 	The Debtors argue that the values listed in their schedules were reasonably
accurate. 	The Debtors also object to any surcharge of their exemptions, asserting that
either (1) they have already turned over an amount in excess of the value of estate property
sought by the Trustee or (2) they are not obligated to turn over any monies at all. As to the
latter point, the Debtors question the propriety of the Trustee’s demands for turnover under
the circumstances, because, they say, he delayed prosecution of the bankruptcy case for
so long that the doctrine of laches should now bar his requests.
In Count I of the Complaint, the Trustee argues that the Debtor’s Discharge should
be revoked. Although it is unclear in the Complaint, the Trustee’s proposed findings of fact
and conclusions of law indicate that he relies on both § 727(d)(1) and § 727(d)(2) of the
Bankruptcy Code in support of revocation. The Trustee asserts that the Debtors engaged
in intentional and fraudulent conduct warranting a revocation of their Discharge by: (1)
misrepresenting the number of bank accounts they held; (2) failing to disclose the receipt
of the Pension Award; (3) misrepresenting the Checking Account Balance on the Petition
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20
Date; (4) failing to disclose the $5,000 cash held on the Petition Date; (5) failing to include
the Banknorth Claim on Schedule B; (6) misrepresenting the value of their real property;
(7) misrepresenting the value of their personal property; (8) failing to list all of their
creditors; (9) failing to disclose all of their income; (10) failing to disclose and turn over the
Settlement Proceeds; (11) failing to disclose use of estate property – i.e., the Settlement
Proceeds and Refinancing proceeds – to pay off Chadbourne; and (12) obtaining the
Refinance without informing the Trustee or receiving Court authority.
The Debtors, on the other hand, note that this adversary proceeding was filed over
a year and a half after their Discharge entered, and they first argue that the Trustee is
barred from seeking revocation based on the doctrine of laches. In any event, the Debtors
claim that they did not act with the requisite fraudulent intent warranting a revocation of
their Discharge. They say they did not attempt to hide assets and disclosed all requested
information to Attorney Doyle and to the Trustee. With the exception of failing to disclose
the receipt of the Pension Award (which they claim was simple ignorance of its receipt at
the time they signed their Schedules and Statements), they place much of the blame on
Attorney Doyle for failing to properly assist and advise them. 	At trial, Francis stated:
“There’s everything that I did and . . . everything that I’ve told Attorney Doyle and
everything that I gave Attorney Doyle and everything he asked me for I gave to him
truthfully. What he gave me was not – he didn’t do anything truthfully. . . . And then he told
us we had a discharge . . . [w]hich got us into more hot water. . . . So, yes, I blame him for
a lot of it, yes, sir. . . . And my ignorance of the law is part of it, but I blame the majority of
[it] on the attorney because that’s why I hired an attorney, so I wouldn’t wind up in a mess
like this.” Trial Tr. at 40-41. Because they relied on the advice of their attorney in good
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20 See, e.g., McNally v. Echart (In re Echart), 374 B.R. 596, 598 n.2 (Bankr. E.D. Tex. 2007)
(“[N]o amount of inactivity by the Chapter 7 Trustee could relieve the Debtors . . . of their affirmative
duties to disclose and to surrender their bankruptcy estate property to the Trustee pursuant to 11
U.S.C. § 521(a)(4).”).
Similarly, the Debtors’ obligation to turn over estate property is unaffected by this Court’s
21
faith and after full disclosure, the Debtors argue that they simply have not acted with
knowing and fraudulent intent.
III. 	DISCUSSION
a. 	Count II: Turnover of Property
With the commencement of a bankruptcy case, a new estate (the “bankruptcy
estate”) is created, comprised of “all legal or equitable interests of the debtor in property
as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Property of the bankruptcy
estate encompasses an incredibly broad range of potential and existing property interests;
included in the estate is “every conceivable interest of the debtor, future, nonpossessory,
contingent, speculative, and derivative . . . .” In re Yonikus, 996 F.2d 866, 869 (7th Cir.
1993) (citations omitted); see also Nickless v. McGrail & McGrail (In re Dooley), 399 B.R.
340, 348 (Bankr. D. Mass. 2009). Section 542(a) provides that any entity must turn over
property of the estate, so long as it is “property that the trustee may use, sell, or lease .
. . , or that the debtor may exempt under section 522 of this title . . ., unless such property
is of inconsequential value or benefit to the estate.” 11 U.S.C. § 542(a). And § 541(a)(4)
requires debtors to “surrender to the trustee all property of the estate . . . .” 11 U.S.C. §
521(a)(4). The statutory language is plain and the rule is clear. Laches and the passage
of time are no defense to the obligation of any party to turn over bankruptcy estate
property. 20 Accordingly, as the Trustee is correct in his assertion that the $5,000 cashier’s
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decision on whether revocation of the Debtors’ Discharge is warranted. See Swinson v. Baber (In
re Baber), 2007 WL 3113336, *6 (Bankr. N.D. Okla. Oct. 22, 2007); Morris v. Morris (In re Morris),
2008 WL 819296, *9-10 (Bankr. D. Kan. March 26, 2008) (even though debtor’s discharge was not
denied, the debtor was still obligated under § 542(a) to turn over tax refunds that were property of
the estate); Hill v. Muniz (In re Muniz), 320 B.R. 697, 702 (Bankr. D. Colo. 2005) (“The fact that
Debtor’s discharge is revoked does not nullify the legal obligations which she voluntarily invoked
upon the filing of her bankruptcy petition. She is still obligated to pay over to the Trustee the value
of the non-exempt property which she possessed or was entitled to receive as of her petition date
. . . .”).
21 See In re Dooley, 399 B.R. at 348 (prepetition workers’ compensation claim was property
of the bankruptcy estate); Wood v. Premier Capital, Inc. (In re Wood), 291 B.R. 219, 224 (B.A.P.
1st Cir. 2003) (prepetition worker’s compensation claim was property of bankruptcy estate, as were
proceeds from settlement of claim); Pare v. Campopiano (In re Campopiano), 1994 WL 675317,
*3 (Bankr. D.R.I. Nov. 23, 1994) (proceeds of insurance policy that was property of the estate were
also property of the bankruptcy estate).
22 Notably, the Trustee has not moved to compel Attorney Mulhearn to turn over his share
of the Settlement Proceeds. Nor has the Trustee asked this Court to declare the settlement void
as a violation of the automatic stay under § 362, see In re Dooley, 399 B.R. at 351, although it is
doubtful that the Court would declare the settlement here void, as more than three years have
passed since its finalization.
22
check, the excess Checking Account balance, and the Banknorth Claim and Settlement
Proceeds 21 constituted property of the Debtors’ bankruptcy estate, the value of that
property must be turned over to the Trustee. 22
The Trustee has also argued, though not at great length, that the Debtors should
be ordered to turn over the value of personal property that was not disclosed on their
schedules. According to the Trustee, the Debtors have not accounted for and disclosed
approximately $19,000 worth of personal property in their possession on the Petition Date.
His argument is premised on the discrepancy between the $6,000 value of “household
furnishings” listed on Schedule B and the $35,000 value of “Antiques and Household
[Goods]” listed in the “Other Assets” portion of the Debtors’ loan application submitted in
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23 The Debtors actually disclosed and exempted $13,300 in personal property that could be
characterized as “household” goods in their schedules. 	In Schedule B, the Debtors listed the
following: (1) “Household furnishings including furniture, tvs and appliances” valued at $6,000; (2)
“Miscellaneous books and cds” valued at $500; (3) “Miscellaneous clothes” valued at $1500; (4)
“Miscellaneous watches, rings and necklaces” valued at $3,000; and (5) “Lawn mower & snow
blower” valued at $2,000. These items were all claimed as exempt on Schedule C. This results
in a total difference between the values on Schedule A and the Loan Application of $21,700.
24 With the exception of the Banknorth Claim and the proceeds from the Pension Award,
which the Court assumes the parties are not claiming are “household goods.”
23
connection with the Refinance (the “Loan Application”). 23 Both the Debtors and the
Trustee agree that the Debtors have not obtained postpetition personal property to
account for the difference in purported value.
In order for the Trustee to prevail, the Court would need to find either that (1) the
$35,000 value included on the Loan Application reflected the true value of the Debtors’
household personal property, while the property was undervalued on Schedule B; or (2)
the Debtors possessed additional, undisclosed property at the time of filing. The Court has
not been presented with a preponderance of evidence to support either alternative.
First, the Trustee has produced no evidence and elicited no testimony tending to
show that the Debtors possessed additional, undisclosed personal property omitted from
Schedule B. 24 Second, the Court finds it more likely that the $35,000 value cited in the
Loan Application was inflated, with the values placed on the personal property in Schedule
B more closely reflecting the truth. The Debtors both testified credibly that Daury, who
assisted Janice in filling out the Loan Application, chose the $35,000 figure. After Janice
expressed surprise at the seemingly high valuation of their household property, Daury
explained that $35,000 was a “standard” figure used on loan applications and reflected the
cost of replacing the items and not the value of the items if they were to be sold. Trial Tr.
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24
64-65, 131-32. 	Regardless of the accuracy of Daury’s advice, the Court finds that the
Debtors accepted them without further argument. In sum, the Court rules that the Debtors
fully disclosed and exempted (with the exception of the Banknorth Claim and the proceeds
of the Pension Award) all personal property they owned on the Petition Date.
The only remaining question is whether, as the Trustee claims, the value of the
Debtors’ residence was greater than $200,000 as valued by the Debtors on Schedule A.
If so, the Trustee would be entitled to seek a sale of the Property to recover the amount
of non-exempt equity or he could seek the value of the non-exempt equity from the
Debtors in settlement of the bankruptcy estate’s entitled share.
In accordance with § 542(a), the estate’s interest in the Property is measured as
of the Petition Date. 11 U.S.C. § 542(a). Determining what the value of that interest is,
however, is not a straightforward or simple task:
There is no word used in the bankruptcy court which is more elusive
than the word value. It is not surprising how many different results are had
when more than one person looks at a piece of real estate. The real test,
of course, is when the deal is closed in connection, therewith, after a
reasonable willing buyer and a reasonable willing seller, neither being under
duress, have reached an agreement on price in the open market. Short of
the real test, determining the value of property is a difficult task, made more
difficult . . . [when] the figures arrived at by both sides are so close.
Value is subject to fluctuations caused by market fluctuations,
changes in interest rates and general economic factors. . . . The Court
listens to evidence of value and must determine which appraisal figure to fix
upon. In making that determination, the Court is not bound by any figure in
particular, but merely guided by them all. This is because “[a]n appraisal of
a property is not the result of a scientific analysis,” but is, rather, a subjective
opinion which can and does differ from the next appraisal even though both
may be based on real estate market trends.
In re Rehbein, 49 B.R. 250, 252-53 (Bankr. D. Mass. 1985) (citations omitted).
The Trustee relies on two appraisals in support of his claim that the Property was
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25 The Debtors also submitted into evidence an exterior appraisal apparently commissioned
by the Trustee in February 2006. That appraisal valued the Property at $190,000 to $210,000.
Although this appraisal tends to corroborate the Debtors’ own assessment of value, the Court finds
it ultimately unnecessary to rely on that appraisal to estimate the value of the Property.
26 The conversion of the lower level half-bathroom to a full bathroom was intended to ease
the difficulties associated with Francis’s illness, since he could not traverse the stairs to the full
25
worth $220,000 on the Petition Date, and not $200,000 as the Debtors claimed. The first
appraisal cited by the Trustee is one commissioned by Legacy 	in conjunction with the
Refinance (the “Legacy Appraisal”). 	The Legacy Appraisal estimated the value of the
Property as $250,000 as of March 26, 2007. 	The second appraisal, conducted by
Residential Appraisal Service on April 7, 2008 at the request of the Trustee (the
“Residential Appraisal”), purports to value the property “as of October 15, 2005” as
$220,000.
The Debtors claim that both the Legacy and Residential Appraisals are inaccurate
and inflated assessments of the Property’s value on the Petition Date, because both take
into account improvements to the Property that occurred postpetition. 	Instead, the
Debtors claim that 	their valuation of the Property on Schedule A is more reasonable.
According to Janice, the $200,000 value included on Schedule A was taken from the tax
assessed value. 	She explained that she was aware that tax assessment values were
often lower than fair market values. But after considering the Property’s malfunctioning
furnace and backed-up sewer, she believed $200,000 was a “fair”, if not slightly
exaggerated, assessment of the Property’s value. 25 Trial Tr. 151-52.
Since the filing of the case, both the sewer line and the furnace have been repaired.
In addition, with the help of donated labor and supplies from friends, a half-bathroom in
the lower level was converted to a full bathroom after the filing of the bankruptcy case. 26
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bathroom located on the Property’s second floor.
27 For instance, the Residential Appraisal indicates that the Property had two full bathrooms
when it actually had only one full bathroom and one half-bathroom on the Petition Date.
28 See 11 U.S.C. 522(l); Taylor v. Freeland & Kronz, 503 U.S. 638 (1992).
26
None of these improvements appear to have been considered and factored out of the
Residential Appraisal, 27 and each of the improvements was taken into consideration in the
Legacy Appraisal.
Given the improvements to the Property and taking into account the likely
appreciation between October 2005 and March 2007, the Court finds the Legacy Appraisal
unpersuasive in establishing the Property’s value on the Petition Date. Likewise, the Court
finds that the Residential Appraisal does not discount the improvements that were made
after the case was filed. Because the Residential Appraisal was only $20,000 more than
the estimated value on Schedule A, the difference can easily be accounted for by slight
variations in value estimations – variations which grow with the passage of time – and the
postpetition improvements. Thus, the Court finds that the estimate of fair market value
given by the Debtors in Schedule A should be accorded due weight as a reasonable and
persuasive valuation of the Property. Because the excess equity was claimed as exempt
on the Debtors’ Schedule C, an exemption now deemed valid, 28 the Trustee has not
persuaded the Court that the Debtors are obligated to turn over additional funds
representing excess equity in the Property.
In sum, the Trustee has demonstrated that the Debtors had in their possession
$8,758.39 in non-exempt funds in the Checking Account and cashier’s check on the
Petition Date and received, postpetition, an additional $11,334 in the proceeds of non-
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29 Because the Trustee is currently holding $25,000 in escrow pending the outcome of this
case, the ultimate result will be a return to the Debtors of $4,907.61.
27
exempt estate property. The Debtors will accordingly be ordered to turn over $20,092.39
to the Trustee. 29
b. 	Count I: Revocation of Discharge
“Revocation of discharge is an extraordinary remedy. . . .[that] runs contrary to the
general policy of the Bankruptcy Code of giving Chapter 7 debtors a fresh start.” 	In re
Jordan, 521 F.3d 430, 433 (4th Cir. 2008) (internal citations and quotations omitted).
“[T]he statutory right to a discharge should ordinarily be construed liberally in favor of the
debtor.” In re Koss, 403 B.R. 191, 211 (Bankr. D. Mass. 2009); see also Yules v. Gillis (In
re Gillis), 403 B.R. 137, 144 (1st Cir. BAP 2009) (“because revoking a discharge is an
extraordinary remedy, § 727(d) should be construed liberally in favor of the debtor and
strictly against those objecting to discharge”).
The Trustee, as the party seeking revocation, bears the burden of proving that
revocation of the Debtors’ Discharge is warranted. In re Foster, 343 B.R. 385, 392 (Bankr.
D. Mass. 2006). “For § 727 objections to discharge, the substantive evidentiary standard
of proof is preponderance of the evidence.” R. I. Depositors Econ. Prot. Corp. v. Hayes
(In re Hayes), 229 B.R. 253, 259 n.7 (1st Cir. BAP 1999).
i. 	Section 727(d)(1)
The Trustee does not specifically refer to § 727(d)(1) in the Complaint, but later
refers to that section in his post-trial filings. And many of his allegations squarely fit within
the parameters of § 727(d)(1). That section provides that a debtor’s discharge shall be
revoked if:
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28
(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
11 U.S.C. § 727(d)(1).
Nondisclosure of prepetition property is “the classic example of obtaining a
discharge by fraud,” Still v. Gault (In re Gault), 2006 WL 2270338, *3 (Bankr. E.D. Tenn.
Aug. 4, 2006) (citing 6 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy
¶ 727.15[2] (15th ed. revised 2006)), and is therefore grounds for revocation under
§ 727(d)(1). 	The Trustee claims that the Debtors omitted assets and engaged in
fraudulent misrepresentations that fall under the rubric of “fraud” contemplated by this
section. Specifically, the following alleged actions would be encompassed in a § 727(d)(1)
claim: 	(1) 	misrepresentation 	of 	the 	number 	of 	the 	Debtors’ 	bank 	accounts; 	(2)
misrepresentation of the Checking Account Balance; (3) failure to disclose the Debtors’
possession of the $5,000 cashier’s check; (4) failure to include the Banknorth Claim on
Schedule B; (5) failure to disclose accurate income; and (6) failure to list all creditors.
Regardless of whether these actions were committed with the requisite fraudulent
intent, however, the Trustee cannot prevail because the action is time-barred. 	Section
727(e)(1) provides that revocation of discharge claims under § 727(d)(1) must be brought
“within one year after such discharge is granted.” 	Here, the Debtors’ Discharge was
granted on February 8, 2006. 	The adversary proceeding objecting to the Discharge,
however, was not filed until October 12, 2007, approximately nineteen months after the
Discharge was entered. Accordingly, the Court cannot revoke the Debtors’ Discharge on
§ 727(d)(1) grounds.
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29
ii. 	Section 727(d)(2)
The Trustee also seeks to revoke the Debtors’ discharge pursuant to § 727(d)(2),
which provides that a debtor’s discharge shall be revoked if:
(2) 	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.
11 U.S.C. § 727(d)(2). In contrast to the more limited time in which a § 727(d)(1) action
may be brought, a request for revocation of discharge under § 727(d)(2) may be brought
before the later of: “(A) one year after the granting of such discharge; and (B) the date the
case is closed.” 11 U.S.C. § 727(e)(2). Because the case has not been closed, the
§ 727(d)(2) claim was timely filed.
“Section 727(d)(2) provides that a chapter 7 debtor’s discharge may be revoked if
the following elements are met: (1) the debtor acquired property of the estate; and (2) the
debtor knowingly and fraudulently failed to report or deliver the property to the trustee.” In
re Gillis, 403 B.R. at 145-46. The Trustee has demonstrated that the Debtors acquired
property of the estate after the Petition Date – namely, the Settlement Proceeds and,
arguably, the Refinancing proceeds – and the first element has accordingly been
established.
The only question, then, is whether the Debtors “knowingly and fraudulently” failed
to report the acquisition of and deliver the property to the Trustee. “Knowingly” requires
proof that “the Debtor’s failure was accompanied by knowledge that the property in
question belonged to the estate and that he was obliged to report or surrender it to the
Trustee (as the case may be).” In re Foster, 343 B.R. at 393. In other words, the Debtors
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30 See, e.g., Fokkena v. Klages (In re Klages), 381 B.R. 550, 554 (8th Cir. BAP 2008); In
re Echart, 374 B.R. 596; In re Baber, 2007 WL 3113336; Richardson v. Schoemperlen (In re
Schoemperlen), 332 B.R. 179 (Bankr. C.D. Ill. 2005); In re Muniz, 320 B.R. 697.
30
must have been consciously aware that the acquired property was property of the estate.
Where a trustee pointedly advises a debtor that certain property belongs to the estate and
must be turned over upon receipt, bankruptcy courts have had no difficulty in concluding
that the debtor acted “knowingly,” even when the debtors have received contradictory
advice from an attorney. 30
Regarding the Refinance proceeds, there is no indication that the Debtors were
aware of the estate’s interest, if any, in those proceeds. 	Indeed, the possibility of a
refinance was not a topic broached between the Trustee and the Debtors. And even given
the impropriety of the refinance, the only information the Debtors received indicated that
a refinance was permissible so long as a discharge had entered. Although case law in the
First Circuit, and in other jurisdictions, indicates a general wariness to excuse misconduct
based solely on allegedly erroneous counsel, see, e.g., Boroff v. Tully (In re Tully), 818
F.2d 106, 111 (1st Cir. 1987), the Court finds no evidence that the Debtors actually knew
or had reason to know of the estate’s possible interest in proceeds from the Refinance.
The acquisition of the Settlement Proceeds presents a more difficult question.
Because the transcript from the 341 Meeting was not produced or admitted into evidence,
the Court is left with competing accounts of what, exactly, the Debtors were told regarding
the estate’s interest in the Settlement Proceeds. The Trustee asserts that he informed the
Debtors of the estate’s entitlement to any proceeds from the Banknorth Claim. 	The
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31 See also Massachusetts v. Bartel (In re Bartel), 2009 WL 2461727, *6 (Bankr. D. Mass.
Aug. 10, 2009); Guardian Indus. Products, Inc. v. Diodati (In re Diodati), 9 B.R. 804, 808-09 (Bankr.
D. Mass. 1981).
Many of the cases detailing conduct rising to the level of a “reckless disregard for the truth”
are in the context of § 727(a)(4) claims. Section 727(a)(4) contemplates an objection to a debtor’s
discharge before discharge is entered. That section provides that a debtor’s discharge can be
denied if the debtor “knowingly and fraudulently, in or in connection with the case” engaged in
certain bad acts, including making a false oath, presenting or using a false claim, or withholding
information or documents related to the debtor’s property or financial affairs from an officer of the
estate.” 11 U.S.C. § 727(a)(4).
31
Debtors testified that the Trustee suggested only a possible interest in the proceeds if a
settlement or judgment were to yield sufficient value. Although it is a close call, the Court
finds that the Debtors were aware of the Trustee’s interest in the suit and can be charged
with “knowing” that the estate had a possible interest in any potential settlement or
judgment award.
But knowledge alone is not enough. The Trustee also must demonstrate that the
Debtors acted fraudulently. “Fraudulently” under § 727 has been held to encompass both
a “specific intent to defraud the Trustee or the estate,” In re Foster, 343 B.R. at 393, and,
in some instances, a “reckless disregard for the truth,” In re Koss, 403 B.R. at 213. 31 In
determining whether a debtor has acted fraudulently, courts look to a variety of factors,
including a debtor’s course of conduct, surrounding circumstances, and sophistication.
See, e.g., In re Yonikus, 974 F.2d 901, 905 (7th Cir. 1992); In re Koss, 403 B.R. at 213;
In re Bartel, 2009 WL 2461727, at *6-7.
The Trustee’s strongest claim for revoking the Debtors’ Discharge on grounds that
they acquired and fraudulently failed to report and turn over estate property rests on the
Debtors’ failure to report and turn over the Settlement Proceeds. In response, the Debtors
say that they did not act fraudulently because they relied on the advice of Attorney Doyle
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32
and the Trustee’s perceived inaction. Having provided the information requested by the
Trustee and disclosed the pending bankruptcy case to Attorney Mulhearn, as advised by
counsel, they believed that the Trustee’s subsequent lack of action or inquiry constituted
disinterest in any proceeds from the Banknorth Claim.
Generally speaking, a debtor may not escape the consequences of acting in
violation of the Bankruptcy Code by pleading ignorance and pointing the finger at former
(or current) counsel as the bearer of bad advice. This was made patently clear in In re
Tully, where the First Circuit Court of Appeals upheld the denial of a debtor’s discharge
under § 727(a)(4) for failure to disclose prepetition assets. 818 F.2d 106. Rejecting the
debtor’s argument that the omissions were simply attorney error, the Tully Court upheld
the lower court’s finding that the debtor knowingly and fraudulently made a false oath or
account in connection with the case, which are grounds for the denial of discharge under
section § 727(a)(4). Id. at 111.
Specifically, the First Circuit in Tully noted that the Debtor had amended his
schedules multiple times to include initially undisclosed property, but continued to omit
other estate property despite pointed questioning from the Chapter 7 trustee. Id. at 110-
11. In affirming the denial of discharge, the First Circuit held that it either was or should
have been evident to the debtor that the assets ought to have been disclosed in the
schedules; the debtor’s behavior amounted, at the very least, to a “reckless indifference
to the truth.” Id. at 112. The Tully Court emphasized the debtor’s “cavalier indifference
and a pattern of disdain for the truth” and the debtor’s disregard for the importance of full
disclosure and candor. Id. 	Noting the difficulties the Trustee had in obtaining full
disclosure from the Debtor, the First Circuit placed the blame squarely on his shoulders:
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32 See, e.g., First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1343 (9th Cir. 1986)
(“Generally, a debtor who acts in reliance on the advice of his attorney lacks the intent required to
deny him a discharge of his debts”); Neary v. Darby (In re Darby), 376 B.R. 534, 541 (Bankr. E.D.
Tex. 2007) (“a debtor’s reliance on advice of counsel can, under proper circumstances, constitute
an excuse for an omission of assets from schedules when there has been a full disclosure of all
pertinent facts to the lawyer and such reliance has been placed reasonably and in good faith”);
Seaver v. Markey (In re Markey), 378 B.R. 594, 604 (Bankr. D. Minn. 2007) (“[R]eliance in fact on
the advice of counsel may prevent a finding of actual knowledge of impropriety, at least ‘if the
advice is reasonable’ and the attorney was fully-informed before giving it.” ) (quoting In re Sendecy,
283 B.R. 760, 765 (8th Cir. BAP 2002)); Colish v. United States (In re Colish), 289 B.R. 523, 542
(Bankr. E.D.N.Y. 2002) (“It is well established that the advice of counsel is a complete defense to
a charge of fraud where a full and fair disclosure of the facts is made.”) (citations omitted); Watson
v. Jackson (In re Jackson), 141 B.R. 702, 706 (Bankr. D. Ariz. 1992) (“Generally, a debtor acting
in reliance on the advice of counsel lacks the intent required to be denied a discharge.”).
33
“The law, fairly read, does not countenance a petitioner’s decision to play a recalcitrant
game, one where the debtor hides, and the trustee is forced to go seek.” Id.
While casting a jaundiced eye toward “my attorney did it!” claims, the First Circuit
in Tully did not hold that reliance on an attorney’s advice could never negate the element
of fraudulent intent in an attack on a debtor’s entitlement to a discharge. 	And in In re
Mascolo, the First Circuit noted that “an explanation by a bankrupt that he had acted upon
advice of counsel who in turn was fully aware of all the relevant facts generally rebuts an
inference of fraud.” 505 F.2d 274, 277 (1st Cir. 1974). Other courts have also reiterated
that, in limited circumstances, a debtor’s genuine and reasonable reliance on an attorney’s
advice may preclude a finding that the debtor acted with fraudulent intent. 32
Here, the Debtors claim reliance on (1) Attorney Doyle’s statements indicating that
they would fulfill their responsibilities toward the Trustee by providing full disclosure of the
Banknorth Claim and Attorney Mulhearn’s contact information and (2) the Trustee’s
apparent inaction after the 341 Meeting. While the Banknorth Claim was not listed on the
Debtors’ Schedule B, all details related to the claim were fully disclosed on the Statement
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33 Compare with In re Yonikus, 974 F.2d 901 (debtor’s discharge denied after debtor failed
to disclose prepetition lawsuit on schedules, failed to turnover postpetition settlement proceeds, did
not disclose lawsuit to bankruptcy attorney or trustee, and gave evasive and noncredible
testimony); Stornawaye Fin. Corp. v. Hill (In re Hill), 387 B.R. 339, (1st Cir. BAP 2008) (discharge
denied under § 727(a); debtor’s disclosure of tax refund on Statement of Financial Affairs was
insufficient because it was misleading); In re Wood, 291 B.R. 219 (motion to amend schedules to
exempt prepetition worker’s compensation claim was denied, because, among other things, debtor
failed to disclose the claim anywhere in schedules or statements and did not disclose the claim at
the section 341 meeting, even when questioned about employment termination); In re Nagel, 2003
WL 23811677 (failure to disclose possible receipt of inheritance, even though debtor’s mother died
prepetition); Olsen v. Reese (In re Reese), 203 B.R. 425 (Bankr. N.D. Ill. 1997) (discharge revoked
under § 727 where debtors knew about possible receipt of tax refund, but did not disclose it on
petition; failed to disclose receipt at § 341 meeting despite having received funds one day prior, and
were recalcitrant and uncooperative with trustee’s demands for documents); see also Puckhaber
v. Schwartz (In re Schwartz), 64 B.R. 285 (Bankr. D.N.H. 1986) (trustee’s motion to revoke
discharge under § 727(d)(2) denied where debtors disclosed prepetition interest in mortgage,
answered trustee’s questions at § 341 meeting and were not on notice of trustee’s interest in the
property).
34 Compare with In re Wood, 291 B.R. 219; Richardson v. McCullough (In re McCullough),
259 B.R. 509 (Bankr. D.R.I. 2001) (debtor’s discharge revoked under § 727(d)(2) where debtor lied
at § 341 meeting regarding receipt of trust funds); In re Reese, 203 B.R. 425; see also In re
Schwartz, 64 B.R. 285.
35 Compare with In re Yonikus, 974 F.2d 901; In re Bartel, 2009 WL 2461727 (debtor acted
with at least reckless disregard for the truth in failing to disclose assets; debtor testified
ambiguously and inconsistently at trial and Rule 2004 exeamination and discharge was denied
under § 727(a)); In re Gillis, 403 B.R. 137 (debtor acted knowingly and fraudulently in failing to turn
over proceeds from estate assets; debtor testified inconsistently regarding the assets at the § 341
meeting and the later deposition); Buckeye Ret. Co., LLC v. Heil (In re Heil), 289 B.R. 897 (Bankr.
E.D. Tenn. 2003) (fraudulent behavior found found where debtor made inconsistent statements
regarding perceived obligations, failed to disclose asset to his own attorney and the trustee and had
received advice from another experienced bankruptcy attorney that the asset should be disclosed);
Krommenhoek v. Covino (In re Covino), 241 B.R. 673 (Bankr. D. Idaho 1999) (debtor found to have
acted fraudulently in concealing assets; debtor gave misleading testimony at § 341 meeting, lacked
credible and corroborative documentation, and provided inconsistent assertions of asset ownership
in separate context); In re Couch, 54 B.R. 682 (Bankr. E.D. Ark. 1985) (where debtor failed to
disclose interest in stock, even after amending schedules, and testified inconsistently and in
contradiction to other evidence regarding reason for omission, debtor acted knowingly and
fraudulently under 727(d)).
34
of Financial Affairs,33 and the Debtors testified truthfully and fully at the 341 Meeting in
response to the Trustee’s questions. 34 There is no evidence that they provided
ambiguous, misleading, or contradictory answers regarding the claim. 35 There is no
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36 Compare with In re Nagel, 2003 WL 23811677; In re Reese, 203 B.R. 425; In re Jackson,
141 B.R. at 706 (where debtor’s claim that she disclosed receipt of inheritance property to counsel
was not credible, debtor did not offer any other explanation for failure to disclose, admitted that she
discussed with counsel the need to disclose the property, failed to bring relevant paperwork to
deposition, and repeatedly denied access to bank account, and where other debtor’s omissions and
recalcitrance damaged credibility, discharge was revoked under § 727(d)(2)).
37 While not excusing a debtor’s obligation to turn over estate property, “in certain
circumstances knowledge of particular facts by a trustee might shed light upon whether a debtor’s
actions were taken with the mental state required under the statute . . . .” In re Echart, 374 B.R. at
598 n.2.
38 See also Morris v. Wright (In re Wright), 371 B.R. 472, 481 (Bankr. D. Kan. 2007) (despite
inconsistencies and inaccuracies in the schedules, Debtor had relied on advice of counsel and
agreement with his ex-wife to share tax refund that belonged to the estate; the court held that the
debtor “did not understand the process and understandably relied on his counsel. . . . While [the
debtor’s] belief was misguided and ill-advised,” debtor had not acted with fraudulent intent); Grant
v. Putnam (In re Putnam), 85 B.R. 881, 883-84 (Bankr. M.D. Fla. 1988) (where debtor did not
disclose interest in deceased father’s estate on bankruptcy petition, but had informed his lawyer
about it, and both he and his attorney believed he was entitled to nothing, debtor did acted
35
evidence that they attempted to obstruct the Trustee’s search for information or failed to
provide documentation and information related to the claim or Settlement Proceeds when
requested in December 2006. 36 While the Debtors’ assumption that they were free to keep
the Settlement Proceeds because they had not heard from the Trustee in quite some time
was a gravely erroneous one, they were not entirely unreasonable in concluding that the
Trustee’s knowledge of the Banknorth Claim would prompt him to more actively monitor
the case. 37
After considering the Debtor’s testimony in light of the surrounding circumstances,
the Court concludes that the Debtors did not act fraudulently in failing to report and turn
over the Settlement Proceeds. While self-serving statements of ignorance and reliance
on others are cautiously considered, the Court finds that this case differs from others
where such excuses are more readily disregarded. The Debtors relied on the poor advice
of their attorney. 38 They have acted with candor and full disclosure when questioned. And
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knowingly and fraudulently in failing to report interest and in waiving his interest in probate estate).
36
they have provided information and documentation when asked to do so. The Trustee’s
request for revocation of the Debtors’ Discharge for failure to disclose and turn over the
Settlement Proceeds will accordingly be denied.
Similarly, the Court cannot find that the Debtors acted with fraudulent intent when
they refinanced the Property in April 2007. Although Janice worked in the banking industry
for many years, she worked mainly as a teller and in customer service. 	She had no
responsibility for examining, evaluating, or passing on the propriety of loan applications.
Francis had even less experience in financial matters; he has a high-school education and
was a fairly careful and intelligent speaker, but was clearly reliant on others for all matters
financial. Both Debtors turned to those with more experience and education for advice
and assistance with the Refinance, and they received a consistent message – so long as
a discharge had entered, the Debtors were free to refinance. And so they did, without an
intent to hide the transaction or defraud the Trustee.
Having found that the Debtors did not act knowingly and fraudulently in failing to
disclose and turn over estate property acquired after the Petition Date, the Court will rule
in favor of the Debtors on Count I and deny the Trustee’s request to revoke their
Discharge.
IV. 	CONCLUSION
The Court ultimately rules that the Debtors are entitled to keep their Discharge.
This decision was not made lightly, and nothing here should be interpreted as a
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37
willingness to allow a debtor to “play[ ] ostrich and bury[ ] his head deeply enough in the
sand [to] disclaim all responsibility.” In re Tully, 818 F.2d at 111. Rather, on the unique
circumstances of this case, this Court concludes that the Debtors did not act with the intent
required to revoke a discharge under § 727(d)(2). The Debtors do not, however, escape
their responsibility to turn over estate property; they are obligated to the estate in the
amount of $20,092.39. Accordingly, the Court will enter judgment in conformity with this
Memorandum for the Trustee on Count II of the Complaint in the amount of $20,092.39
and for the Debtors on Count I. 	Because the Debtors have provided the Trustee with
sufficient funds to satisfy their obligations under Count II, Count III, which sought to
surcharge the Debtors’ exemptions in an amount necessary to compensate the estate for
the value of any property not turned over, will be denied as moot.
DATED: October 15, 2009 	By the Court,
Henry J. Boroff
United States Bankruptcy Judge
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