By Ryan C. Wood
On November 6, 2013, I wrote a blog article about how a discharge of your debts by filing bankruptcy can be taken away or revoked after being entered by the Bankruptcy Court pursuant to Section 727(d)(1), (2) and (3) of the Bankruptcy Code. Ironically the Ninth Circuit Court of Appeals issued an opinion in Jones v. United States Trustee; D.C. No. 6:12-cv-00440-HO on this vary same subject on December 2, 2013. This case helps to reiterate why it is so important to disclose all of your income, expenses and assets when filing for bankruptcy protection. If a mistake is made or an asset not disclosed, disclose it as soon as possible and own up to it. Do not make the situation worse by trying to play games or lie about why the mistake took place.
Mr. Jones filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on December 23, 2008. For some unknown reason Mr. Jones’ bankruptcy attorneys did not file a complete petition and on January 19, 2009, the schedules of assets were filed in the case. Please note the declaration in support of the schedules or assets, income and debts is signed under penalty of perjury by the person filing for bankruptcy protection. After the filing of a bankruptcy case the meeting of the creditors is scheduled for about 30 days from the date the case was filed. Mr. Jones’ meeting was schedule for February 6, 2009, where Mr. Jones testified under oath that he listed all of his income, expenses and assets in the bankruptcy petition. In all fairness, there are plenty of reasonable explanations as to why a schedule of assets needs to be amended to include additional assets or make changes. All bankruptcy attorneys have had a client not understand that certain complicated future interests or contingent interests can be considered assets that must be disclosed. On April 9, 2009, the Bankruptcy Court entered an order granting Mr. Jones an order of discharge.
At some point within a year of Mr. Jones receiving his discharge the Chapter 7 trustee and United States Trustee found out Mr. Jones did not accurately disclose the true value of his assets and failed to list all of his assets in his schedules. Arguably Mr. Jones committed a fraud on the Bankruptcy Court and committed perjury twice, once by signing the declaration in support of his schedules and a second time when testifying under oath at his 341 meeting of the creditors. The United States Trustee moved to revoke Mr. Jones’ discharge arguing that Mr. Jones violated Section 727(a)(4)(A), which states that a bankruptcy court should deny discharge if the debtor knowingly or fraudulently, in or in connection with the case, made a false oath or account. The lower bankruptcy court agreed with the United States Trustee and revoked Mr. Jones’ discharge and the District Court affirmed. The Ninth Circuit Court of Appeals affirmed the District Court’s ruling.
The Ninth Circuit Court of Appeals published opinion does not provide the whole story though. According to court documents filed in Mr. Jones’ bankruptcy case, Case No. 08-65144, and Adversary Case No. 10-06100, Mr. Jones used to have various ownership interests in at least 50 businesses and had ownership in multiple parcels of property. Mr. Jones has a level of sophistication and knowledge that makes the alleged errors in his disclosure of assets and value of his assets highly suspect. The court filings further provide that Mr. Jones was order to provide testimony at a Rule 2004 Examination as well. Rule 2004(a) of the Federal Rules of Bankruptcy Procedure provides on motion of any party in interest, the court may order the examination of any entity. A Rule 2004 exam is very powerful given the scope of the information that can be asked about. The Unites States Trustee described Mr. Jones’ case as a “shell game of hiding the ball.” The United States Trustee received a tip that Mr. Jones did not disclose one limited liability company he owned and that led to the further investigation that uncovered Mr. Jones’ alleged fraud. The court documents do not reveal the source of the tip, but you can imagine that a jilted love interest or ex-business partner are prime suspects for providing the United State Trustee information. Court documents also allege that Mr. Jones had every opportunity to come clean and properly disclose his assets and business dealings transparently, but he did not to the detriment of his bankruptcy estate as real estate values declined during the litigation.
The most egregious fraud and false oath according to the United State Trustee was Mr. Jones’ claim that he transferred multiple limited liability companies into his father’s self-direct Individual Retirement Account. All courts involved in this case agreed with the United States Trustee that Mr. Jones lied about this transfer and actually continued to control the limited liability companies and continued to lie about his inaccurate schedules and statement of financial affairs.
At first glance the Ninth Circuit Court of Appeals holding seems harsh. After a closer look at the facts in this case the holding is very reasonable. A good faith mistake or inadvertent mistake in a petition can be quickly and easily corrected if the situation is not made worse. Mr. Jones’ case is a good blueprint for what not to do.
