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ADVERSARY LAWSUITS: THE NEED TO DEFEND YOURSELF AND PROTECT YOUR BANKRUPTCY DISCHARGE...

What is an adversary complaint?

Can I ignore the adversary complaint filed against me and still receive my bankruptcy discharge?

When must I act?

Is the attorney who represented me in the bankruptcy case required to represent me in the adversary lawsuit?

These and other questions must be answered before you can start preparing an aggressive defense. Aggressively defending debtors against adversary lawsuits and preserving debtors’ bankruptcy discharge is what the Schaller Law firm does. We would like to help you too!

Debtors need to protect their bankruptcy discharge like they would protect their own life. The loss of the discharge would permanently jeopardize the “fresh start” promised by the U.S. Bankruptcy Code--- the goal sought by every bankruptcy debtor. Debtors would be duty bound permanently to pay the non-discharged debts for the rest of their lives, including any interest, penalties, late fees, costs, and attorney’s fees that apply.

This is no time to be passive or put a debtor’s head in the sand. Debtors must fight and defend! An adversary lawsuit is a frontal assault against debtors trying to rip the discharge from their lives. Debtors would otherwise lose their benefits and could have a judgment entered against them if they fail to defend.

A defensive strategy must be bold, direct, aggressive, and zealous. The attorney defending debtors must be skilled and experienced---the Schaller Law Firm suggests a minimum of 20 years of legal experience and a bare minimum of 1,000 bankruptcy cases. This is no time for "on the job training."

The Schaller Law Firm offers a FREE consultation to discuss the specifics of your case and how we can help you. You are encouraged to visit my Adversary Defense Blog to discover more information about adversary lawsuits. You are also invited to Contact me to schedule an appointment to talk to an experienced bankruptcy attorney.

Adversary Defense: General Topics

  1. What is an adversary Complaint?
  2. Can I ignore the adversary complaint filed against me and still receive my bankruptcy discharge?
  3. When must I act?
  4. Is the attorney who represented me in the bankruptcy case required to represent me in the adversary lawsuit?
  5. Section 523(a)(2)(A): False Pretenses
  6. Section 523(a)(2)(A): False Representation
  7. Section 523(a)(2)(A): Fraud
  8. Section 523(a)(2)(B): False Representation
  9. Section 523(a)(4): Fraud or defalcation while acting in a fiduciary capacity
  10. Section 523(a)(4): Embezzlement
  11. Section 523(a)(4): Larceny
  12. Section 523(a)(6): Willful and malicious injury
  13. Section 727(a)(3): Failure to Produce Financial Records
  14. Section 727(a)(4)(A): False Oath or Account
  15. Section 727(a)(4)(B): False Claim
  16. Section 727(a)(6)(A): Failure to obey a court order
  17. Who has the burden of proof?

What is an adversary complaint?

An adversary complaint is a separate lawsuit filed in the US Bankruptcy Court seeking to deny the debtor the bankruptcy discharge and possibly to enter a judgment against the debtor. The adversary complaint may seek to deny the discharge as to all creditors or as to only the particular creditor who filed the lawsuit. An adversary complaint typically relates to debtor’s bad behavior before the bankruptcy was filed or bad behavior in connection with the bankruptcy case itself.

A typical adversary complaint is filed by a creditor who believes it was wronged by debtor’s bad behavior prior to the bankruptcy case being filed. Examples of debtor’s wrongful behavior relate to: incurring credit card debt without the ability or intent to repay; taking payday loans without the ability or intent to repay; alimony; child support; taxes; fraud; false representations; false pretenses; breach of fiduciary duty; embezzlement; larceny; or willful and malicious injury.

Adversary complaints also could be filed by a standing trustee or the U.S. Trustee who believes a debtor engaged in wrongful behavior in connection with the bankruptcy case. Examples of debtor’s wrongful behavior relate to: making fraudulent oaths; making false claims; transferring or destroying property with an intent to hinder, delay or default a creditors; concealing, destroying, or failing to maintain books and records; failing to explain the loss of assets; and refusing to obey any court order.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Can I ignore the adversary complaint filed against me and still receive my bankruptcy discharge?

No. Debtors should never ignore an adversary complaint filed against them. In essence, an adversary complaint is a lawsuit filed against a debtor seeking to deny that debtor’s bankruptcy discharge. That’s serious and harsh.

Failure to defend against the adversary complaint would be a disaster and would result in a default judgment being entered against the debtor, the denial of the “fresh start” discharge, and possibly a money judgment being entered against the debtor. It is never a good idea to ignore a lawsuit that has been filed against you.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

When must I act?

ACT NOW! TIME IS OF THE ESSENCE! An adversary complaint is dangerous. A debtor who loses an adversary lawsuit would suffer permanent negative consequences. Debts for which the discharge is denied are debts that will remain owed for the remainder of your life, unless paid in full with any owed interest, fees, costs, and attorneys fees.

Debtors have only a short time to defend themselves---approximately 28 days! After that debtors are in jeopardy of a default judgment being entered against them and their bankruptcy discharged being DENIED OR REVOKED.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Is the attorney who represented me in the bankruptcy case required to represent me in the adversary lawsuit?

Debtors must offer an aggressive defense. Debtors must offer a defense if there is any hope of avoiding the loss of the bankruptcy discharge. But, the court system is stacked against debtors who fail to defend themselves or acts without the benefit of an attorney. On one hand, debtors are typically unschooled in bankruptcy law and unskilled in defending themselves. On the other hand, the creditor who files an adversary is typically represented by an experienced bankruptcy attorney who is schooled and skilled in the art of filing adversary lawsuits. The attorney against you studied the U.S.

So who should represent the debtor? Most debtors wrongly believe that the attorney who filed the underlying bankruptcy case would necessary also automatically represent the debtors in the adversary proceeding. Nevertheless, that is the assumption of most debtors. But, the bankruptcy case is a totally separate and different case from the adversary lawsuit filed against the debtor to deny the discharge. The attorney for the bankruptcy case is NOT required to represent the debtor in the adversary lawsuit. For example, Local Bankruptcy Rule 2090-5 of the U.S. Bankruptcy Court for the Northern District of Illinois does NOT require the attorney who represented a debtor in bankruptcy case to also represent the same debtor in an adversary lawsuit.

Nevertheless, each debtor is urged to contact the attorney who represented that debtor in the underlying bankruptcy case to determine whether that attorney would also represent the debtor in defending against the adversary complaint. Each debtor is also urged to engage that same attorney for the adversary proceeding if the attorney did a good job in the underlying bankruptcy case. If not, debtors are urged to consider hiring a different attorney---like the Schaller Law Firm.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Section 523(a)(2)(A): False Pretenses

Section 523(a)(2)(A) excepts from discharge any debt for money to the extent obtained by false pretenses. A creditor must show that the debtor’s actions were purposefully deceptive or misleading. Courts infer requirements establishing intent, reliance and materiality.

To provide that a debtor acted by false pretenses, the objecting creditor must show the following: (1) an implied misrepresentation or conduct by the debtor; (2) promoted knowingly and willingly by debtor; (3) to create a contrived and misleading understanding of the transaction on the part of the objecting creditor; and (4) which wrongfully induced plaintiff to advance money, property, or credit to the debtor. The frauds covered by this concept are those which in fact involve moral turpitude or intentional wrong.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Section 523(a)(2)(A): False Representation

Section 523(a)(2)(A) excepts from discharge any debt for money to the extent obtained by false representation. A creditor must show that the debtor’s actions were purposefully deceptive or misleading. Courts infer requirements establishing intent, reliance and materiality.

To provide that a debtor acted by false representation, the objecting creditor must show the following: (1) debtor made an express false or misleading statement; (2) with the intent to deceive; (3) on which the creditor justifiable relied; (4) in order to induce the creditor to turn over money or property to the debtor; and (5) that resulted in a loss to creditor caused by the false representation.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Below are some interesting legal cases involving Section 523(a)(2) (A). The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are available to review after being transferred from this webpage to my blog entitled "Adversary Defenses." You are encouraged to view my blog to discover more information about defending yourself from the adversary complaint and to protect your bankruptcy discharge. Visit my Adversary Defense Blog or contact me to talk to an experienced bankruptcy attorney.

  1. In re Schempp, 420 B.R. 637 (Bankr. W.D.Pa 2009). A credit card lender filed a Section 523(a)(2)(A) adversary complaint against a Debtor who took two cash advances on debtor's credit card 165 days before filing bankruptcy. The credit card provider alleged debtor made an implied misrepresentation by taking the cash advances without the intent to repay.

    Credit attempted to prove its claim by offering as evidence: (a) debtor made only one installment payment; (b) debtor filed bankruptcy within 165 days of taking the cash advance; (c) debtor had a negative net worth and was substantially insolvent when debtor filed bankruptcy; and (d) debtor earned substantially less than debtor spent on a monthly basis when debtor filed for bankruptcy.

    Debtor admitted experiencing financial difficulty when and after debtor obtained the cash advances, but the court found that this fact by itself did not demonstrate that debtor never intented to repay the cash advances. Next, debtor admitted that debtor had financial difficulties at the time the bankruptcy case was filed, but the court found that this fact and the presumed insolvency some 165 days before the bankruptcy filing, did not constitute conclusive evidence that debtor lacked an intent to repay, and thus a misrepresentation to creditor regarding debtor's intent to repay the cash advances.

    The court held that a "subjective standard" rather than an objective standard must be utilized to ascertain whether a debtor had an intent to deceive (i.e. whether a debtor's representation that debtor intended to repay was false) for purposes of Section 523(a)(2)(A). Therefore, the court focused its attention upon whether debtor subjectively intended to repay the cash advances, not upon whether an objective person would have thought that he or she could repay said debt. Consequently, the court gave great weight to debtor's testimony that (a) debtor's income had decreased dramatically in the roughly one-year period prior to filing bankruptcy because of the decline in the real estate market; and (b) debtor nevertheless thought that debtor's income would improve so as to allow debtor to make installment payments on the cash advances.

    Therefore, the court rejected creditor's claim and concluded that the alleged facts did not preponderantly prove the falsity of, or any deceptive intent on debtor's part with respect to, debtor's representation that debtor intended to repay the cash advances. Instead, the court concluded that is was at least equally likely that debtor (a) did not obtain the cash advances as part of a scheme to deceive creditor by accumulating debt on the the eve of bankruptcy without any intent to repay, and (b) was thus truthful when debtor implicitly represented to creditor that debtor intended to repay the cash advances.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Section 523(a)(2)(A): Fraud

Section 523(a)(2)(A) excepts from discharge any debt for money to the extent obtained by "actual fraud." The term “actual fraud” means common law fraud. A creditor must show that the debtor’s actions were purposefully deceptive or misleading. Courts infer requirements establishing intent, reliance and materiality.

To provide that a debtor committed "actual fraud," the objecting creditor must show the following: (1) a representation made by debtor to the objecting creditor; (2) debtor’s knowledge of the falsity when the representation was made; (3) debtor’s intent to deceive in making such representation; (4) creditor’s justifiable reliance; and (5) creditor’s damage as a result. A creditor must plead and prove each element of fraud in order to sustain a finding that a debt is nondischargeable, including intent on the part of the debtor to deceive at the time the debt was created.

For a breach of contract to result in a nondischargeable debt, the objecting party must prove that debtor misrepresented debtor’s intention to perform contractual duties, which may be inferred if the debtor failed to begin performance.

In cases involving contractor-debtors, there are generally two ways to prove fraud or misrepresentation. First, the creditor could show that the debtor entered into the contract with the intent of never complying with the terms; or second, the creditor could show that debtor intentionally misrepresented a material fact or qualification when soliciting or obtaining the work.

when determining whether a contractor committed fraud in connection with a construction project, the question pivots on whether during the negotiations the contractor induced the property owner into signing the contract by making material false representations, like promising to obtain the necessary permits or overstating the contractor’s qualifications. Substandard performance or a mere breach of the construction contract does not rise to the level of fraud necessary to except the debt from discharge.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Below are some interesting legal cases involving Section 523(a)(2)(A). The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are available to review after being transferred from this webpage to my blog entitled "Adversary Defenses." You are encouraged to view my blog to discover more information about defending yourself from the adversary complaint and to protect your bankruptcy discharge. Visit my Adversary Defense Blog or contact me to talk to an experienced bankruptcy attorney.

  1. In re Treadwell, 423 B.R. 309 (8th Cir. 2010). The 8th Circuit noted that it would be highly unusual to hold a debt nondischargeable where the debtor is only vicariouisly liable and had NOT participated in the underlying fraud.

  2. In re Treadwell, 423 B.R. 309 (8th Cir. 2010). The 8th Circuit addressed the "creditor’s justifiable reliance" element of Section 523(a)(2) and noted that the Supreme Court has held that the standard to be applied to exceptions to discharge for actual fraud is "justifiable reliance," which is a lower standard than "reasonable reliance," and entails no duty to investigate.

    However, it is true that the receipient of a fraudulent misrepresentation is not justified in relying upon its truth if the receipient knows that it is false or its falsity is obvious to the recipient. The Treadwell court found that the facts of the particular case did not involve obvious warning signs of falsity, and the bankruptcy court had found no evidence that an investigation would have unearthed proof of the fraud.

    But, the court noted a "red flag" exception for extreme situations such as a one-eyed hourse or where a debtor tells the creditor he will not be able to repay his debt.

  3. In re Powell, 423 B.R. 201 (Bank. N.D.TX 2010). The bankruptcy court addressed the "creditor’s justifiable reliance" element of Section 523(a)(2). The court noted that whether a creditor's reliance was reasonable under Section 523(a)(2) is a factual determination to be made in light of the totality of the circumstances.

    Among the circumstances that might affect the reasonableness of a creditor's reliance are: (1) whether there has been previous business dealings with the debtor that gave rise to a relationship of trust; (2) whether there were any "red flags" that would have aletered an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and (3) whether even minimal investigation would have revealed the inaccuracy of the debtor's representations.

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Section 523(a)(2)(B): False Representation

Section 523(a)(2)(B) excepts from discharge any debt for money, propety, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false representation or fraud. To prove a Section 523(a)(2)(B) claim, a creditor must show the following: (1) debtor made a statement in writing; (2) that is materially false; (3) respectinng the debtor's or an insider's financial condition; (4) on which the creditor to whom the debtor is liable for such money reasonably relied; and (5) that the debtor caused to be made or published with intent to deceive.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Below are some interesting legal cases involving Section 523(a)(2) (B). The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are available to review after being transferred from this webpage to my blog entitled "Adversary Defenses." You are encouraged to view my blog to discover more information about defending yourself from the adversary complaint and to protect your bankruptcy discharge. Visit my Adversary Defense Blog or contact me to talk to an experienced bankruptcy attorney.

  1. In re Schempp, 420 B.R. 637 (Bankr. W.D.Pa 2009). A credit card lender filed a Section 523(a)(2)(B) adversary complaint against a Debtor who took two cash advances on debtor's credit card 165 days before filing bankruptcy. The credit card provider alleged debtor made an implied misrepresentation by taking the cash advances without the intent to repay.

    In rejecting the lender's claim, the court noted that Section 523(a)(2)(B) pertains only to money obtained by debtor's use of a statement IN WRITING that is materially false respecting the debtor's or an insider's financial condition. The court's rejection was based upon (a) debtor's representations were NOT in writing; and (b) debtor's representations were NOT respecting debtor's financial condition.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Section 523(a)(4): Fraud or defalcation while acting in a fiduciary capacity

Section 523(a)(4) provides an exception to the general discharge provisions. Pursuant to §523(a)(4), a discharge under Section 727 does not discharge an individual debtor from any debt for fraud or defalcation while acting in a fiduciary capacity. An objecting creditor must plead and prove the following to except debts from discharge: (1) debtor acted in a fiduciary relationship when the alleged wrongful acts giving rise to the objecting creditor’s claim occurred; and (2) debtor committed fraud or defalcation.

Defalcation requires a showing of conscious misbehavior or extreme recklessness. Such a standard ensures that the term defalcation complements but does not dilute the other terms of the provision --- fraud, embezzlement, and larceny –-- of which require a showing of actual wrongful intent.

Accordingly, this standard does not reach fiduciaries who may have failed to account for funds or property for which they were responsible only as a consequence of negligence, inadvertence or similar conduct not shown to be sufficiently culpable. With respect to the kind of conducts that constitute defalcation, bankruptcy courts have generally held that commingling, failing to account for, or misdirecting funds may suffice.

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Section 523(a)(4): Embezzlement

Section 523(a)(4) provides an exception to the general discharge for debtors who embezzle assets of an objecting creditor. Courts look to the federal common law definition of embezzlement for purposes of non-dischargeability as the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.

To establish a claim of embezzlement under §523(a)(4), a creditor must show that (1) property owned by another is rightfully in the possession of debtor; (2) debtor’s appropriation of such property to a use other than the use for which the property was entrusted to debtor; and (3) circumstances indicating fraudulent intent. Absent intent to defraud, a debtor’s appropriation of funds does not arise to the level of embezzlement.

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Section 523(a)(4): Larceny

Section 523(a)(4) provides an exception to the general discharge for a debtor who wrongfully takes the assets of an objecting creditor. Larceny is distinguishable from embezzlement because in larceny, the original taking of the property must be unlawful. Where payments are lawfully received pursuant to a contract, larceny cannot exist for purposes of excepting a discharge.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Below are some interesting legal cases involving Section 523(a)(4). The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are available to review after being transferred from this webpage to my blog entitled "Adversary Defenses." You are encouraged to view my blog to discover more information about defending yourself from the adversary complaint and to protect your bankruptcy discharge. Visit my Adversary Defense Blog or contact me to talk to an experienced bankruptcy attorney.

  1. In re Ormsby, 591 F.3d 1199 (9th Cir. 2010). The debtor argued that summary judgment was inappropriate because a state court judgement against debtor for larceny should not preclude debtor from contending that debtor did not commit larceny within the federal definition of the term. The 9th Circuit disagreed and held that summary judgment against debtor was appropriate because the state court judgment was sufficient to preclude relitigation of whether debtor's conduct meets the requirements of Section 523(a)(4).

    The court cited Collier on Bankruptcy, which states that for purposes of Section 523(a)(4), a bankruptcy court is not bound by the state law definition of larceny but, rather, may follow federal common law, which defines larceny as a "felonious taking of another's personal property with intent to convert it or deprived the owner of the same."

    The 9th Circuit determined that it was not bound to the state court's judgment. Nevertheless, the 9th Circuit found that the state court judgment provided enough information to determine that debtor's action amounted to fraud, since "intent may properly be inferred from the totality of the circumstances and the conduct of the person accused. Citing Kaye v. Rose (In re rose), 934 F.2d 901, 904 (7th Cir. 1991).

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Section 523(a)(6): Willful and malicious injury

Section 523(a)(6) prevents an individual debtor from discharging any debt that is the result of willful and malicious injury. The terms "willful" and "malicious" are separate elements. An objecting creditor must prove both elements in order for the discharge to be excepted.

Speaking to the "willful" element, the Supreme Court specifically rejected a broad interpretation of the exception by narrowly holding that "non-dischargeability takes a deliberate or intentional injury, not merely a deliberate act that leads to injury." Kawaaukau v. Geiger, 523 U.S. 57 (1998). The injury itself must be desired and in fact anticipated by the debtor in order or for the debt to be excepted from discharge. Thus, debts arising from recklessly or negligently inflicted injuries do not fall within the compass of §523(a)(6).

The term "malicious" refers to the debtor’s motivation in committing the act and has been defined by the court to mean wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will. Actual or constructive malice will suffice and may be imputed to the debtor in cases where a debtor seeks profit or some other benefit only upon a finding of aggravated circumstances.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page.

Below are some interesting legal cases involving Section 523(a)(6). The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are available to review after being transferred from this webpage to my blog entitled "Adversary Defenses." You are encouraged to view my blog to discover more information about defending yourself from the adversary complaint and to protect your bankruptcy discharge. Visit my Adversary Defense Blog or contact me to talk to an experienced bankruptcy attorney.

  1. In re Ormsby, 591 F.3d 1199 (9th Cir. 2010). The 9th Circuit found that a malicious injury involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse. Malice may be inferred based on the nature of the wrongful act. To infer malice, however, it must first be established that the conversion was willful.

  2. In re Powell, 423 B.R. 201 (Bankr. N.D.TX 2010). The court found that an adversary plaintiff seeking to deny debtor's discharge under Section 523(a)(6) must prove, by a preponderance of the evidence, a willful and malicious injury by the debtor to plaintiff or plaintiff's property. The word "willfull" in Section 523(a)(6) modifies "injury" and, therefore, required plaintiff to prove "a deliberate or intentional act that leads to injury."

    Following the Supreme Court's decision in Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998), the court determined that either an objective substantial certainty of injury or a subjective motive to cause injury meets the Surpreme Court's definition of "willful" in Section 523(a)(6).

    Then, the Powell court rejected plaintiff's claim because plaintiff failed to prove the underlying conduct from which debtor's intent could have been inferred. In fact, plaintiff offered no evidence to support the claim.

  3. In re Moore, 346 Fed.Appx. 321 (10th Cir. 2009). Debtor appealed the district court's judgment affirming the bankruptcy court's granting of summary judgment in favor of plaintiff on non-dischargeability adversary claim brought pursuant to Section 523(a)(6)'s willful and malicious standard. Debtor had been found liable prepetition to plaintiff in a California state civil proceeding for intentional infliction of emotional distress.

    Consequently, the bankruptcy granted summary judgment against debtor because that court believed debtor was collaterally estopped from relitigating whether plaintiff's debt was the result of a willful and malicious injury. Therefore, the debt was deemed non-dischargeable pursuant to Section 523(a)(6).

  4. In the case of In re Rodenbaugh, 431 B.R. 473 (Bankr. E.D. Mo. 2010), the bankruptcy court addressed whether a husband would be denied a bankruptcy discharge because of his ambivalence to the family finances while his wife was engaging in willful and malicious conduct. In Rodenbaugh, the wife and husband filed a joint bankruptcy case attempting to discharge debts relating to the wife’s felonious theft of $314,327 from her ex-employer. The husband did not participate in the wife’s theft.

    The wife deposited the stolen funds into a joint bank account shared with her husband. The husband admitted that he benefited from the wife’s theft in that some of the stolen funds were used to pay family expenses. The husband also admitted that he had spent some of the stolen funds; however, he did so without any knowledge of the preceding crimes. The husband maintained that he became aware of the wife’s crime only after her termination from the wife’s employer. Finally, the husband testified at the trial that he had never noticed any superfluous funds in the joint bank account because he allowed the wife to pay the bills and was ambivalent to the family finances.

    The wife’s ex-employer objected to the husband’s discharge pursuant to 11 U.S.C. §523(a)(6) claiming that the financial obligation to repay the stolen funds should be excepted from discharge. The employer argued that the debt should be excepted from discharge as to the husband too because the husband knew of, or was willfully blind to the wife’s theft and therefore the husband’s actions were willful an malicious towards the ex-employer. The ex-employer argued that at the very least, the husband’s actions were reckless and as such any debt excepted from the wife’s discharge should be imputed to him as well.

    The husband opposed the exception to discharge. The husband argued that the standard of willful and malicious conduct cannot be attributed to the husband because at all relevant times, the husband was not aware of the wife’s criminal actions and did not conspire, condone, contribute or encourage said criminal actions.

    The court ruled in favor of the husband. The court began its analysis by noting that debts arising from willful and malicious injury by a debtor are excepted from discharge under 11 U.S.C. §523(a)(6). Wilfulness and maliciousness are two distinct elements of §523(a)(6). To prove willfulness, the creditor must show by a preponderance of the evidence that debtor intended the injury, not just a deliberate or intentional act leading to injury. Debts arising from recklessly or negligently inflicted injuries do not fall within the compass of §523(a)(6). But, the court did recognize that acts intrinsically meriting nondischargeability under §523(a) can be attributed to a debtor who did not perform them, if the debtor was a “knowing active participant” in a scheme or conspiracy through which a third-party malefactor performed the acts.

    Apply the law to the facts, the Rodenbaugh court held that to prove willfulness under Section 523(a)(6), the wife’s ex-employer was required to prove by a preponderance of the evidence either that the husband desired for the ex-employer to be harmed and thus conspired with the wife to this end OR that the husband knew of the wife’s crimes and schemed with her to this end despite substantial certainty that the ex-employer would suffer harm as a result of the wife’s actions.

    Finally, the court rejected the ex-employer’s complaint objecting to the husband’s bankruptcy discharge. The court believed that the facts did not support a conclusion that the husband acted willfully. The court found that while the husband’s ambivalence to the family finances was likely reckless, there was insufficient facts to conclude that the husband’s actions rouse to the level of willful and maliciousness or that he conspired with his wife. Therefore, the husband was granted his bankruptcy discharge.

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Section 727(a)(3): Failure to Produce Financial Records

Section 727(a)(3) states that the court shall grant the debtor a discharge unless the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless the failure to act was justified under all of the circumstances of the case.

The purpose of §727(a)(3) is to give a creditor and the court complete and accurate information concerning the status of the debtor’s financial affairs and to test the completeness of the disclosure requisite of a discharge. The policy served by debtor’s disclosure obligations is to give unsecured and undersecured creditors the ability to trace a debtor’s financial history to determine whether they are being treated fairly.

The elements of a §727(a)(3) claim that must be proved by a preponderance of the evidence are as follow: (1) the creditor must prove that the debtor failed to keep or preserve records; and (2) such failure was not reasonably under the circumstances and this failure makes it impossible to ascertain the debtor’s true financial condition or business transactions. All records that are necessary to understand a debtor’s financial condition are within the scope of this section. All books and materials which shed light on what was done with a debtor’s bankruptcy estate and the factors which led to the filing for relief are material to a §727(a)(3) analysis.

In a personal bankruptcy case, the quintessential documents that must be preserved and kept are debtor’s pay stubs and tax returns. The debtor’s failure to provide bank and credit card statements can also form the basis for denying a discharge under §727(a)(3) since those documents form the core of what is necessary to ascertain the debtor’s financial condition, primarily debtor’s use of case assets. The determination of whether a debtor has maintained adequate records is particularly fact intensive and must be determined on a case by case basis. Considerations relevant to this determination include debtor’s occupation, financial structure, education, experience, and sophistication.

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Section 727(a)(4)(A): False Oath or Account

Section 727(a)(4)(A) provides that the 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. Examples of these false oaths relating to the bankruptcy schedules include: understating income, over stating expenses, intentionally omitting assets, intentionally omitting debts owed to creditors, or failing to identity fraudulent conveyances or preferential transfers.

A party objecting to a debtor’s discharge must allege and prove the following: (1) the debtor made a statement under oath; the statement was false; (3) the debtor knew the statement was false; (4) the statement was made with fraudulent intent; and (5) the statement related materially to the bankruptcy case.

Qualifying statements include statements in documents, such as the bankruptcy schedules and statement of financial affairs, filed with the petition and statements by the debtor during examinations under oath---including the Section 341 meeting of creditors.

Because a debtor is unlikely to admit having made a deliberate misstatement, knowledge of falsity or fraudulent intent may be found where the debtor acted with reckless disregard for the truth. The requirement of materiality was judicially created to ensure that debtors are not denied discharge for inconsequential or technical misstatements. A test for materiality is whether the false statement relates to the debtor’s business transactions or estate or whether it is pertinent to the discovery of assets or the existence or disposition of property.

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Section 727(a)(4)(B): False Claim

Section 727(a)(4)(B) prohibits the granting of a discharge to a debtor who knowingly and fraudulently presented or used a false claim in or in connection with a bankruptcy case. This provision of the code is utilized infrequently. The courts that have considered objections to discharge for presenting a false claim have required the objecting party to prove that the debtor presented or used an inflated or fictitious claim. Such cases generally involve the scheduling of non-existent debts, the scheduling of inflated debts, or the filing by the debtor of a false proof of claim.

A §727(a)(4)(B) violation requires both intentionality and materiality to be actionable. At least one bankruptcy court has denied a debtor’s discharge where the court found that the overstatement of a secured claim was a material falsity because it created a mistaken belief that the liens against the debtor’s residence exceeded it fair market value.

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Section 727(a)(6)(A): Failure to obey a court order

Section 727(a)(6)(A) provides that the court shall grant the debtor a discharge, unless the debtor has refused to obey any lawful order of the court, other than an order to respond to a material question or to testify. Given the plain language of the statute that debtor "refuse" to obey a court order, it appears that "mere failure" to obey is insufficient to justify the harsh sanction of denial of a discharge imposed by §727. Consequently, discharge should only be denied where the debtor’s noncompliance with a court order was a result of willful, intentional disobedience or dereliction rather than mere inadvertence or mistake.

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Who has the burden of proof?

The party seeking to bar a debtor from discharge under Section 727 and concomitant "fresh start" has the burden of proof. That party must articulate well-pleaded allegations establishing the required elements for the denial of discharge under one or more provision of the U.S. Bankruptcy Code. The creditor or trustee objecting to a debtor’s discharge carries the burden of proof because of the draconian relief sought. The courts strictly construe against objecting creditors and liberally construe in favor of the debtor.

Exceptions to discharge under Section 523 must be similarly construed so as to give maximum effect to the Code’s policy of providing honest but unfortunate debtors with a "fresh start." To sustain a cause of action under either §727 or §523, the creditor must establish each element of the statue by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991).

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