Farnham v. Serpa

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 10-30428DM
FERNANDO SERPA, 	)
)
Debtor. 	) Chapter 7
___________________________________)
MICHAEL FARNHAM, 	) Adversary Proceeding
) No. 10-3098DM
Plaintiff,)
)
v. 	)
)
FERNANDO SERPA, 	)
)
Defendant.)
___________________________________)
MEMORANDUM DECISION ON OBJECTION TO DISCHARGE
I. FACTUAL AND PROCEDURAL BACKGROUND1
Plaintiff, Michael Farnham (“Farnham”), filed an amended
complaint against debtor Fernando Serpa (“Serpa”) and Does 1-10 on
September 7, 2010, seeking to determine dischargeability under
section 523(a)(2)(A) 2 and to deny discharge to Serpa under
sections 727(a)(2)(A), 727(a)(3), and 727(a)(4)(A). 	The court
bifurcated the section 523 and 727 actions on October 29, 2010.
1 This Memorandum Decision constitutes the court’s findings
of fact and conclusions of law pursuant to Rule 7052(a).
2 Unless otherwise indicated, all chapter, section, and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
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Signed and Filed: September 28, 2011
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
September 30, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 10-03098 Doc# 72 Filed: 09/28/11 Entered: 09/30/11 11:43:55 Page 1 of
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After extended discovery disputes, the court conducted a trial
on the section 727 claims on August 29, 2011. 	Appearances were
noted on the record. 	The court orally indicated that it would
enter a judgment on partial findings, dismissing the section
727(a)(2)(A) and 727(a)(3) claims when Farnham failed to put
forward any evidence to support those claims. 	The court took the
727(a)(4)(A) matter under submission. 	For the reasons stated
below, the court will deny discharge to Serpa.
Serpa holds a J.D. from George Washington University and has
worked as a diversity consultant for various large companies.
Most recently he collects unemployment and has a small diversity
consulting company and a massage company. 	Serpa has three real
properties, one in Texas and two in San Francisco (the Castro
Street property and the 7th Street property). 	Serpa and Farnham
were romantically involved and lived together in the Castro Street
property. 	By any account it has been a messy break-up: Farnham is
involved in this bankruptcy case as an unsecured creditor and
there is a pending action in state court related to restraining
orders and investments Farnham made in the Castro Street property,
among other issues.
Serpa filed a voluntary petition for Chapter 7 bankruptcy and
initially filed all schedules on February 8, 2010. 	Over the
course of the bankruptcy case Serpa has filed eight amendments to
his schedules and his statement of financial affairs (“SOFA”).
The first and second of these amendments were filed on March 1,
2010, approximately one month after the petition. 	Both amendments
were to Schedule J, adjusting the amount of taxes paid on a piece
of real property from $0 to $850, and subsequently adding a $380
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payment for a third deed of trust on real property located in
Texas (bringing total installment payments from $3,724 to $4,104).
Serpa’s section 341 meeting of creditors was held
approximately two weeks later on March 17, 2010. 	Farnham attended
the meeting and asked Serpa questions regarding the status of
various pieces of real property, a Persian rug relevant to the
state court suit, and rental of the Texas Property. 	(Exhibit Z at
8-12). 	The Trustee suggested amending the SOFA based on Serpa’s
answers to these questions to include this rental income.
(Exhibit Z at 12). 	Serpa filed a third amendment that day,
adjusting Schedule I, the SOFA, and the means-test calculation.
In this amendment Serpa increased income from real property in
Schedule I by $425 (from $3,675 to $4,100), and added rental
income disclosed in the SOFA totaling $68,500 on three properties
from 2008 to 2010 (as of March 17, 2010). 	Rental income for the
Castro Street property was divided into two groups for 2009 and
2010: roommate and non-roommate. 	The total 2009 rental figures
disclosed for rental income indicated a monthly income from real
property of approximately $3,292 ((13,200 + 5,500 + 4,800 +
16,000)/12).
Approximately one week later, Serpa filed a fourth amendment,
this time to both Schedule G and the SOFA. 	Serpa added an
unexpired lease agreement on the Texas property to Schedule G and
added $2,100 in freelance earnings from 2008 and 2009 to the SOFA.
The fifth amendment was filed approximately three weeks later on
April 11, 2010, this time adjusting the SOFA, again, and Schedule
B to reflect settlement proceeds from yet another suit (this one
in small claims court) between Farnham and Serpa.
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Farnham next filed a motion for a 2004 Examination on April
16, 2010. 	On June 3, 2010, one day before the 2004 Examination,
Serpa filed his sixth amendment, adjusting Schedule I and the
Statement of Current Monthly Income and Means Test Calculation.
Relevant changes include an increase in income from real property
to $4,500 per month (versus $3,675 originally and $4,100 in the
third amendment). 	Also on the same day, June 3, 2010, Farnham’s
lawyers examined Richard Buckner (“Buckner”), a subsequent
romantic partner of Serpa. 	(Exhibit V). 	In this meeting Buckner
explained a “net zero” arrangement that he had with Serpa where he
paid different expenses, including the mortgage, for Serpa and was
subsequently repaid by various methods. 	Id. 	at 7-19. 	These
methods included primarily cash, but also at least one renter at
the Castro Street property making checks out directly to Buckner
instead of Serpa. 	Id.
This sixth amendment also included an adjustment to Schedule
I to include $300 per month for income received as a masseur.
This income was previously brought to Serpa’s attention in his
December 3, 2009 deposition, approximately two months before
filing his petition. 	(Exhibit C at 20). 	Upon being asked about
his work as a masseur at the deposition, Serpa invoked his 5th
Amendment Privilege against self-incrimination. 	Id. at 20-22.
The 2004 Examination proceeded on June 4, 2010 and Serpa
indicated upon questioning that he did not actually have a
roommate separate from the vacation rental income for the Castro
Street property, as indicated in the March 17, 2010 amendment, and
that he incorrectly filed duplicate numbers for the Castro Street
property. 	(Exhibit DD at 12-15). 	Serpa asserted that he did not
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have a roommate at the property, despite having testified in the
341 hearing less than three months before that he had a roommate
for approximately 6 months at the property. 3 	(Exhibit DD at 12-
15, Exhibit Z at 4). 	He was further unable to reconcile the
numbers disclosed in the SOFA with a monthly breakdown of rent
received and stated that he was not sure how he came up with the
rental income numbers. 	(Exhibit DD at 25). 	Upon further
questioning Serpa also admitted that he used 401(k) accounts
cashed in 2008 and 2009 (but not disclosed on the SOFA) to pay for
a remodel of the Castro Street property. 	Id. at 34.
Serpa filed his last two of the eight amendments, again to
the SOFA, a few days after this 2004 Examination on June 10, 2010.
Serpa removed rental income from a roommate on the Castro Street
property and adjusted the 2009 number for income. 	He also, for
the first time since filing for bankruptcy protection, disclosed
ten payments made to creditors in the 90 days preceding bankruptcy
and three financial accounts that had been closed within one year
preceding bankruptcy. 	These closed financial accounts
corresponded to the retirement accounts mentioned in the 2004
Examination, with balances totaling over $56,000. 	(see Exhibit DD
at 34). 	Without listing every payment made to a creditor,
payments to unsecured creditors totaled $17,426 and payments to
3 Serpa’s assertion that he was merely confused by the
Trustee’s question at the 341 meeting is unconvincing given the
clarity of the question: “All right, in the last year have you
received any, other than a roommate, have you received any rental
income for the Tenants in Common property?” 	(Exhibit Z at 5).
The Trustee again asked “All right, and have you rented the
property out at all in 2009 through that source other than...not
including the roommate?” with a clear response from Serpa of “Yes
we have also...about $2,000." 	Id. at 6.
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secured creditors totaled $14,649. 	Two payments to unsecured
creditors ($3,000 to a lawyer and $7,762 to a Wells Fargo credit
card balance) completely paid off the balance owed to those
creditors. 	Serpa’s explanations for previously omitting these
payments and accounts were that he was neither good at arithmetic
nor keeping records.
II. DISCUSSION
To deny Serpa’s discharge under section 727(a)(4)(A), 4
Farnham must show: (1) Serpa made a false statement or omission,
(2) regarding a material fact, and (3) did so knowingly and
fraudulently. 	Khalil v. Developers Surety and Indemnity Co. (In
re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007). 	“The
fundamental purpose of § 727(a)(4)(A) is to insure that the
trustee and creditors have accurate information without having to
conduct costly investigations.” 	Id. (quoting Fogal Legware of
Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP
1999)).
At first blush, and each taken individually, the omissions
and misstatements outlined above may seem minor. 	However the
totality of circumstances, including the pattern of omissions and
suspicious timing of corrections, lead the court to conclude that
Serpa knowingly and fraudulently made these false oaths.
(1) False Statement or Omission
“A false oath may involve a false statement or omission in
the debtor’s schedules.” 	Roberts v. Erhard (In re Roberts), 331
4 Under section 727(a)(4)(A) “[t]he court shall grant the
debtor a discharge, unless the debtor knowingly and fraudulently,
in or in connection with the case, made a false oath or account.”
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B.R. 876, 882 (9th Cir. BAP 2005). 	“The same is true for
statements made by the debtor when being examined at meetings of
creditors.” 	Phillips v. United States Trustee (In re Phillips),
No. WW-09-1114-MoMkH, 2010 WL 6259975, at *6 (9th Cir. BAP April
6, 2010). 	Serpa made a false statement by omitting a multitude of
facts from the bankruptcy schedules. 	Among other things, he
disclosed the wrong numbers two times for income in Schedule I.
Furthermore, it is undisputed that he omitted all of the
retirement accounts and payments to creditors in the SOFA in the
petition and the first six amendments filed.
(2) Material Fact
“A false statement is material if it bears a relationship to
the debtor’s business transactions or estate, or concerns the
discovery of assets, business dealings, or the existence and
disposition of the debtor’s property.” 	Wills, 243 B.R. at 62. 	It
may be material “even in the absence of direct financial prejudice
to creditors.” 	Roberts, 331 B.R. at 883.
In Serpa’s case, these misstatements were to the magnitude of
thousands of dollars and potentially hindered the discovery and
disposition of Serpa’s property. 	For example, rental payments
received could increase the size of the estate. 	Similarly,
information regarding preferential payments to creditors may allow
the Trustee to recover those payments and increase the estate to
the benefit of other creditors. 	Finally, closed financial
accounts may aid the Trustee in discovering attempts to hide
assets from creditors or past financial transfers. 	The false
oaths here were material because rental payments received on real
property, potentially preferential payments to creditors, and
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recently closed financial accounts all have a direct bearing on
the bankruptcy estate.
(3) Knowingly and Fraudulently
“A person acts knowingly if he or she acts deliberately and
consciously.” 	Roberts, 331 B.R. at 883. 	“Recklessness does not
measure up to the statutory requirement of ‘knowing’ misconduct.”
Id. at 884. 	Serpa consciously made the misrepresentations. 	Serpa
amended income from rents two times, meanwhile he was collecting
rents on these properties. 	His claim that he was confused about
the difference between a roommate and vacation renters is
outweighed by his legal training. 	Serpa also neglected to
disclose his massage business meanwhile collecting $300 a month
from the business, only to suspiciously disclose that income
immediately before his 2004 Examination and on the same day as
Buckner’s examination. 	Any claim that he forgot about this income
is further outweighed by the fact that this income was a subject
of his deposition two months before filing. 	Finally, that Serpa
had to review financial records to file his petition and the first
couple of amendments indicates that he would have had to
continually turn a blind eye to the information in these records
in order to forget about so much information.
Similarly, claiming to forget about over $56,000 in
retirement accounts closed and, at least partially, used to fund a
remodel of the Castro Street property is outweighed by his legal
training and the fact that he was reaping the benefits of the
remodel by renting out multiple rooms in the property throughout
bankruptcy. 	Finally, it is incomprehensible that Serpa could
forget about over $17,000 in payments made to unsecured creditors
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meanwhile reviewing his financial affairs in order to make the six
prior amendments. 	Serpa was in severe financial distress leading
up to bankruptcy, indicating that such large payments to creditors
would have made a lasting impression in his mind.
A debtor acts fraudulently if (1) he or she makes
representations, (2) that at the time he or she knew were false,
(3) with the intention of deceiving creditors. 	Khalil, 379 B.R.
at 173. 	“Recklessness can be probative of fraudulent intent.”
Id. 	“Intent usually must be proven by circumstantial evidence or
inferences drawn from the debtor’s course of conduct. . .
Recklessness can be part of that circumstantial evidence.” 	Id. at
174.
There is a significant pattern of recklessness in Serpa’s
extensive amendments throughout the bankruptcy process. 	Serpa
contends that he made mistakes, and that his decision to file
amendments demonstrates a lack of fraudulent intent. 	While true
that he filed amendments, the timing of four of these amendments
is suspicious. 	One amendment was made directly before the 2004
Examination and on the same day as Buckner’s examination. 	Another
amendment was filed to correct omissions and misstatements
directly after questioning by Farnham at the 341 hearing.
Finally, the last two were filed when the 2004 Examination
revealed additional information. 	Khalil emphasized that such
disclosures can be considered fraudulent: “Debtor belatedly
disclosed some of that income, when deposed about it, but that is
not the same as disclosing it voluntarily.” 	Khalil, 379 B.R. at
177. 	Furthermore, Phillips considered the suspicious timing of a
debtor’s decision to amend as evidence of fraudulent intent.
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Phillips, 2010 WL 6259975 at *8 (where debtor filed an amendment
to include a policy claim days before the insurance company
disclosed the claim to the Trustee).
Furthermore, “multiple omissions of material assets or
information may well support an inference of fraud if the nature
of the assets or transactions suggests that the debtor was aware
of them at the time of preparing the schedules and that there was
something about the assets or transactions which, because of their
size or nature, a debtor might want to conceal.” 	Khalil, 379 B.R.
at 175 (quoting Garcia v. Coombs (In re Coombs), 193 B.R. 557,
565-66 (Bankr. S.D. Cal. 1996)). 	This is probably not the case
for the 2008 and 2009 income disclosed in the SOFA because it is
relatively consistent with an annualized amount of the first
income figure disclosed in Schedule I.
However, Serpa did have an incentive to underestimate the
income from real property and his massage business received at the
time of bankruptcy in order to keep some payments for himself.
Significant increases in income from real property were disclosed
immediately after the section 341 meeting and immediately before
the 2004 Examination. 	Serpa may have thought he could hide these
payments because of his arrangement with Buckner wherein Buckner
sometimes took third party checks or cash as payment for Serpa’s
debts to him, thereby keeping those transactions out of his
records. 	Furthermore, Serpa probably wanted to avoid disclosing
massage income to keep that money out of the estate and to avoid
any culpability for fraudulently collecting the income.
Finally, regarding the omitted closed financial accounts
worth over $56,000, no coherent motive in hiding those closures is
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readily ascertainable. 	However, due to the late disclosure of
those accounts both the Trustee and creditors were limited in
their abilities to follow-up on any potential mis-use of those
funds. 	Serpa has repeatedly failed to give clear, straightforward
answers regarding his finances, and the use of money in these
closed accounts is no exception. 	This case has been replete with
omissions and misstatements coupled with suspicious timing and
elusive explanations. 	Regardless of what Serpa may have thought
or wanted to avoid, the totality of circumstances lead the court
to find that Serpa acted knowingly and fraudulently.
III. CONCLUSION
Serpa knowingly and fraudulently disclosed incorrect numbers
for his monthly income and omitted information regarding his
massage income, closure of his retirement accounts prior to
bankruptcy, and payments to creditors prior to bankruptcy. 	These
misstatements and omissions were material and were false oaths
within the meaning of section 727(a)(4)(A). 	Based on the
foregoing reasons, Serpa’s discharge shall be denied under section
727(a)(4)(A). 	The court is hereby entering a judgment consistent
with this Memorandum Decision. 5
**END OF MEMORANDUM DECISION**
5 If discharge were granted, Farnham’s section 523 claim
could be separately prosecuted. 	However, because discharge has
been denied this section 523 claim will be dismissed as moot.
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