United States Trustee v. Cunningham et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
In re
SHAWN N. CUNNINGHAM
NANETTE A. CUNNINGHAM
Debtors.
PATRICK S. LAYNG, United
States Trustee for Region 19
Plaintiff,
v.
SHAWN N. CUNNINGHAM
NANETTE A. CUNNINGHAM
Defendants.
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) 	Case No. 	13-20832
) 	Chapter 7
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) 	Adv. No. 	14-2008
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OPINION
On February 4, 2015, the Complaint for Revocation of the Debtors' Discharge
Pursuant to 11 U.S.C. § 727(d)(1) filed by Richard A. Wieland, United States Trustee for
Region 19 ("UST") and the Amended Answer filed by Shawn Cunningham and Nanette
Cunningham ("Debtors") came before the court for an evidentiary hearing. At the
conclusion of the hearing, the court took the matter under advisement. Having reviewed
the record, testimony, and evidence the court is prepared to rule.
Debtors filed for chapter 7 bankruptcy protection on August 28, 2013. They
received their discharge, pursuant to 11 U.S.C. § 727(a) on December 3, 2013. The UST
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seeks a determination that cause exists to revoke Debtors' discharge under§ 727(d)(1)
and (eV
Jurisdiction
The court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157
and 1334(a).
Findings of Fact
The parties stipulated to the uncontroverted facts as listed in the Final Pretrial
Order? Each debtor previously filed a chapter 7 bankruptcy. Debtors retained Felix
Sowada ("Sowada") to file this chapter 7 bankruptcy case, paying him $1,300.00. Mr.
Sowada requested Debtors provide a list of creditors that brought lawsuits against
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Debtors in order to prepare the bankruptcy petition and schedules. Ms. Cunningham
provided a computer generated list of lawsuits to Mr. Sowada, as given to her by the
Circuit Court of Campbell County. The list did not contain lawsuits from the District
Court.
After Debtors' bankruptcy case was filed, Randy Royal ("Trustee") was appointed
as the chapter 7 trustee to administer the case. Debtors appeared and testified, under oath,
at the §341 meeting of creditors on October 2, 2013. Debtors' discharges were entered on
December 3, 2013 as no complaints were filed controverting their eligibility for a
1 Unless otherwise noted, all statutory references are to Title 11 of the United States Code.
2 Final Pretrial Order, Dkt. No. 27, filed on January 29, 2015, page 3, Section 4, ~Nos. 1-36.
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discharge under§ 727(a).
Prior to filing for chapter 7 bankruptcy protection, Debtors were Plaintiffs in a
civil action in Campbell County District Court, Sixth Judicial District, State of Wyoming,
against Defendant, Western Fuels- Wyoming, Inc. ("Western Fuels"). Debtors and
Western Fuels entered into a Settlement Agreement on March 22, 2013. 	The Settlement
Agreement contained a Confidentiality provision, which stated:
Plaintiffs agree that they will forever keep strictly confidential the
substance of negotiations and conditions of the settlement, and the terms of
this Agreement, except for communications with the Internal Revenue
Service; accountants or other tax advisers; immediate family members; or as
may be required by law. Plaintiffs agree that they will advise such persons
to who they disclose this confidential information that they must keep the
substance of the negotiations and the conditions of the settlement strictly
confidential and shall not disclose the information to any third party in any
fonn. 	This provision prohibits the release or publication of any information
about the terms of this Agreement by Plaintiffs or by any party to which
they may disclose the terms of this Agreement, all allowed under this
Agreement. Plaintiffs may respond to inquiries relating to the Lawsuit by
stating, "It has been resolved."
Debtors agreed to release all claims against Western Fuels for the total sum of
$230,000.00. After attorneys' fees and tax withholdings were deducted from the
settlement proceeds, Debtors received a check in the amount of $60,226.24 dated March
25, 2013. Debtors cashed the settlement check by April 7, 2013. Debtors testified that
the reason the settlement check was cashed and not deposited into a bank account was so
Donald Lundvall and other creditors could not get it to satisfY debts. Debtors did not
disclose the lawsuit, Settlement Agreement or settlement proceeds to Sowada, the Trustee
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or the UST until after their discharge was entered on December, 3, 2013.
Debtors testified that between the time they cashed the settlement check in April,
2013 and filed their bankruptcy petition on August 28, 2013, they spent the entire amount
of settlement proceeds. Debtors provided an "Itemized List..." to the UST detailing how
they spent the proceeds. The list, included the following expenditures:
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Down payment of2006 Dodge Ram, $7,000.00;
Taxes & Plates on 06 Dodge, $1,300.00;
Taxes & Plates on Honda CRY, $1,500.00;
Tires on 06 Dodge, $1,300.00;
Rocker Panels of 06 Dodge, $500.00;
Tonneua Cover on 06 Dodge, $600.00;
Carpet for house $2,000.00;
Flooring for Kitchen & Dining Room, $2,000.00;
Other minor repairs on house, $1,000.00;
Washer & Dryer, $2,000.00;
Paid off Couch, $600.00;
King bed, dresser, 2 end tables, $1,200.00;
Dining Room Table, $500.00;
Pressure Washer, $500.00;
Air tools, drills and other tools, $2,500.00;
Kids school clothes, $4,000.00;
Gave each kid $500 to spend for themselves, $2,000.00;
Each Debtor bought $500 clothes and shoes, $1 ,000.00;
Eating out several times in 4 months, $2,000.00;
Trips to Thermopolis, Rapid City, Billings, est: $3,000.00;
Caught up on bills (Cell, city, cable, gas), $2,500.00;
Bought a full beef, $2,500.00;
Several soccer and baseball trips, $3,000.00;
Kids sports fees, shoes, wrestling stuff, baseball stuff, school
lunch money, $3,500.00;
First Interstate Bank overdraft, $300.00;
Groceries for four months, $5,000.00;
Felix Sowada for Bankruptcy, $1,300.00;
Camping trips, tent and air mattresses, $2,500.00;
Movie, theater, bowling, things for house, flowers for yard,
garden, $2,000.00;
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• 	Fuel, $1,500.00;
• 	Flat screen tv for daycare room, $500.00;
• 	Craft supplies for daycare, $300.00;
• 	Air conditioner repaired in house, $650.00.
The court's review of Debtors' Schedule F reflects that Debtors listed unsecured
nonpriority claims in the amount of $200,463.00 upon filing their bankruptcy petition.
Discussion
The UST asserts that Debtors' discharge should be revoked under § 727 (d)( 1) and
(e), which states,
"(d) On request of the trustee, a creditor, or the United States trustee,
and after notice and a hearing, the court shall revoke a discharge granted
under subsection (a) of this section if-
and,
( 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 the discharge ... "
"(e) The trustee, a creditor, or the United States trustee may request a
revocation of a discharge -
(1) 	under subsection ( d)(l) of this section within one year after
such discharge is granted ... "
Revocation of a debtor's discharge is an extraordinary remedy and§ 727(d) must
be construed strictly against a party seeking revocation and liberally in the debtor's
favor. 3 To prevail on a claim under§ 727(d)(l), the movant must prove by a
preponderance of the evidence that: (1) the discharge was obtained through fraud; (2) the
movant did not discover the fraud until after the discharge was granted; and (3) the fraud,
3 Boydstun v. Galey (In re Boydstun), No. 7-11-12456 TR, Adv. No. 12-1193T, Adv. No. 12-l298T, 2013
Bankr. LEXlS 3821 (Bankr. D.N.M. Jan. 18, 2013).
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if known, would have prevented the discharged under§ 727(a). 4 A bankruptcy debtor's
fraudulent intent in a transfer or concealment of property may be established by
circumstantial evidence, or by inferences drawn from a course of conduct. Fraudulent
intent can also be demonstrated by showing that the bankruptcy debtor acted with reckless
disregard, or the state of mind present when the debtor does not care about the truth or
falsity of a statement, which is equivalent of knowing that the representation is false and
material. An honest mistake or oversight is not sufficient to deny the debtor a discharge.
The bankruptcy court is required to evaluate whether the debtors' pre·petition debt is of
such a magnitude that denial of a discharge would make life virtually impossible for them
and to balance that against the degree of heinousness evidenced by the circumstances of
the violation of the bankruptcy laws constituting the grounds for denial of discharge. The
Bankruptcy Code does not dole out this substantial benefit [a discharge] indiscriminately.
Rather, the opportunity for a completely unencumbered new beginning is reserved only
for the honest but unfortunate debtor. Also, at the core of bankruptcy law is the policy of
obtaining a maximum and equitable distribution for creditors.
The court, analyzes the following elements in considering the case before it:
(1) Was Debtors' discharge obtained through fraud?
Evidence of fraudulent intent can be demonstrated by the debtor's admission that
4 Boydstun citing Lawrence Nat/ Bank (In re Edmonds), 924 F.2d 176, 180 (1Oth Cir. 1991 ).
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he or she made the transfer to protect his or her assets from attachment. 5 Debtors testified
the reason they did not deposit the settlement proceeds into a bank account was to
forestall creditors, especially an ex-step-father from proceeding to collect on his
judgment. Mrs. Cunningham testified that after receiving the settlement proceeds the
Debtors considered paying creditors, but determined not to, as "other creditors would get
a judgment and execute." The court finds that the Debtors admit that they protected the
settlement proceeds from creditors by cashing the settlement check and keeping the cash
in a cash box at their house, rather than deposit the funds into a bank account. Debtors'
actions demonstrate evidence of their fraudulent intent to protect the settlement proceeds
from creditors' attachment. The UST met the requirements of this element.
(2) The movant did not discover the fraud until after the discharge was granted.
The parties stipulated that the UST did not discover the Debtors' Settlement
Agreement and receipt of the settlement proceeds until after Debtors' discharge was
entered on December 3, 2013. This element has been satisfied.
(3) Would have the fraud. if known. prevented Debtors' discharge under§ 727(a)?
The Bankruptcy Code provides that the court, "shall grant the debtor a discharge,
unless the debtor, with intent to hinder, delay ... a creditor or an officer of the estate
charged with custody of property under this title, has transferred, removed, destroyed,
mutilated, or concealed .... (A) property of the debtor, within one year before the date of
5 Aweida v. Cooper (ln re Cooper), 150 B.R. 462, (D. Colo. 1993).
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the filing of the petition. 6 It is uncontroverted that in the five month period, prior to filing
their chapter 7 bankruptcy petition, Debtors ( 1) cashed the settlement check in the amount
of $60,226.24; (2) intentionally did not deposit the funds in a bank account so their
creditors could not garnish or attach it to satisfy judgments; (3) spent the proceeds on
improvements to their house, purchased a replacement vehicle for Mr. Cunningham;
vacations, and various household items. Debtors testified that since the circumstances of
their lives did not allow them or their children to have "extras", and upon receiving the
settlement proceeds they decided to spend the funds on themselves, rather that pay
creditors. The court finds Debtors' behavior to reflect a blatant intent to hinder and delay
payment of their creditors.
The UST additionally argues Debtors' discharge would not have been entered
under§ 727(a)(4)(A), which provides: (a) the court shall grant the debtor a discharge,
unless- (4) the debtor knowingly and fraudulently, in or in connection with the case- (A)
made a false oath or account. Reckless indifference to the truth ... has consistently been
treated as the functional equivalent of fraud for purposes of§ 727(a)(4)(A). 7
Debtors testified: they did not receive a copy of their completed bankruptcy
petition and schedules from Mr. Sowada; that when they went to Mr. Sowada's office to
sign the documents, the pages were printed on paper with other print on the other side;
6 § 727(a)(2)(A).
7 Freelife International, LLC v. Butler (In re Butler), 377 B.R. 895, 922 (Bankr. D. Utah 2006).
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-- - -··----------·--·-----------
and he did not review the petition, schedules and other documents with them. Contrarily,
Debtors testified, under oath, at their § 341 meeting of creditors and responded to the
following questions, put to them by the Trustee:
"Mr. Royal. Okay. Did you folks give Mr. Sowada the information
so that he could prepare the statements and schedules that you filed in this
bankruptcy?
Ms. Cunningham: 	Yes.
Mr. Cunningham: Yes, sir.
Mr. Royal: I can't hear you.
Mr. Cunningham: Yes, sir.
Mr. Royal: Okay. Did both ofyou review those documents before
you signed them?
Ms. Cunningham: Yes, sir
Mr. Cunningham: Yes, sir.
Mr. Royal: And did both of you sign them?
Ms. Cunningham: Yes.
Mr. Cunningham: Yes." 8
The court finds the Debtors' testimony incredulous. They testified that their
counsel did not explain the contents of their settlement agreement regarding the
confidentiality provision. They testified that separate counsel did not explain or provide
them documents regarding their bankruptcy petition. Then contrarily, they testified
8 Trustee's Exhibit 3, Pg. 4, 1[4-17.
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before the Trustee, that they read and understood the contents of their bankruptcy
documents.
It is difficult for this court to believe that Debtors did not know that their testimony
at the § 341 meeting was false, or they did not understand they had an obligation to tell
the truth during the creditors' meeting, as they were sworn in at the beginning of the
meeting. As the Colorado Bankruptcy Court found in Disgesualdo, 9 the functioning of
the bankruptcy depends upon the honesty of debtors at all stages of the bankruptcy
process. Debtors' false statements under oath constitute a basis for denial of discharge
under§ 727(a)(4)(A). Debtors cannot have it both ways. They cannot assert they were
not provided guidance from counsel in one breath, and deny the same in another. The
court finds that their false testimony at the § 341 meeting, at minimum, showed a reckless
disregard for the truth and is a basis that their discharge would have been denied. The
court finds the UST satisfied this element.
In conclusion, the court finds that the UST met the elements under § 727 (d)( 1) to
revoke Debtors' discharges.
Debtors argue that the court must consider whether their prepetition debt is of such
magnitude that denial, or in this case, revocation, of their discharge would make life
virtually impossible for them and to balance that against the degree of heinousness
evidence by the circumstances of the violation of the bankruptcy laws constituting the
9 Digesualdo at 523.
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ground for revocation of the discharge. 10 Debtors list unsecured non-priority debt in the
amount of$200,463.00. Ms. Cunningham operates a day-care from her home earning
$2,000.00 income per month. 11 Mr. Cunningham has been injured in three separate
incidents and receives Worker's Compensation in the amount of$2,620.00 each month.
The Debtors have four teenage dependents. Mr. Cunningham has a high school
education. Ms. Cunningham attained her GED. Debtors rely upon Digesualdo arguing
that in the event the court finds that their discharge should be revoked, the court takes into
consideration their circumstances and allow them to retain the discharge.
In Digesualdo, Debtors owned and were employed by the business. They operated
the business for nearly 22 years. Mr. Digesualdo was 66 years old with a high-school and
trade school education. Mrs. Digesualdo also worked part-time at the family business.
She also was the primary homemaker, worked at the elementary and high schools, had run
a restaurant and delivered newspapers. The DiGesualdos sold the business and paid a
substantial amount of funds to family members from funds deposited into their personal
account to repay loans, purchased a vehicle, pre-paid monthly mortgage payments,
retained cash to pay taxes, and paid business creditors. The Digesualdos appear to have
attempted to pay off as many creditors as possible, before considering bankruptcy.
In the case before this court, Debtors specifically decided not to pay their creditors.
10 Digesualdo at 524.
11 Debtors' Schedule I.
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They intentionally retained the settlement funds, determined that creditors would not gain
access to the funds, did not disclose the settlement agreement or award to their
bankruptcy counsel, and spent the funds making improvements on their residence, taking
vacations and generally spending the money in a period of four months before talking to
counsel about filing their bankruptcy. The court distinguishes the Colorado Bankruptcy
Courts ruling allowing the Digesualdo their discharge. Debtors intentionally denied
distribution of any of the settlement funds from their creditors. 	In this case, the court
tinds that Debtors' actions were egregious enough to warrant the revocation of their
discharges.
In conclusion, the court t1nds that the UST has met its burden for the revocation of
Debtors' discharges under §727(d)(l). This opinion constitutes the Court's findings of
fact and conclusions of law. A separate order shall be entered pursuant to Fed. R. Bankr.
P. 9021.
DATED this L3 day ofFebruary, 2015.
Service to:
Daniel Morse, UST
Phillip Willoughby
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