litigating bankruptcy discharge denials under ...accounts for about 18% of malpractice claims). see...

LITIGATING BANKRUPTCY DISCHARGE DENIALS

UNDER 11 U.S.C. § 727

(ESPECIALLY AS RELEVANT TO LEGAL ETHICS)

JAMES J. S. JOHNSON, ESQ.Master Faculty, LeTourneau University

P.O. Box 2952Dallas, Texas 75221 - 2952

817-430-9305 telephone 817-430-9306 FAX

State Bar of Texas20TH ANNUAL ADVANCED

CONSUMER BANKRUPTCY COURSESeptember 23-24, 2004

Houston

CHAPTER 9

JAMES J. S. JOHNSON, ESQ.Master Faculty, LeTourneau University

P.O. Box 2952, Dallas, Texas 75221 - 2952817-430-9305 telephone; 817-430-9306 FAX

SELECTED BIOGRAPHICAL INFORMATION

LEGAL EDUCATION, BAR ADMISSIONS, & CERTIFICATIONS

Juris Doctor, University of North Carolina at Chapel Hill, including senior staff service for theNorth Carolina Journal of International Law & Commercial Regulation

Admitted: State of Texas; all U.S. district courts in Texas; Fifth Circuit Ct. of Appeals; U.S. Supreme CourtCertified in Business Bankruptcy Law (by the Texas Board of Legal Specialization)Certified Independent Hearing Examiner (by the Texas Education Agency)Certified Paternity Establishment Entity (by the Office of the Attorney General of Texas)

PROFESSIONAL & ACADEMIC ACTIVITIES, INCLUDING INTERNATIONAL LECTURING

Community Program Director, SWern Legal Foundation’s Conf. on Internat’l & Amer. Law (1991-1992) Master Faculty, LeTourneau University (since 1991, including Business Law, American Political Foundations,

Business Gov’t Policy, International Business, Business Ethics, etc.)Adjunct Faculty, Dallas Christian College (since 1995, including Business Law, Internat’l Law & Treaties,

Water Quality Monitoring & Environm’l Limnology, National & State Gov’t, Philosophic History ofAmerican Gov’t, Ecology & Environm’l Studies, Ornithology & Avian Conservation, etc.)

Guest Lecturer on Environmental Law, Southern Methodist University (1992-1993)Political History Lecturer, for Norwegian Cruise Lines (Caribbean, 1998; Western Europe, Iceland, Eastern

Canada, & Boston, 2002), and for the Orient Lines (Western Europe, 2003)Member of various Sections of State Bar of Texas, including the Bankruptcy Law Section.

LAW-RELATED PUBLICATIONS & SEMINAR PAPERS

Law–related Seminar Papers, etc.:“Administrative Law Issues in Bankruptcy” (SBOT Bankruptcy Section, Paris, France 2004 seminar)“Litigating 11 U.S.C. § 727 Issues” (SBOT Bankruptcy Section Seminar, Paris, France 2004 seminar)“Did the Good Samaritan Doctrine Justify How the Massachusetts Puritans Provided Military Aid during

the ragin’ Cajun French Civil War in the 1640s ? ” (E.T.S. @ Dallas Theological Seminary, 2004)“How Texas Addresses Administrative Law Issues in School Law Contexts” (Nat’l Business Institute, 2003)

Primary (or Sole) Author of Various Law Journal Articles appearing in the following: Jones Law Review (1998); Norton Bankruptcy Law Advisor (1996); Texas Wesleyan Law Review (1996);State Bar of Texas Environmental Law Journal (1996); Univ. of Baltimore Journal of Environmental Law(1995); Proceedings of the Wetlands Scientists 16th Annual Meeting (Boston 1995); Temple EnvironmentalLaw & Technology Journal (1995); Federal Bar Association’s Energy, Environment, & Natural ResourcesLaw Section Newsletter (1995); Journal of Natural Resources & Environmental Law (1994-1995); FederalBar Association’s Bankruptcy Law Section Newsletter (1993); Simon Greenleaf Law Review (1985).

Author of Undergraduate College Textbook on Ecology, Conservation Policy, and Environmental Law: Introduction to Environmental Studies: an interdisciplinary analysis of applied ecology, conservation policy, & environmental ethics (1995 et seq., Dallas Christian College; 1996 et seq.,LeTourneau Univ.)

ACKNOWLEDGEMENT: This bankruptcy law paper was submitted to the State Bar of Texas in a timely manner,and in the proper format, due to generous editorial assistance and formatting of Donald L. Totusek, Esq., aTexas attorney (board-certified in Estate Planning & Probate Law), who sometimes teaches as an adjunctfaculty for LeTourneau University.

Litigating Bankruptcy Discharge Denials Under 11 U.S.C. § 727 Chapter 9

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TABLE OF CONTENTS

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A. Overview, including Legal Ethics Relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1B. “... there are many adversaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. LESSONS FROM KONTRICK V. RYAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2A. Pleading Affirmative Defenses to §523 / §727 Adversary Complaints . . . . . . . . . . . . . . . . . . . . . . . 2B. Summary Highlights for the Consumer Bankruptcy Lawyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7C. Lesson: Pleading Affirmative Defenses to a §727 Complaint Objecting to Debtor’s Discharge . . . . . . 7D. Lesson: Pleading Affirmative Defenses to a §523 Complaint to Declare Debt Non-dischargeable . . . . 8E. Lesson: Summary Judgment on the Material Fact of “Intent to Defraud” . . . . . . . . . . . . . . . . . . . . . 8

III. HOW AN ADVERSARY’S “SCAREY FACE” REVIVAL CAN DEFEAT A DORMANTAFFIRMATIVE DEFENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

IV. SELECTED CASES ANALYZING SECTION §727-RELEVANT EVIDENCE OF DEBTOR’S“INTENT TO DEFRAUD” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12A. “Intent to Defraud” as applicable to §727(a)(2)(A) and/or (a)(2)(B) allegations . . . . . . . . . . . . . . . 12

1. In the Matter of Swift . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122. In the Matter of Bowyer “I” and “II” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123. In re Rothrock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134. In re Womble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135. Matter of Reed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

B. “Intent to Defraud” and the Importance of Showing “Extrinsic” Fraud Evidence . . . . . . . . . . . . . . . 131. What Proves Debtor’s Section 727(a)(2)-relevant “Intent”? . . . . . . . . . . . . . . . . . . . . . 132. Is a Fact-finding of Fraud Necessary? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133. What is the Definition of “Extrinsic” Fraud Evidence? . . . . . . . . . . . . . . . . . . . . . . . . . . . 144. In re Martty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

C. “Extrinsic” Evidence of Actual “Intent” to Hinder, Delay, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15D. “Actual Intent to Defraud” as Analyzed by the 5th Circuit’s Chastant Checklist. . . . . . . . . . . . . . . . 16

1. In re Dennis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16E. “Intent to Defraud” as Evidenced by a Debtor’s “Concealment” of Asset Transactions . . . . . . . . . . 17

1. How Does the Fifth Circuit Define “Concealed”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172. In re Cook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183. In re Lightfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

F. “Intent to Defraud” as Applicable to §727(a)(3) And/or (A)(5) Accounting Problems . . . . . . . . . . . 191. What Proves Debtor’s 727(a)(3)/(5)-defined Failure to Account? . . . . . . . . . . . . . . . . . . 192. In re Womble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193. In re Townsley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204. In re Dennis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

G. “Intent to Defraud” as Applicable to §727(a)(4)-relevant Disclosure Deceptions . . . . . . . . . . . . . . . 211. How 727(a)(4)-relevant Are Debtor’s Schedule Non-disclosures? . . . . . . . . . . . . . . . . . 212. In re Lightfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223. In re Townsley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

V. OTHER LEGAL ETHICS ISSUES RELATED TO DISCHARGE TOPICS . . . . . . . . . . . . . . . . . . . . . . . . 22A. Legal Ethics Issues Involving the Texas Public Information Act . . . . . . . . . . . . . . . . . . . . . . . . . . 22

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222. Word of Faith World Outreach Center Church, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233. Bankruptcy practice implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

B. Representing the Governmental Employee: Considering Concurring or Future Proceedings . . . . . . . 25


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C. Withdrawal from Continued Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

VI. CONCLUDING COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27


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LITIGATING BANKRUPTCY DISCHARGEDENIALS UNDER 11 U.S.C. § 727(ESPECIALLY AS RELEVANT TO LEGAL ETHICS)

I. INTRODUCTIONA. Overview, including Legal Ethics Relevance

This outline reviews a variety of bankruptcy fraud-related issues, highlighting some legal ethics issues.

But how is a debtor’s pre-bankruptcy planning(and/or post-bankruptcy back-pedaling) a potentialPandora’s box full of legal ethics surprises?

Compare the “plain language” (and implications) of18 U.S.C. §§ 152 – 157 with the “plain language” of 11U.S.C. § 727. Sobering, isn’t it, especially when ituses the word “attorney” in 18 U.S.C. § 153(b)?

Or, consider the applicational breadth of the statutorylanguage in 18 U.S.C. § 157’s “bankruptcy fraud”provision — regarding a “person” who “files adocument in a proceeding under title 11” — or who“makes a false or fraudulent representation, claim, orpromise concerning or in relation to a proceeding undertitle 11, at any time before or after the filing of the petition....”! In other words, a bankruptcy practitioner need beconcerned about more than the State Bar rules’prohibition against aiding and abetting a continuingfraud, because Title 18 prohibitions are more focused.

Therefore, this paper presupposes – in light of itsintended audience – that the underlying subject-matter ofdischarge denial-justifying Bankruptcy Code offenseslargely overlaps with the underlying subject-matter ofTitle 18’s “bankruptcy crimes” sections.

Accordingly, all considerations of how “intent todefraud” is treated in the bankruptcy courts, especiallywhen “concealment” (or destruction) of estate assets,transaction documentation, etc., must be considered notonly as to how they impact § 727 discharge denial issues,but also – when such overlap – how they impact abankruptcy lawyer’s relationship to Title 18 statutes.

In this paper, the selected § 727(a) discharge denialcases will focus mostly on two § 727(a)-based themes:(1) evidentiary issues regarding a debtor’s “intent todefraud” (for discharge denial purposes), with attention tohow proof of “extrinsic” acts of fraud complicates theevidentiary analysis; and (2) an analysis of the U.S.Supreme Court’s decision (on January 14, 2004) inKontrick v. Ryan, which involved pleading affirmativedefenses in discharge denial adversary litigation.Attention will be given to how and why the Kontrickruling applies equally to both Section 727 discharge deniallitigation and Section 523 dischargeability litigation. Thelatter analysis, regarding Kontrick, is also considered as

a “legal ethics”-oriented topic, because it illustrates thetrickiness of properly pleading “limitations” as anaffirmative defense. (Of course, missing a limitationsassertion is known to trigger malpractice questions, andmalpractice questions are often a topic of “legal ethics”concer n . (See generally, accord, “Into the Deep End:Navigating the Perilous Waters of Legal Ethics andLegal Malpractice”, State Bar of Texas 1998–1999, co-sponsored by the Texas Center for Legal Ethics &Professionalism, e.g., Michael J. Crowley’s “As theWorld Turns: Changing Firms, Changing Lives”, at itspage G-17 (regarding “docket control systems” and page3 of its Appendix A, citing a Professional Liabilitystudy, suggesting that “failing to comply with deadlines”accounts for about 18% of malpractic e claims). Seealso, accord, Kathryn McGlothlin, “Some MalpracticeTraps in the General Practice (and Ways to AvoidThem)”, State Bar of Texas 1987, at its page 18 (listing“missing a deadline” as one of the “most common”grounds asserted in a malpractice claims againstbankruptcy / debt collection attorneys).

So, brief attention is given to the legal ethics issuespotentially relevant to statutes of limitations, including theprocedurally rare situation where an adversaryproceeding in bankruptcy court can be used to “revive”a “dormant-yet-not-quite-dead” Texas judgment.

Finally, some other legal ethics topics relevant tobankruptcy practice will be noted, with special attentionto protecting a debtor-client’s privacy rights.

B. “... there are many adversaries.”This admittedly out-of-context quotation from the

apostle Paul (1st Corinthians 16:9, KJV), originally hadnothing to do with adversary proceeding litigation.However, the phrase does fit a bankruptcy litigator’sobservations, accurately portraying the inundatedimpression one sometimes receives when wading intothe vast oceans of federal case law interpreting 11U.S.C. § 727(a)-based adversary proceeding courtlitigation to “fraud-on-creditor” allegations.

So, by way of introducing this paper, on “selected”cases involving 11 U.S.C. § 727(a) discharge deniallitigation, an immediate qualifier is needed: this paperdoes not attempt to provide a summary-like “survey” or“overview” of such cases. Rather, this paper’s solepurpose is to insightfully focus on one recent ruling by theU.S. Supreme Court, and to follow that analysis with areview of a few other § 727(a) cases involving “intent todefraud” bankruptcy evidence issues.


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II. LESSONS FROM KONTRICK V. RYANA. Pleading Affirmative Defenses to §523 / §727Adversary Complaints

On January 14, 2004, the United States SupremeCourt issued Kontrick v. Ryan, ___ U.S. ___, 124S.Ct. 906, 72 U.S.L.W. 4126 (2004), — disallowinga debtor’s usage of an affirmative defense needed by adebtor to defend against a creditor’s § 727(a)(2)(A)-based discharge challenge in an adversary proceedingdecided by a summary judgment.

In Kontrick, the high court affirmed a summaryjudgment (not a trial judgment) that favored the objectingcreditor, despite the creditor having missed theBankruptcy Rule 4004 deadline for asserting the specificdischarge denial grounds upon whic h the creditor’ssummary judgment was bottomed, and despite the debtorhaving specifically denied the “intent to defraud”allegations.

Although this was a contested § 727(a)(2)(A)adversary case, there was no trial on the merits! TheSupreme Court was affirming a summary judgment forthe creditor. The material facts focused on the debtor’spre-petition “intent” and financial behavior, and debtorhad specifically denied the material fact allegations of thedischarge denial grounds (such as the alleged “intent” tohinder, delay, and/or defraud) used to support thesummary judgment.

Why? Because although the debtor opposed the late-asserted grounds for discharge denial, the debtor did nottimely plead the affirmative defense that the creditor hadmissed Bankruptcy Rule 4004’s deadline – a fatalpleading error. Following is a portion of the U.S.Supreme Court’s ruling, with that court’s description oftheir own decision:

This case concerns the duration of a right toobject to a pleading on the ground that it wasfiled out of time. Under the Bankruptcy Rulesgoverning Chapter 7 liquidation proceedings, acreditor has “60 days after the first date set forthe meeting of creditors” to file a complaintobjecting to the debtor’s discharge. Fed. RuleBkrtcy. Proc. 4004(a). That period may beextended “for cause” on motion “filed beforethe time has expired.” Fed. Rule Bkrtcy. Proc.4004(b). In the matter before us a creditor, inan untimely pleading, objected to the debtor’sdischarge. The debtor, however, did notpromptly move to dismiss the creditor’s plea asimpermissibly late. Only after the BankruptcyCourt decided, on the merits, that the dischargeshould be refused[,] did the debtor, in a motion

for reconsideration, urge the untimeliness, ofthe creditor’s plea. [emphasis supplied]

Quoting from Kontrick, 124 S.Ct. at 910. Notice thatthe trial court’s decision “on the merits” was a summaryjudgment ruling!

Rule 4004 of the Federal Rules of Bankruptcyprocedure is the focus of the U.S. Supreme Court’sinquiry in Kontrick. Said Rule 4004 provides a filingdeadline (comparable to a statute of limitations) for acreditor’s discharge objection:

(a) TIME FOR FILING COMPLAINTOBJECTING TO DISCHARGE; NOTICEOF TIME FIXED. In a chapter 7 liquidationcase a complaint objecting to the debtor’sdischarge under § 727(a) of the Code shall befiled no later than 60 days after the first dateset for the meeting of creditors under § 341(a).... [provision regarding chapter 11 omitted]

(b) EXTENSION OF TIME. On motion ofany party in interest, after hearing on notice,the court may for cause extend the time to filea complaint objecting to discharge. The motionshall be filed before the time has expired.

Quoting Rule 4004, Federal Rules of BankruptcyProcedure (amended for style in 1999).

Moreover, Rule 4004 is supplemented, in bankruptcypractice, by the effect of Rule 9006(b)(3) of the FederalRules of Bankruptcy Procedure, which provides:

Reinforcing Rule 4004(b)’s restriction onextension of the Rule 4004(a) deadline, Rule9006(b)(3) allows enlargement of “the time fortaking action” under Rule 4004(a) “only to theextent and under the conditions stated in [thatrule],” i.e., only as permitted by Rule 4004(b)[ followed in original by footnote # 3 ].1

Quoting from Kontrick, 124 S.Ct. at 911, citingBankruptcy Rule 9006(b)(3).

However, pleading a statute of limitations (or“laches”) is generally a defendant’s affirmative defense,

1 Footnote 3 indicates that “essentially thesame time prescriptions apply to complaints ... [for debtdischargeability exceptions, asserted under] § 523(c)”— due to equivalent application of Bankruptcy Rule4007(c)’s procedural time-frame restrictions.

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so it must be affirmatively pleaded by a defendantseeking its protection, at a time when it will provide aprocedural benefit to that defendant. Kontrick, 124 S.Ct.at 917-918.

Bankruptcy Rule 4004’s filing deadline, which is anaffirmative defense to a discharge objection, is noexception to this general rule regarding a defendantneed’s to both timely plead and prove defendant’saffirmative defense.2 And, as with all affirmativedefenses, the defendant has the proof burden. In otherwords, a defendant has the burden of both pleading andproving an affirmative defense, such as the affirmativedefense that the plaintiff-creditor failed to “timely” file aparticular objection to the debtor’s discharge.

Accordingly, the proper time for an adversarydefendant to assert an affirmative defense in response toa court-authorized amended § 727(a)-based complaint is:(1) when the amended answer is due, pursuant toBankruptcy Rule 7012, or else (2) when an amendedand/or supplemented pleading is filed, with courtpermission, under Bankruptcy Rule 7015.

Ordinarily, under the Bankruptcy Rules asunder the Civil Rules, a defense is lost if it isnot included in the answer or amended answer.See Fed. Rule Bktry. Proc. 7012(b) (“Rule12(b) – (h) F.R.Civ.P. applies in adversaryproceedings.”) 5A Wright & A. Miller, FederalPractices and Procedure § 1347, p. 184 (2ded. 1990). (“A defense or objection that is notraised by motion or in the responsive pleadingis waived unless it is protected by Rules12(b)(2) or 12(h)(3) or by the successfulinvocation of the liberal amendment policy ofRule 15.”) Rules 12(h)(2) and (3) prolong thelife of certain defenses, but time prescriptionsare not among those provisions. Even if adefense based on Bankruptcy Rule 4004 couldbe equated to “failure to state a claim uponwhich relief can be granted,” the issue could beraised, at the latest, “at the trial on the merits.”Fed. Rule Civ. Proc. 12(h)(2). Only lack ofsubject-matter jurisdiction is preserved post-trial. Fed. Rule Civ. Proc. 12(h)(3). .... No

reasonable construction of complaint-processing rules, in sum, would allow a litigantsituated as [debtor] Kontrick is to defeat aclaim [under § 727(a)], as filed too late, afterthe party has litigated and lost the case on themerits.

Kontrick, 124 S.Ct. at 917-918.Thus, the debtor-defendant should have asserted

the time-bar defense in debtor’s amended answer,which was filed in response to the creditor-plaintiff’samended complaint (but which amended answer did notexpressly say “time-bar” or words to that specificeffect):

We can assume, arguendo, that had [debtor]Kontrick timely asserted the untimeliness of[creditor] Ryan’s amended complaint, Kontrickwould have prevailed in the litigation. ... Here,however, the sole question is whether Kontrickforfeited his right to assert the untimeliness ofRyan’s amended complaint by failing to raisethe issue until after that complaint wasadjudicated on the merits.

Quoting from Kontrick, 124 S.Ct. at 917. But, is it accurate to say that the debtor “waived”

the time-bar defense, when the debtor did notintentionally relinquish that pleading right? In answer tothis question the Supreme Court distinguished “waiver”from “forfeiture”:

As the Government [as amicus curiae,supporting creditor Ryan] notes, “[t]he issuein this case is more accurately described asone of forfeiture rather than waiver.” [citingamicus brief] ... Although jurists often use thewords interchangeably, “forfeiture is the failureto make the timely assertion of a right[;]waiver is the ‘intentional relinquishment orabandonment of a known right.’ United Statesv. Olano, 507 U.S. 725, 733, 113 S.Ct.1770, 123 L.Ed.2d. 508 (1993) (quotingJohnson v. Zerbst, 304 U.S. 458, 464, 58S.Ct. 1019, 82 L.Ed. 1461 (1938) ).” Briefof the United States as Amicus Curiae 7, n. 5....

Quoting from Kontrick, 124 S.Ct. at 917, footnote 13.In sum, the debtor’s need to assert a time-bar defense(under Bankruptcy Rule 4004) in reply to a late-filed

2 This rule also applies under Texas state law. See In re Hinsley, 201 F.3d 638, 644-645 (5th Cir. 2000), citing KPMG Peat Marwick v. Harrison County Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex.1999) (a defendant who asserts the affirmativedefense of limitations has burden of proof thereon).

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discharge challenge is, to be precise, not a matter of“waiver” — it is a matter of procedural “forfeiture”.

The critical question then becomes: when is it toolate to assert the affirmative defense of Rule 4004’s filingdeadline?

Although a “trial amendment” might save a debtor’sneck, it is important to notice that the Supreme Courtconsiders a summary judgment ruling to be a decision “onthe merits” equivalent to a trial — so the very latest“safe” time to assert an affirmative defense for the firsttime would be before a summary judgment is granted.

And, since no debtor can guarantee that anaffirmative defense raised while a summary judgment ispending, e.g., pursuant to bankruptcy Rule 7015, the only“safe” time is within the deadline for answering anadversary plaintiff’s most recently filed “live” pleading,whether that be the original complaint or an amendedcomplaint or a complaint supplement.

Of course, since debtor-defendants don’t haveforeknowledge of the adversary plaintiff’s pleadingstrategy, there is no guarantee that a debtor-defendantwill get a “second bite at the apple” when the adversaryplaintiff repleads, because plaintiff might never do so.

Likewise, except for the “matter-of-course”exception, a Rule 7015 motion to amend and/orsupplement pleadings, – notwithstanding its “liberalamendment policy”, – holds no bulletproof guarantees ofbeing granted in the debtor’s favor:

(a) Amendments. A party may amend theparty’s pleading once as a matter of course atany time before a responsive pleading is servedor, if the pleading is one to which no responsivepleading is permitted and the action has notbeen placed on the trial calendar, the party mayso amend it at any time within 20 days after itis served. Otherwise a party may amend theparty’s pleading only by leave of the court or bywritten consent of the adverse party; and leaveshall be freely given when justice so requires.A party shall plead in response to an amendedpleading within the time remaining for responseto the original pleading or within 10 days afterservice of the amended pleading, whicheverperiod may be the longer, unless the courtdirects otherwise. ... [omitting remainder ofCivil Rule 15’s text]

Quoting from Fed. Rule Civ. Proc. 15, which isincorporated by reference into Bankruptcy Rule 7015(applicable to adversary proceedings based on complaintsunder either § 727(a) or § 523(a)).

In other words, once the “matter-of-course”amendment conditions expire, a debtor thereafter “bows”to the bankruptcy judge’s “discretion” (the word“discretion”is then read as “mercy”).

Accordingly, it is possible that the debtor may missthe narrow “matter-of-course” chance to amend — andthus have no chance to amend, producing what somedisappointed debtor-clients may view as a case-dispositive malpractice error. Do not rely on a “trialamendment” (by “consent” or otherwise) to “conform tothe evidence” — a summary judgment filing may “stopthe (pleading) clock” and effectively take way thedefendant-debtor’s anticipated “day in court”.

In other words, take Kontrick’s practical lesson toheart: if you are the debtor, do not wait until trial on themerits, hoping for a chance to assert a “trial amendment”to your defensive pleading, — because the presidingbankruptcy judge may decide the “merits” of youradversary proceeding via a summary judgment ruling,after which ruling it will be too late to plead yourtheretofore-not-yet-clearly-asserted “creditor-missed-the-filing-deadline” affirmative defense.

One more lesson from Kontrick: don’t be caughttrying to argue that Bankruptcy Rule 4004 is a“jurisdictional” bar to a late-asserted discharge challengepleading — it is not:

Only Congress may determine a lower federalcourt’s subject-matter jurisdiction. U.S.Const., Art. 111, § 1. Congress did so withrespect to bankruptcy courts in Title 28(Judiciary and Judicial Procedure); incataloging core bankruptcy proceedings,Congress authorized bankruptcy courts toadjudicate, inter alia, objections to discharge.See 28 U.S.C. §§ 157(b)(1) and (b)(2)(I) and(J). Certain statutory provisions governingbankruptcy courts contain built-in timeconstraints. For example, § 157(c)(1)addresses de novo district court review ofbankruptcy court findings and conclusions innoncore proceedings; that provision confinesreview to “matters to which any party hastimely and specifically objected.” [footnote 8omitted] The provision conferring jurisdictionover objections to discharge, however, containsno timeliness condition. Section 157(b)(2)(J)instructs only that “objections to discharges”are “[c]ore proceedings” within the jurisdictionof the bankruptcy courts.

* * * *


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In short, the filing deadlines prescribed inBankruptcy Rules 4004 and 9006(b)(3) areclaims-processing rules that do not delineatewhat cases bankruptcy courts are competent toadjudicate.

Quoting from Kontrick, 124 S.Ct. at 914. As an aside, the Supreme Court also took this

opportunity to criticize, in a semi-repentant confession,how sloppily it and some other courts have used the term“jurisdictional”, when what they really meant was a “anonextendable time limit”:

Courts, including this Court, it is true, have beenless than meticulous in this regard; they havemore than occasionally used the term“jurisdictional” to describe time prescriptions inrules of court ...”

124 S.Ct. at 915. (citing sloppiness in Supreme Court caselaw, as well as cases that “did it right”).

Furthermore, there is yet another major lesson fromKontrick, namely, that a Chapter 7 debtor can lose afraud-based discharge challenge by a summaryjudgment, — even though the debtor genuinelydisputes the necessary proof that the debtor’sobjected-to behavior was tainted by an “intent tohinder, delay, or defraud”!

A debtor’s “intent to hinder, delay, or defraud”,arguably, is a “material fact” issue, which ought to beadjudicated “on the merits” yet not typically thought of asbeing capable of being litigated apart from a trial on themerits, with an opportunity for the debtor to testify inopen court about his own past intentions and conduct.

Yet, if discovery responses are deemed strongenough (evidentiarily speaking), for the presidingbankruptcy judge to find that the debtor’s “intent” isrecognizable to the point that the judge says there is no“genuine dispute” about that “intent”, a summaryjudgment may adjudicate the case’s “merits” – withoutany trial. On the issue of discharge-forfeiting “intentto defraud”, this aspect of Kontrick may be the morenoteworthy.

The specifics of Kontrick will illustrate how trickythis litigation concept can be when applied, even in avigorously contested adversary context.

Ryan filed an amended complaint on May 6,1998, with leave of court, ibid. [citing toRyan’s Appendix to Petition for Certiorari,at page 40], but without seeking or gaining a

court-approved time extension [underBankruptcy 4004(b)]. The amendedcomplaint particularized for the first time thedebtor’s violation of § 727(a)(2)(A) in thisregard: Debtor Kontrick, creditor Ryanalleged, had fraudulently transferred money toKontrick’s wife, first by removing Kontrick’sown name from the family once-joint checkingaccount, then by continuing regularly to deposithis salary checks into the account, from whichhis wife routinely paid family expenses (the“family-account” income). ... Kontrickanswered Ryan’s amended complaint on June10, 1998. [Debtor Kontrick’s] answer “did notraise the untimeliness of the [family-account]claim,” Brief for Petitioner [Kontrick] [at] 4;on the merits, he admitted the transfers to thefamily account but denied violating §727(a)(2)(A). In March 1999, after the partiesengaged in acrimonious discovery, Ryanmoved for summary judgment. As LocalBankruptcy Rule 402(M) (Bkrtcy. Ct. N.D. Ill.1994) instructs, Ryan appended to his motion a“statement of material facts as to which [he]contend[ed] there [was] no genuine issue.”Kontrick cross-moved, in August 1999, tostrike portions of Ryan’s summary judgmentfilings.

Kontrick’s motion to strike sought deletionof “new allegations,” i.e., allegations makingtheir first appearance in the litigation in Ryan’ssummary judgment submissions – Ryan’ss tatement of facts pursuant to Local Rule402(M), accompanying exhibits, andcorresponding portions of the summaryjudgment motion and memorandum. ... Although Kontrick noted that the family-account allegations were stated only in theamended complaint and were absent from theoriginal complaint, id., at 3-4, he did not ask thecourt to strike those allegations. [DebtorKontrick’s] response, instead, and in line withLocal Rule 402(N), addressed the substance ofthe family-account claim [which had beenuntimely asserted by creditor Ryan, under §727(a)(2)(A), within Ryan’s amendedcomplaint], [Debtor Kontrick] admitted takinghis name off the account, but observed that hedid so “over four years before bankruptcy” ...[and] also acknowledged that, thereafter, he“deposited his paycheck into the account thesame way he had always done.” Ibid.


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On February 25, 2000, the BankruptcyCourt ruled on the cross-motions, granting inpart Kontrick’s motion to strike, awardingsummary judgment to Ryan on the family-account claim [under 11 U.S.C. §727(a)(2)(A)], and dismissing the remainingclaims. The court used the amended complaintas its baseline; it struck as untimely “allegationsnot included in [that] complaint.” ... Homingin on Kontrick’s continuing deposits into theaccount from which he had removed his name,the court concluded that Kontrick hadtransferred property with intent “to hinder,delay or defraud at least [creditor] Ryan.” Id.,at 55. That course of conduct, coupled withKontrick’s testimony [which was extractedfrom a pre-bankruptcy deposit ion,according to the Supreme Court’s footnote#5], the court concluded, sufficed to prove aviolation of § 727(a)(2) ... Accordingly, thecourt held, Kontrick was not entitled to adischarge of his debts.

Quoting from Kontrick, 124 S.Ct. at 911-912. Amazing! The only “claim” upon which Kontrick’s

discharge denial was legally and factually grounded wasthe creditor-evasive “family-account” claim, belatedlyasserted by Ryan under § 727(a)(2)(A), — i.e., the onlydischarge denial claim which was indisputably time-barred according to Bankruptcy Rule 4004!

Unsurprisingly, debtor Kontrick immediately movedfor a reconsideration of the trial court’s summaryjudgment ruling:

Kontrick moved for reconsideration. ... [and]argued that the Bankruptcy Court lackedjurisdiction over the sole claim on which thecourt had granted summary judgment, thefamily-account claim. ... The court waspowerless to adjudicate the claim, Kontrickinsisted, because the amended complaintcontaining the claim was untimely. GoverningRules 4004(a) and (b) and 9006(b)(3), ...Kontrick maintained, establish a mandatory,unalterable time limit of the kind [debtorKontrick] then called “jurisdictional.” ... TheBankruptcy Court denied the reconsiderationmotion on June 8, 2000, and entered finaljudgment five days later. The court held thatRule 4004’s complaint-filing time instructionsare not “jurisdictional,” and that Kontrick hadwaived the right to asert the untimeliness of the

amended complaint by failing squarely to raisethe point before the court reached the merits ofRyan’s objections to discharge.

Kontrick, 124 S.Ct. at 912-913. Bottom line for debtor’s counsel: don’t rely on a

motion for reconsideration to save you.But Kontrick has further lessons for bankruptcy

barristers — what about the usual expectation that anycase requiring a prove-up of “fraudulent intent” is not aproper case for a summary judgment favoring theplaintiff (who must prove up such fraudulent intent)?

Conventional wisdom suggests that fraud cases arenot conducive for summary judgment rulings against thealleged fraudfeasor. See, e.g., Cure v. Krottinger (Inre Krottinger), 2001 WL 258619 (N.D. Tex., WichitaFalls Div. 2001) (case involving Texas UniformFraudulent Transfer Act and 11 U.S.C. § 548).

In Krottinger, Chief Justice Buchmeyer observedthe difficulty of resolving fraudulent intent cases viasummary judgment rulings:

The issue of intent to hinder, delay, ordefraud a creditor is raised only byconclusory statements and/or allegationsabout why the debtor and/or the[fraudulent conveyance transferee] did ordid not take certain actions. The lack oflegal argument demonstrates that the debtor’sintent is a highly factual inquiry best left tothe jury; the fact finders will have to judgethe credibility of the debtor, the[fraudulent conveyance transferee], andany witnesses presented. Therefore, unlessthis Court indicates otherwise, insofar as the[ fraudulent conveyance transferee] ismoving for Summary Judgment on the issue oftransfers made with the intent to defraud, delayor hinder, this Motion is DENIED and thisCourt will limit its legal analysis to issues otherthan the debtor’s intent.

Quoting from Krottinger , 2001 WL 258619, at page*2 (emphasis supplied).

Accordingly, Kontrick illustrates how the routinelycontested and triable issue – in an adversary caseasserted under § 727(a) – of debtor’s alleged “intent”to hinder, delay, and/or defraud a creditor – can bedisposed of, against the debtor, in a summary judgmentruling.


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B. Summary Highlights for the ConsumerBankruptcy Lawyer

There are primarily two practical lessons from theKontrick ruling which every consumer bankruptc ypractitioner should immediately appreciate:

(1) A debtor’s timely pleading of Rule 4004’sdeadline, in order to block a creditor’s late-asserted§ 727(a)-based grounds for a discharge denial (or inorder to block a creditor’s late-asserted §523(a)-based grounds for a debt dischargeability exception),is necessary, or else the “missed-deadline”affirmative defense is “forfeited” by the debtor; and

(2) A debtor’s §727(a)-relevant “intent” tohinder, delay, and/or defraud — even if specificallydenied by the debtor, — can be proven sufficientlyat the summary judgment phase to support asummary judgment for a creditor.

Both of these practical issues provide attorneys whorepresent consumer debtors with additional opportunitiesto stumble in outcome-determinative ways, whichpotentially means yet more opportunities for disappointedclients to sue disappointed debtor’s attorneys for legalmalpractice.

As noted above, if a creditor belatedly asserts afactual allegation as a basis for a discharge denial, in anamended complaint that effectively asserts a new groundfor denying the debtor’s discharge, the debtor must timelyplead (in an amended answer) the affirmative defensethat Bankruptcy Rule 4004’s deadline was missed – bysubstantively saying so (e.g., allude to Rule 4004 inconjunction with words like “untimely”, “time-barred”,“limitations”, “too late”, “missed deadline”, etc.).

Moreover, if and when a debtor does so, he or shewill be deemed to have committed a “forfeiture” (asopposed to a “waiver”) of the right to bloc k the newlyasserted discharge denial ground, since the SupremeCourt has distinguished “waiver” from “forfeiture”:

As the Government [as amicus curiae,supporting creditor Ryan] notes, “[t]he issuein this case is more accurately described as oneof forfeiture rather than waiver.” [citingamicus brief] ... Although jurists often use thewords interchangeably, “forfeiture is the failureto make the timely assertion of a right[;] waiveris the ‘intentional relinquishment orabandonment of a known right.’ United Statesv. Olano, 507 U.S. 725, 733, 113 S.Ct.1770, 123 L.Ed.2d. 508 (1993) (quoting

Johnson v. Zerbst, 304 U.S. 458, 464, 58S.Ct. 1019, 82 L.Ed. 1461 (1938) ).” Briefof the United States as Amicus Curiae 7, n. 5....

Quoting from Kontrick, 124 S.Ct. at 917, footnote 13.

In sum, the debtor’s need to assert a time-bardefense (under Bankruptcy Rule 4004) in reply to a late-filed discharge challenge is, to be precise, not a matter of“waiver” — it is a matter of procedural “forfeiture”.Kontrick enforces the debtor’s duty to amend hispleadings timely, at the expense of non-enforcement ofthe creditor’s duty to amend his pleadings timely.

And, as the discussion below will indicate, theSupreme Court’s logic applies equally to both §727-baseddischarge denial complaints and §523-based debtdischargeability complaints.

However, perhaps the more practical lesson fromKontrick, due to its likelihood of applying to moredischarge denial cases, is Kontrick’s potential as aprecedent favoring more summary judgments in §727(a)-based cases, — i.e., as a precedent confirmingthat a debtor’s discharge may be lost at the summaryjudgment level, even if “intent-to-defraud” is contested“acrimoniously” (perhaps even during pre-bankruptcydiscovery) by the debtor.

C. Lesson: Pleading Affirmative Defenses to a§727 Complaint Objecting to Debtor’s Discharge

Considering the above discussion of the SupremeCourt’s Kontrick’s ruling, a practical lesson for debtorsis that a debtor’s failure to timely plead Bankruptcy Rule4004’s filing deadline is a way that the debtor can“forfeit” a potentially case-dispositive affirmativedefense:

Here, however, the sole question is whetherKontrick forfeited his right to assert theuntimeliness of Ryan’s amended complaint byfailing to raise the issue until after thatcomplaint was adjudicated on the merits.

Quoting from Kontrick, 124 S.Ct. at 917. As notedabove, the Supreme Court’s ruling in Kontrick governs adebtor’s right to oppose a late-filed § 727(a)-basedobjection to the debtor’s discharge:

This case concerns the duration of a right toobject to a pleading on the ground that it wasfiled out of time. Under the Bankruptcy Rules








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governing Chapter 7 liquidation proceedings, acreditor has “60 days after the first date set forthe meeting of creditors” to file a complaintobjecting to the debtor’s discharge. Fed. RuleBkrtcy. Proc. 4004(a). That period may beextended “for cause” on motion “filed beforethe time has expired.” Fed. Rule Bkrtcy. Proc.4004(b). In the matter before us a creditor, inan untimely pleading, objected to the debtor’sdischarge. The debtor, however, did notpromptly move to dismiss the creditor’s plea asimpermissibly late. Only after the BankruptcyCourt decided, on the merits, that the dischargeshould be refused[,] did the debtor, in a motionfor reconsideration, urge the untimeliness, ofthe creditor’s plea. [emphasis supplied]

Quoting from Kontrick, 124 S.Ct. at 910. Bottom line: Debtor-defendants must comply with

Bankruptcy Rule 7012’s deadlines when it comes topleading responsively to all complaints containingobjections to discharges.

D. Lesson: Pleading Affirmative Defenses to a§523 Complaint to Declare Debt Non-dischargeable

The Supreme Court clearly communicated that thepleading lesson of Kontrick applies just as much to §523(a)-based adversaries as it does to § 727(a)-basedadversaries.

In particular, the Supreme Court indicated that thelogic of its ruling in Kontrick applied not only to anyadversary complaints containing objections to a debtor’sdischarge, but also to any adversary complaints seekingdebt dischargeability exception relief.

Under Bankruptcy Rule 4007(c), essentially thesame time prescriptions apply to complaintstargeting the discharge of a particular debtpursuant to 11 U.S.C. § 523(c). See supra,at 911, n. 2. Rule 4007(c) tracks Rules 4004(a)and (b), and Rule 9006(b)(3) lists Rule 4007(c)as well as Rule 4004(a) among timeprescriptions bankruptcy courts may enlarge“only to the extent and under the conditionsstated [in the rules themselves].” Because ofthe practical identity of the time prescriptionsfor objections to the discharge of particulardebts under § 523(c), courts have considereddecisions construing Rule 4007(c) indetermining whether the time limits delineatedin Rules 4004(a) and (b) may be forfeited. See,e.g., In re Kontrick, 295 F.3d 724, 730, n.

3 (C.A.7 2002) (citing In re Santos, 112 B.R. 1001, 1004, n. 2 (C.A.9 BAP 1990)).

Kontrick, 124 S.Ct. at 911, footnote 3.Accordingly, the logic of the above discussions

regarding Kontrick’s application to § 727(a) dischargedenial adversaries should likewise fit debt dischargeabilityadversaries under § 523(a).

E. Lesson: Summary Judgment on the MaterialFact of “Intent to Defraud”

As noted and discussed above, another lessonappears in Kontrick, applicable to discharge denial cases:a discharge challenge may be lost by a debtor at thesummary judgment level, even if “intent-to-defraud” iscontested “acrimoniously” in discovery by the debtor.

Accordingly, despite the so-called “conventionalwisdom” that suggests that fraud cases are notconducive for summary judgment rulings against thealleged fraudfeasor — (e.g., Cure v. Krottinger (In reKrottinger), 2001 WL 258619 (N.D. Tex., WichitaFalls Div. 2001)) — a debtor can lose his or herdischarge via a summary judgment ruling.

How? If discovery responses are deemed strongenough (evidentiarily speaking), for the presidingbankruptcy judge to find that the debtor’s “intent” isrecognizable to the point that the judge says there is no“genuine dispute” about that “intent”, a summaryjudgment may adjudicate the case’s “merits” – withoutany trial.

So, on the issue of discharge-forfeiting “intent todefraud”, this aspect of Kontrick may be morenoteworthy than its effect on pleading practice:

Ryan filed an amended complaint on May 6,1998, with leave of court, ibid. [citing toRyan’s Appendix to Petition for Certiorari,at page 40], but without seeking or gaining acourt-approved time extension [underBankruptcy 4004(b)]. The amendedcomplaint particularized for the first time thedebtor’s violation of § 727(a)(2)(A in thisregard: Debtor Kontrick, creditor Ryanalleged, had fraudulently transferred money toKontrick’s wife, first by removing Kontrick’sown name from the family once-joint checkingaccount, then by continuing regularly to deposithis salary checks into the account, from whichhis wife routinely paid family expenses (the“family-account” income). ... Kontrickanswered Ryan’s amended complaint on June10, 1998. [Debtor Kontrick’s] answer “did not


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raise the untimeliness of the [family-account]claim,” Brief for Petitioner [Kontrick] [at] 4; onthe merits, he admitted the transfers to thefamily account but denied violating §727(a)(2)(A). In March 1999, after the partiesengaged in acrimonious discovery, Ryan movedfor summary judgment. As Local BankruptcyRule 402(M) (Bkrtcy. Ct. N.D. Ill. 1994)instructs, Ryan appended to his motion a“statement of material facts as to which [he]contend[ed] there [was] no genuine issue.”Kontrick cross-moved, in August 1999, to strikeportions of Ryan’s summary judgment filings.

Kontrick’s motion to strike sought deletionof “new allegations,” i.e., allegations makingtheir first appearance in the litigation in Ryan’ssummary judgment submissions – Ryan’sstatement of facts pursuant to Local Rule402(M), accompanying exhibits, andcorresponding portions of the summaryjudgment motion and memorandum. ... Although Kontrick noted that the family-account allegations were stated only in theamended complaint and were absent from theoriginal complaint, id., at 3-4, he did not ask thecourt to strike those allegations. [DebtorKontrick’s] response, instead, and in line withLocal Rule 402(N), addressed the substance ofthe family-account claim [which had beenuntimely asserted by creditor Ryan, under §727(a)(2)(A), within Ryan’s amendedcomplaint], [Debtor Kontrick] admitted takinghis name off the account, but observed that hedid so “over four years before bankruptcy.” ...[and] also acknowledged that, thereafter, he“deposited his paycheck into the account thesame way he had always done.” Ibid.

On February 25, 2000, the BankruptcyCourt ruled on the cross-motions, granting inpart Kontrick’s motion to strike, awardingsummary judgment to Ryan on the family-account claim [under 11 U.S.C. §727(a)(2)(A)] , and dismissing the remainingclaims. The court used the amended complaintas its baseline; it struck as untimely “allegationsnot included in [that] complaint.” ... Homing inon Kontrick’s continuing deposits into theaccount from which he had removed his name,the court concluded that Kontrick hadtransferred property with intent “to hinder,delay or defraud at least [creditor] Ryan.” Id.,at 55. That course of conduct, coupled with

Kontrick’s testimony [which was extractedfrom a pre-bankruptcy deposition,according to the Supreme Court’s footnote#5], the court concluded, sufficed to prove aviolation of § 727(a)(2) ... Accordingly, thecourt held, Kontrick was not entitled to adischarge of his debts.

Quoting from Kontrick, 124 S.Ct. at 911-912. As other below-discussed cases illustrate, that type

of adjudicative result is not a case law “first”, — yet itnevertheless may provide a sobering surprise to somebankruptcy barristers, especially those who regularlyrepresent consumer debtors. Immediately following area few case law examples of “fraud” cases being lost bydebtors, via summary judgment rulings.

The idea of “intent to defraud” being decidedagainst the debtor at the summary judgment phase is notunheard of. See, e.g., Crescent Retail Joint Venture v.Bueche (In re Bueche), 5 Tex. Bkr. Ct. Reptr. 212,212–215 (Bkrtcy., N.D. Tex. 1991, later vacated in anunpublished ruling, yet effectively ratifying theresults after a trial on the merits) (per Robert C.McGuire, Chief Bankruptcy Judge.). The Buechesummary judgment proceeding was adjudicated on§523(a) dischargeability exception grounds, including §523(a)(6) conversion-accomplished-by-fraud allegations,with the plaintiff’s § 727(a) objections being dismissed bythe trial court.

Of course, the Bueche case is not a loner; othercases involving fraudulent intent as part of the plaintiff’sproof burden have been the subject of summary judgmentrulings. See also, e.g., BMG Music v. Martinez, 74F.3d 87 (5th Cir. 1996) (affirming summary judgmentfor plaintiff; federal district court’s decision to grantsummary judgment that transfer was fraudulent, andinvolved fraudulent intent reasonably inferrable fromdiscovery submitted with summary judgment motion, suchthat no reasonable fact-finder would find otherwise,negating probative value of defendant’s self-servingstatement to the contrary).

The evidence of a debtor’s “fraudulent intent” maybe proven by direct evidence and/or by circumstantialevidence. Some transactions display a fraudulentcharacter by circumstantial characteristics thatpresumably indicate a debtor’s role as a fraudfeasor, asif the debtor were wearing a “badge” before thewatching world, to identify his transactional role as anobvious fraudfeasor.

Accordingly, the time-honored “badges of fraud”approach (discussed more fully later in this paper), forproving a transaction as a fraud-on-creditors, can be used




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to prove up a prima facie case of fraud, even assummary judgment evidence.

In particular, a “badges of fraud” approach canfocus on an insolvent debtor’s intentional transfer ofproperty of inadequate consideration, as in the case ofHinsley v. Boudloche (In re Hinsley), 202 F.3d 638(5th Cir. 2000) (adversary proceeding brought by trustee;fraudulent transfer proven by summary judgmentevidence; 11 U.S.C.§ 544(b) applied in conjunction withthe Texas Uniform Fraudulent Transfers Act and TexasFamily Code’s § 4.106(a) ).

Section 24.005(b) of the Tex. Bus. & Com.Code, the Texas Uniform Fraudulent TransfersAct (“UFTA”), lists eleven, non-exclusive,badges of fraud that may be used to prove thefraudulent intent that may be used to prove thefraudulent intent of the transferor. The trusteecontends that eight of the badges of fraud werepresent. The Hinsleys’ affidavits do notaddress or dispute any of the evidencesubmitted by the trustee with the exception oftheir general statements as to the reasons forpartition and Mrs. Hinsley’s claims about thevalue of the property divided to each spouse.

In arguing that the affidavits are decisiveon the issue of intent, Mrs. Hinsley hasmisconstrued the summary judgment standard.For purposes of summary judgment, “[a]n issueis ‘material’ if it involves a fact that mightaffect the outcome of the suit under thegoverning law.” ... [citation omitted] ...Mrs. Hinsley contends that the affidavits raiseissues of materiality and credibility becausethey go to the issue of fraudulent intent. “Intentto defraud ... can be decided as a matter oflaw.” BMG Music v. Martinez, 74 F.3d 87,90 (5th Cir. 1996). A party’s self-serving andunsupported claim that she lacked the requisiteintent is not sufficient to defeat summaryjudgment where the evidence otherwisesupports a finding of fraud. ... Mrs. Hinsley’s“belief” about the value of her assets at thetime of [community property] partition isinsufficient to create a[n] issue of material facton this issue in light of the credible andundisputed evidence as to the actual value ofthe assets. ... The value of consideration givenfor a transfer alleged to be in fraud of creditorsis determined from the standpoint of creditors.... [citations omitted] ... Value is determinedas of the date of transfer. . . . [citation

omitted] ... In the instant case, the net effectof the partition and assignments was to removethe valuable assets from Mrs. Hinsley’sownership, making them unavailable to thejudgment creditors. The significant debt on theproperty held by Mr. Hinsley on the date of thetransfer was properly considered indetermining equivalent value. Mrs. Hinsley’saffidavit was not sufficient to raise a genuineissue of fact.

Quoting from Hinsley, 201 F.3d at 643-644 (trusteewins summary judgment on § 544(b) claim).

Hinsley, as noted above, applied summary judgmentprinciples to a fraudulent transfer context. However, thesimilar summary judgment logic has been applied indischarge denial litigation, by the Fifth Circuit Court ofAppeals, as is illustrated in the § 727(a)(4)(A) case ofSholdra v. Chilmark Financial LLP (In re Sholdra), 249F.3d 380 (5th Cir. 2001).

In Sholdra, a creditor of the Chapter 7 debtor movedfor summary judgment on the creditor’s dischargechallenge complaint, which complaint was grounded in 11U.S.C. § 727(a)(4)(A), asserting that the debtor hadmade a “false oath” with fraudulent intent. Thebankruptcy court recognized a “false oath” as provenunder Rule 7056, and granted the creditor’s summaryjudgment motion (and thus necessarily found the debtor’s“fraudulent intent” was proven beyond genuinedisputability), and denied the debtor’s discharge. Thedistrict court affirmed the discharge denial.

The Fifth Circuit emphasizes that the debtor onlyamended his bankruptcy schedules after a depositionflushed out falsity therein.

Because it is undisputed that [debtor Sholdra]made materially false statements under oath,this appeal involves only whether [debtor]made such statements with fraudulent intent –or reckles indifference to the truth, which canbe proven by circumstantial evidence. Cf.Pavy v. Chastant (In re Chastant), 873F.2d 89, 91 (5th Cir. 1989); ... [debtor]argues that there are genuine issues of materialfact precluding summary judgment. ... [but][w]e disagree because the amended schedulesand statement of financial affairs fail to createa genuine issue of material fact. While it mayhave been better practice for [debtor] todisclose the existence of such amendments,they do not negate the fact that [debtor] madeknowingly false oaths in his original schedules








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and statement of financial affairs. See Mazerv. United States, 298 F.2d 579, 582 (7th

Cir. 1962) (rejecting debtor’s argument that anamended schedule relieved a false oath).Moreover, [debtor] filed the amendments onlyafter the falsity of the original documents wasrevealed in his deposition. See Swicegood v .Ginn, 924 F.2d 230, 232 (11th Cir. 1991)(per curiam) (affirming fraudulent intent findingpartially relying on debtor’s amendment ofschedules made after debtor’s former wiferevealed omitted assets to judgment creditor);FDIC v. Sullivan (In re Sullivan), 204 B.R.919, 9943 (Bankr., N.D. Tex. 1997); BancOne v. Braymer (In re Braymer) , 126 B.R. 499, 501-02 (Bank., N.D. Tex. 1991).

* * * *Finally, [debtor physician]’s inexperience withfinancial affairs or reliance on incorrect adviceor information, even if true, cannot withs tandsummary judgment. [Debtor’s] purportedinexperience with financial affairs does notnegate the fact that he made false oaths byknowingly swearing to false information.

Sholdra, 249 F.3d at 382-383. (Aside: the Fifth Circuitalso added that it “cannot accept Appellant’s attempt toblame the false oaths on his bankruptcy counsel’s and hiswife’s conduct”.)

Of course, a defendant can also use a Rule 7056-based summary judgment motion, to defeat anadversary proceeding grounded upon a fraud claim,since a “no-evidence” motion can force a fraud-allegingplaintiff to prove up at least a prima facie case of fraudat the summary judgment phase, or else lose the fraudcase completely. See, e.g., U.S. Internal RevenueService v. Klutts, 215 B.R. 558 (Bkrtcy., W.D. Tex. –Austin Div. 1997) (TUFTA adversary proceeding case,involving fraudulent transfer avoidance claim by the IRS;the defendant-transferee filed a Rule 12(b)(6) motion todismiss, and later expanded that motion into summaryjudgment motion; defendant-transferee wins on summaryjudgment against the IRS).

So, considering the above-cited cases (e.g., Bueche,Hinsley, Sholdra, etc.), using summary judgment to provea debtor’s fraudfeasor’s fraudulent “intent” is not new toAmerican fraud jurisprudence. However, Kontrick maywell be the first time wherein the U.S. Supreme Courthas affirmed a summary judgment against a debtor in acase wherein the summary judgment findings necessarilyincludes a fact-finding of a debtor’s discharge-forfeiting“intent to hinder, delay, or defraud”.

III. HOW AN ADVERSARY’S “SCAREY FACE”REVIVAL CAN DEFEAT A DORMANTAFFIRMATIVE DEFENSE

What if a creditor (which might include a trusteeacting as a creditor) has a “dormant judgment” problem,such that the collectability of his or her judgment iseffectively prevented by the judgment’s statutory“dormancy”? In effect, this constitutes a specializedcategory of limitations problems, since a judgmentcreditor’s failure to timely rehabilitate the judgment’s“dormancy” will result in an unenforceable judgment.

Under Texas law a judgment can fall into“dormancy” ten years after it is recorded, unlessissuance and attempted service of a writ of execution“restarts the clock” on that judgment’s “active” status.See generally Texas Civil Practice & Remedies Code§ 34.001(a). If it does become “dormant”, it can berevived within the second anniversary of the date onwhich it became dormant:

A dormant judgment may be revived by scirefacias or by an action of debt brought not laterthan the second anniversary of the date thatthe judgment becomes dormant.

Quoting Texas Civil Practice & Remedies Code §31.006, as amended in 1995. (In some circles, e.g.,among some creditors’ lawyers, the need for scirefacias relief, to “revive” a dormant (and about-to-die-forever) judgment, is also known as “scarey face”relief.)

For a recent application of this “revival” statute, ina Texas state court context, see Trad v. Colonial Coins,Inc., 2003 WL 124680 (Tex. App. – Houston [14th

Dist.] 2003) (reversing a trial court ruling; granting thejudgment creditor’s petition for scire facias relief, torevive the dormant judgment).

Also, for a somewhat recent application of this“revival” statute within a federal district court context,see FDIC v. Shaid, 142 F.3d 260 (5th Cir. 1998)(affirming federal district court’s decision to revive adormant judgment).

But how can a dormant-yet-still-revivable judgmentbe revived if a bankruptcy filing occurs to block itsprocessing in the court wherefrom the judgment arose?

Chief Bankruptcy Judge McGuire’s answer: in anadversary proceeding asserting a claim on the underlyingdebt — for an example, see In re Deasy, 275 B.R. 490, 494 (Bkrtcy., N.D. Tex. – Dallas Div. 2002)(interpreting and applying Texas Civil Practice 7Remedies Code’s § 31.006 in an adversary proceedingcontext), affirmed in 2002 WL 31114061 (N.D. Tex.












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2002), and again in 2003 WL 21018189 (5th Cir.2003), and citing Penner v. Brints (In re Brints), 227B.R. 94 (Bkrtcy., N.D. Tex. – Lubbock Div. 1998).

So, if a judgment is dormant, and a bankruptcy filingcomplicates a judgment creditor’s (or a trustee’s, or adebtor’s) ability to “revive” it, perhaps an adversary caseshould be filed to fulfill the revival requirements of TexasCivil Practice & Remedies Code § 31.006, if it’s not toolate.

IV. SELECTED CASES ANALYZING SECTION§727-RELEVANT EVIDENCE OF DEBTOR’S“INTENT TO DEFRAUD”

In the remainder of this paper a variety of § 727(a)-based discharge challenge cases will be considered, eachof which focuses on evidentiary concerns about provingdebtor conduct involving “fraudulent intent”.

A. “Intent to Defraud” as applicable to§727(a)(2)(A) and/or (a)(2)(B) allegations

The trickiness of proving a debtor’s “intent todefraud” creditors, – as Twyne’s Case illustrates,3 is aproblem at least as old as the merger of the kingdoms ofEngland and Scotland.

1. In the Matter of SwiftIn the Matter of Swift, 3 F.3d 929 (5th Cir. 1993)

(per Edith Jones, Circuit Judge), is a case well-know toTexas bankruptcy practitioners who frequently litigate §727(a)(2)(A) adversary cases.

Accordingly, this paper will merely allude to it, andwill hereby remind the reader that Swift’s facts involveda money borrowing scheme that functioned like aninsider-money-transfer arrangement that reminds one ofa money-laundering. The bankruptcy court’s findings ofintent-to-defraud were affirmed (using a “no-clear-error”standard of trial record review), with brief recognition ofthe tension between pre-bankruptcy planning and pre-bankruptcy fraud-on-creditors.

Based on these transaction and his credibilitydecision, the bankruptcy court did not clearlyerr in concluding that [debtor] Swift completedthem with intent to hinder, defraud, delay orconceal estate assets from his creditors. Asthe court pointed out, nearly every asset in hisestate had been tampered with beforebankruptcy. Unfortunately, the line between

legitimate pre-bankruptcy planning and intent todefraud creditors contrary to section 727(a)(2)is not clear. Northwest Bank Nebraska, N.A.v. Tveten, 848 F.2d 871, 879 (8th Cir. 1988)(Arnold, J., dissenting). Once court simplystated, “there is a principle of too much;phrased colloquially, when a pig becomes ahog it is slaughtered.” In re Zouhar, 10 B.R.154, 157 (Bankr. D. N.M. 1981). As thefinder of fact, the bankruptcy court has theprimary duty to distinguish between hogs andpigs. Compare Matter of Bowyer, 916 F.2d 1056 (5 th Cir. 1990) (reversingbankruptcy court), op[inion] on reh[earing],932 F.2d 1100 (5th Cir. 1991) (affirmingbankruptcy court and finding intent to hinder,delay or defraud creditors on facts before it).

Quoting from Matter of Swift, 3 F.3d at 931 (withemphatic bold supplied). (Perhaps fans of the old“Green Acres” television series will appreciate thejuxtaposition of the above-quoted allusion to “pigs” and“hogs” as interestingly following the citation to theTveten dissent, by citing a judge surnamed “Arnold”.)

More importantly, the reader should notice that theabove-quoted Swift panel’s citation- parentheticalsummary of the en banc Fifth Circuit “Bowyer II”decision is misleading — the parenthetical should insertthe word “no” between the words “finding” and “intent”!

As the following procedural history of the Bowyerappeal indicates, the en banc “Bowyer II” ruling was avictory for the debtor, i.e., the debtor (Mr. Bowyer) wasgranted a debt discharge.

2. In the Matter of Bowyer “I” and “II”In the case of In the Matter of Bowyer, 916 F.2d

1056 (5th Cir. 1990) (“Bowyer I”), bankruptcypractitioners have been provided with a soundbite-worthycriterion for distinguishing legitimate pre-bankruptc yplanning (to maximize a debtor’s legitimate exemptproperty claims) from pre-bankruptcy “fraud-on-creditor”: the “hog” versus “pig” test.

Bowyer I reversed the district court, which hadaffirmed the bankruptcy court’s refusal to deny thedebtor’s discharge on § 727(a)(2)(A) grounds, anddirected that the adversary be remanded. In otherwords, the debtor lost “Bowyer I”, a Fifth Circuitappellate panel ruling. The debtor appealed for an enbanc reconsideration, hoping to have the bankruptcycourt and district court rulings affirmed.

The Fifth Circuit, sitting en banc in In the Matter ofBowyer, 932 F.2d 1100 (“Bowyer II”), decided that the

3 See, e.g., Twyne’s Case, 3 Coke Rep. 80b(Engl. 1601), cited in In re Crater, 286 B.R. at 764.














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bankruptcy court’s fact-findings should have been treatedwith greater “deference”. See Bowyer II, 932 F.2d at1101 – 1103. Accordingly, the debtor’s victory wasreinstated by the en banc ruling, i.e., the debtor receivesa debt discharge.

3. In re RothrockIn addition to the money-lending scheme which cost

debtor his discharge in In re , supra, a money-diversionscheme involving $ 230,000 in diverted funds cost thedebtor in the case of In re Rothrock, 96 B.R. 666, 669– 672 (Bkrtcy., N.D. Tex. 1989) (supplemental opinionper Robert C. McGuire, Chief Bankruptcy Judge) (finding“the intentional structural and effecting of theapproximate $ 235,000 benefit conferred uponDefendants, in which RRR actively participated,constituted a fraud by RRR upon creditors ... within themeaning of § 727(a)(2), by diverting business property ...to RRR’s exempt assets”) , citing In re Zouhar, 10 B.R.154, 157 (Bkrtcy., D. N.M. 1981) (distinguishing “pigs”from “hogs”). Caveat: the West-published version of thiscase, in its third introductory “keynote”, reports thisdiverted-dollars amount as only “$ 230”!

4. In re WombleDischarge denial can result from “concealing”

bankruptcy estate assets (or information regarding suchassets), under § 727(a)(2). For example, the case of Inre Womble, 289 B.R. 836 (Bkrtcy., N.D. Tex.–Amarillo Div. 2003), illlustrates how a pre-bankruptcyconcealment can, by continuation, be recognized also asa post-bankruptcy concealment. Thus, a discharge denialis doubly grounded, under both § 727(a)(2)(A) and under§ 727(a)(2)(B).

In Womble, the bankruptcy court (Bankruptcy JudgeRobert L. Jones),ruled that a debtor’s fraud-on-creditorsneed not actually cause harm to creditors, in order for adischarge to be denied under § 727(a)(2)(A). Womble,289 B.R. at 845. Moreover, obstructionist discoverytactics can satisfy the “concealment” element of a §727(a)(2)(A) discharge disqualification. Id. at 845 (citing7th Circuit and 8th Circuit case law).

The importance of Womble, as a discharge denialcase, is further discussed below.

5. Matter of ReedOur discussion of a debtor’s alleged “intent to

defraud” creditors, in a § 727(a)(2) context, receivesspecial analysis in the Fifth Circuit’s noteworthy decisionin In the Matter of Reed, 700 F.2d 986 (5th Cir.1983). Accordingly, that ruling is discussed in depth,hereinafter.

B. “Intent to Defraud” and the Importance ofShowing “Extrinsic” Fraud Evidence1. What Proves Debtor’s Section 727(a)(2)-relevant“Intent”?

Bankruptcy judges and practitioners alike have foryears struggled with the evidentiary conundrum ofdefining and recognizing the kind of debtor “intent” thatgives rise to discharge denial under 11 U.S.C. section727(a). Although it is helpful to read it, as a practicalmatter, it is insufficient to simply read and cite In theMatter of Reed, 700 F.2d 986, 989 (5th Cir., 1983).

Regarding the evidentiary enigmas accompanyingdischarge denial adversaries, consider the insightfuldiscussion within In re Crater, 286 B.R. 756 (Bkrtcy.,D. Ariz. 2002), in conjunction with attention to the leadingFifth Circuit case of In the Matter of Reed. Worthwhileissues to study include: (1) whether a denial of adischarge must be predicated on “extrinsic fraud,” i.e.,evidence “extrinsic” to the debtor’s mere conversion ofpre-bankruptcy assets, that shows the debtor’s fraudulentintent; and, if so (2) what would constitute such “extrinsicfraud”, sufficient to justify denying a debtor’s debtdischarge under § 727(a).

Even a cursory study of this evidentiary “intent”issue produces noticeable and conscientious agony inmany Section 727(a)(2) cases.

Thus, a bankruptcy court’s struggle in balancingSection 727(a)(2)’s plain language regarding “intent” (tohinder or delay, if not also to defraud, creditors) — withthe legitimate concern for not “chilling” a debtor’slegitimate right to use pre-bankruptcy planning tomaximize his or her lawful exemptions – has beendiscussed by other courts wrestling with the same basicconundrum. See, e.g., U.S. Trustee v. Robb, 1999 WL324655 (N.D. Tex. 1999); In re Rothrock, 96 B.R. 666(Bkrtcy., N.D. Tex. 1989).

Of course, the underlying problem itself — whether a debtor is intentionally hindering and/or delayingand/or defrauding creditors, by a fraudulent“concealment” of the debtor’s assets – is as old as KingJames’ generation. See, e.g., Twyne’s Case, 3 CokeRep. 80b (Engl. 1601), cited in In re Crater, 286 B.R.at 764.

2. Is a Fact-finding of Fraud Necessary?Is a fact-finding of “extrinsic” fraud really

necessary, in effect, for a bankruptcy court to deny adebtor’s discharge in a § 727(a)-based adversaryproceeding?

The Fifth Circuit has cited with approval holdingsfrom the Federal District Court in Oregon and theBankruptcy Court in Wisconsin that the intent which













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constitutes fraud and which makes denial of a dischargemandatory is “actual intent to place the property beyondthe reach of creditors.” In the Matter of Reed, 700 F.2d986, 992 (5th Cir., 1983) citing In re Martin, 217 F. Supp.937 (D.Or. 1963)(transfer of nonexempt property isfraudulent [emphasis added] if effected with actual intentto place property beyond the reach of creditors) and In reSchwingle, 15 B.R. 291, 295 (W.D.Wis. 1981)(“Wheneffected with actual intent to place property beyond thereach of creditors, the transfer of nonexempt property forexempt property is fraudulent [emphasis added] . . .”)

Accordingly, it appears that Reed establishes thefollowing rule in the Fifth Circuit: if a debtor convertsnonexempt property into exempt property with actualintent to place that property beyond the reach of hiscreditors, that transfer is fraudulent for purposes of therequirement of § 727 of the Bankruptcy Code, becausethat debtor has converted nonexempt assets into exemptones with an actual intent to defraud known creditors.

And, although Reed appears to generally govern thisproblem, it must be noticed that Reed did hold that:

[M]ere conversion is not to be consideredfraudulent unless other evidence proves actualintent to defraud creditors . . . [and] evidenceof actual intent to defraud creditors is requiredto support a finding of actual intent to defraud.

Reed, 700 F.2d at 991.Reading into this holding the definition Reed gave of

“fraud” shows that, in the Fifth Circuit’s jurisdiction,“mere conversion” is not to be considered as provingintent to place property beyond the reach of creditors andevidence of actual intent to do so beyond the mere act ofconversion is required.

Accordingly, although Reed does not use the term“extrinsic,” it would appear to be a correct paraphrase ofReed to say that in requiring “other evidence,” iteffectively requires evidence of intent “extrinsic” to theact of conversion itself, to prove the requisite “fraudulent”intent, but the requisite intent is expressly stated to be only“actual intent to place property beyond the reach ofcreditors.” Reed, 700 F.2d at 992.

So, to the extent that Crater requires proof of anyother or greater or more culpable degree of intent, it isinconsistent with Reed and diverges from controlling FifthCircuit case law.

In the Fifth Circuit, therefore, evidence “standingalone” that a debtor converted nonexempt to exemptproperty is insufficient to support a fact-finding that thedebtor had “actual intent” to place the non-exemptproperty beyond the reach of his creditors. There must

be evidence “extrinsic” to the mere act of conversion tosupport such a critical fact-finding.

So, if (1) there is such “extrinsic” evidence; and (2)based upon such evidence there is a fact-finding that thedebtor did transfer non-exempt property with “actualintent” to place it beyond the reach of his creditors; —that intentional transfer was made with debtor’s “actualintent” to defraud the creditors, and a discharge denialwould appear justified, according to Reed:

11 U.S.C. § 727(a)(2) is absolute: thedischarge shall be denied a debtor who hastransferred property with intent to defraud hiscreditors . . . [i.e., with actual intent to placethe property beyond the reach of thosecreditors]

Reed, 700 F.2d at 991.

3. What is the Definition of “Extrinsic” FraudEvidence?

As shown above, the Fifth Circuit’s definition of“extrinsic” fraud (relevant to discharge challenge cases),as distilled from Reed, is evidence which is extrinsic tothe mere act of converting non-exempt into exemptproperty, and which displays an actual intention to hinderand/or to delay and/or to defraud creditors, i.e., to placethe debtor’s non-exempt property beyond the reach ofthe creditors. Reed, 700 F.2d at 991-92.

Reed gave an example of relevant evidence“beyond” mere conversion, i.e., evidence “extrinsic” tosuch a “mere conversion”, upon which a fact-finding of“actual intent” to defraud could be based:

For example, evidence that the debtor, on theeve of bankruptcy, borrowed money that wasthen converted into exempt assets wouldsuffice to support a finding of actual intent todefraud.

Reed, 700 F.2d at 991. The reason that such evidence would qualify as

extrinsic evidence is that it is evidence beyond, orextrinsic to, the mere fact of buying an exempt asset withborrowed money.

The fact extrinsic to the mere conversion is that theconversion occurred on the eve of bankruptcy. And thereason such evidence would qualify as extrinsic evidenceof actual intent to defraud is that it would be reasonableto infer from it an “actual intent” to place the borrowedmoney beyond the reach of creditors.



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Another approach to analyzing the “extrinsic”evidence suggestive of a debtor’s intent to commit a“fraud-on-creditors’ is the “badges of fraud” analysis.

One example of an adversary case using thatapproach is the above-cited Crater case. The three typesof “badges of fraud” with whic h the Crater courtwrestled4 can all be understood consistently with Reed, ifthey are understood as further examples of the kind ofconduct that both (i) is in addition to, or “extrinsic” to, thedebtor’s mere act of converting non-exempt into exemptproperty, and (ii) would reasonably support an inferenceof the debtor’s “actual intent” to place the non-exemptproperty beyond the reach of creditors.

4. In re MarttyIn the case of Highland Village Joint Venture v.

Martty (In re Martty), 1990 WL 73337, 4 Tex. Bankr.Ct. Reptr. 95 (Bkrtcy., N.D. Tex. – Dallas Div. 1990)(Robert C. McGuire, Chief Bankruptcy Judge), the issueof “extrinsic” fraud was analyzed, as a relevant concernin a fraud-on-creditors context that cited § 727(a)(2)precedent, even though Martty itself was not a §727(a)(2) adversary proceeding. In particular, Marttyinvolved a § 544 adversary grounded upon fraudulenttransfer allegations. In deciding Martty, the courtconsidered Reed’s approach regarding fraudulent intentfact-finding:

Debtor committed no extrinsic fraud inconnection with the transfers in question.Matter of Reed, 700 F.2d 986 (5th Cir.1983). Plaintiff contends that the trustee mayavoid the transfer under § 544 because thetransaction was a fraudulent transfer understate law. UFTA Ch. 24. However, under well-settled Texas law, it is recognized thatdisposition of property subject to execution forthe purposes of obtaining a homestead is notgenerally a fraud on creditors who have nospecific lien on the [disposed] property. Swayne v. Chase, 30 S.W. 1039 ( [Tex.]1895); ... [many citations from 1896 to 1949omitted] ... In re Moody, 77 B.R. 566(S.D. Tex. 1987), aff’d 862 F.2d 1194 (5th

Cir. 1989). Under the facts andcircumstances of this case, as found herein, theactual purchase of the homestead by theDebtor, as well as all related transfers made inorder to obtain the homestead, such as thegranting of the lien on the stock, were notfraudulent transfers. For exceptions to theforegoing general rule, which exceptions andcircumstances are not present in this case, seeIn re Reed, supra, and related cases.

Quoting from Martty, 1990 WL at 73337 (5th print-outpage).

C. “Extrinsic” Evidence of Actual “Intent” toHinder, Delay, Etc.

In Crater, discussed above, Bankruptcy JudgeHaines insightfully identified three categories of “badgesof fraud” – i.e., types of evidence that are relevant torecognizing a debtor’s fraud-oriented “intent” to hinder,delay, or cheat a creditor (in contrast to a debtor’slegitimate intent to use legitimate pre-bankruptcy optionsto maximize debtor’s law-approved exemptions rights).

In particular, Judge Haines opined:

The badges of fraud may be categorized intothree types. Some of the badges arethemselves indicative of concealment,deception or fraudulent intent: 2. The debtorretained possession or control of the propertytransferred after the transfer; [FN 10] 3. Thetransfer or obligation was ... concealed; 6.The debtor absconded; and 7. The debtorremoved or concealed assets.

Crater, 286 B.R. at 764. The other traditional badges offraud-on-creditors, according to Judge Haines, are thetypes that either [1] “do not implicitly suggest fraud butdo suggest there must have been a motivation other thanthe transaction itself because [the transaction itself] wasnot an economically rational decision for the debtor tomake but for its effect to hinder or delay creditors”, [2]or transfer circumstances “that may be innocent inthemselves, [3] or are merely timing factors thatbecome suspicious only when combined with otherfactors”. Id. at 764-765 [emphasis and numerationadded].

The Fifth Circuit, has a similar (albeit not identical)view of “extrinsic” fraud-on-creditors evidence, such thatsuch “extrinsic” factors are recognized by the FifthCircuit as proving prima facie evidence of “actual”intent to hinder-delay-and/or-defraud creditors, as is

4 (1) those in which concealment, deception, orfraudulent intent are implicit, (2) those suggesting somemotivation other than the transaction itself, and (3)those that may be innocent in themselves or that aremerely timing factors that become suspicious only whencombined with other factors. 286 B.R. at 764.







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indicated by the Fifth Circuit ruling in In re Chastant,873 F.2d 89 (5th Cir. 1989). Accordingly, thatnoteworthy ruling is discussed hereinafter.

D. “Actual Intent to Defraud” as Analyzed by the5th Circuit’s Chastant Checklist.

In particular, the Fifth Circuit lists six factors inChastant that can show “actual intent to defraud”creditors:

(1) the lack or inadequacy of consideration [forthe asset transferred by the debtor]; (2) the family, friendship or close associaterelationship between the parties [to thetransfer];(3) the retention of possession, benefit or use ofthe property in question;(4) the financial condition of the party sought tobe charged both before and after thetransaction in question;(5) the existence or cumulative effect of thepattern or series of transactions or course ofconduct after the incurring of debt, onset offinancial difficulties, or pendency or threats ofsuits by creditors; and (6) the general chronology of the events andtransactions under inquiry.

Chastant, 873 F.2d at 91. Of course, as noted above, Fifth Circuit precedent

(such as Reed and Chastant), and not the Crater analysis,is directly binding on Texas bankruptcy courts. Cf.,accord, In re Orso, 214 F.3d 637, 640-641 (5th Cir.2000) (Hon. Edith Jones, Circuit Judge).

Examples of such “extrinsic” evidence abound. Ifadebtor retained full possession and control over the valueof non-exempt real property (including its sale/re-saleproceeds), due to their continuing status as the onlygeneral partners of the family limited partnership(“FLP”), which FLP would ultimately receive paymentfor that property, such a scheme could only beimplemented “safely” by FLP “insiders”, and could thuseasily be recognized by a fact-finder as an “extrinsic”evidence of fraud-on-creditors.

This type of scenario matches the “family” insiderexample provided by the Fifth Circuit in its Chastantdecision. In Chastant, the Fifth Circuit noted in Chastant,that the usage of “insider” entities (such as family limitedpartnerships), to shield non-exempt assets from creditors,is a routine example of “extrinsic” fraud evidence:

Additionally, “a presumption of actual fraudfraudulent intent necessary to bar a dischargearises when property is either transferredgratuitously or is transferred to relatives.” ...The transfer of property to relatives, inconjunction with other circumstances, willoften make the [Section 727 plaintiff]’s casecompelling, notwithstanding the absence ofdirect evidence of fraud. ... In the instant caseChastant established the trust both gratuitouslyand for his children. This creates apresumption of an intent to defraud establishingplaintiff’s prima facie case and shifting to[debtor] Chastant the burden of demonstratingthat he lacked fraudulent intent.

Quoting from In re Chastant, 873 F.2d 89, 91 (5th Cir.1989).

1. In re DennisOne recent example of a case following and

applying the Fifth Circuit’s Chastant checklist is the FifthCircuit’s § 727(a)(2)(A)-related case of Robertson v.Dennis (In re Dennis), 330 F.3d 696 (5th Cir. 2003).

In Dennis, the Fifth Circuit recited the six factors inChastant that can show “actual intent to defraud”creditors:

(1) the lack or inadequacy of consideration [forthe asset transferred by the debtor]; (2) the family, friendship or close associaterelationship between the parties [to the transfer];(3) the retention of possession, benefit or useof the property in question;(4) the financial condition of the party sought to becharged both before and after the transaction inquestion;(5) the existence or cumulative effect of the patternor series of transactions or course of conduct afterthe incurring of debt, onset of financial difficulties,or pendency or threats of suits by creditors; and (6) the general chronology of the events andtransactions under inquiry.

Quoting from In re Dennis, 330 F.3d at 702, quotingChastant, 873 F.2d at 91.

However, after having recognized those “factors”as the proper scope of evidentiary inquiry, the Denniscourt distinguished its appellate role from the one it hadin Chastant:






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Chastant, however, is distinguishable from thiscase. Most important[ly], the court inChastant reviewed a finding of actual intent todefraud, whereas we review a finding that[debtor] Dennis lacked actual intent [todefraud]. Next, [debtor] Dennis, unlike thedebtor in Chastant, offered evidence to rebutthe presumption of actual intent. Id. at 91.

Finally, the Chastant debtor transferredfar more valuable property than did Dennis.Though Chastant, id. at 90, does not specifythe value of the property transferred, the debtor[in Chastant] created an income trust fundfrom which he expected to live, so presumablythe transfer was sizable. In contrast, thelimited evidence in the [Dennis] recordsuggests that the bonds were worth $300; atthe very most, they could have been worth$1,200. Had Dennis actually intended todefraud her creditors, she surely would havetransferred considerably more assets to herson. This is doubly true because she believedher debt to be $63,000, not $6,000, when shefiled her bankruptcy. ... Given the low valueof the bonds, we conclude that the bankruptcycourt did not clearly err by finding that Dennislacked actual intent to defraud.

Dennis, 330 F.3d at 702. In other words, debtor Dennis was only a “pig”, but

debtor Chastant was a “hog”.

E. “Intent to Defraud” as Evidenced by a Debtor’s“Concealment” of Asset Transactions

Cash transfers can constitute a “concealment”demonstrating a debtor’s “actual intent” to commit afraud-on-creditors.

This “extrinsic” evidence of fraud considerationmatches Crater’s “extrinsic” fraud evidence factor #3,involving “concealed” transfers, since unaccounted-for/undocumented cash transactions adding up to serioussums are a form of “concealed” transfer (relevant tobankruptcy law contexts), since a cash transactionwhereby goods or services are paid for by cash money(whether documented by a receipt or not) is a type of“transfer”. See Pirie v. Chicago Title & Trust Co., 182U.S. 438, 442-445, 21 S.Ct. 906, 908-909 (1901).

1. How Does the Fifth Circuit Define“Concealed”?

In the Fifth Circuit, it is important to recognize thatin § 727(a)(2) contexts, a “concealed” asset need not be

literally “concealed” — in the sense that its factualexistence as a transfer is unknown or unknowable, nordoes the term “concealed” contextually necessitate theidea that the existence of the transferred asset is itselfphysically “concealed”.

Rather , the essential characteristic of an transfer’s§ 727(a)(2)-relevant “concealment” is that the level ofdisclosure regarding the debtors’ transfer (or the debtor’sasset) is inadequate to tell creditors the true state ofaffairs regarding that transfer (or that asset):

Concealment as used in Section 727(a)(2)“can be accomplished by a transfer of titlecoupled with the retention of the benefits ofownership.” In re Olivier, 819 F.2d at 553 [5th

Cir. 1987]; see also In re Kauffman, 675 F.2dat 128 [7th Cir. 1981].

A concealment ... need not be literallyconcealed. The transfer of title with attendantcircumstances indicating the bankruptcontinues to use the property as his own issufficient to constitute a concealment. Id.; seeIn re Olivier, 819 F.2d at 553-55; In reSanders, 128 B.R. At 970; In re Hodge, 92B.R. 919, 922-23 (Bankr. D. Kan. 1988). ... It is not the secrecy of the transfer but theretained beneficial interest that constitutes theconcealment. Sanders, 128 B.R. at 970.The Fifth Circuit held that an exception to theone year limitation of 11 U.S.C. [section]727(a)(2) is met when the debtor continues“the concealment of [his] secretly retainedinterest in the property” Olivier, 819 F.2d at554-55. ... Once a debtor has made afraudulent transfer of assets in violation ofSection 727(a)(2), merely discussing thetransfer o[f] debtor’s retained beneficialinterest will not prevent denial of discharge.

Quoting from In re Lightfoot, 152 B.R. 141, 146-147(Bkrtcy., S.D. Tex. 1993), following In re Olivier, 819F.2d 550, 553-555 (5th Cir. 1987).

In other words, the Fifth Circuit’s view of a Section727(a)(2)-relevant “concealment” is the debtor’sconcealment of debtor’s retained interest in thedebtor’s transferred property, not the fact that theproperty was somehow transferred by the debtor.Olivier, 819 F.2d at 553-555.

A “continuing concealment” of assets can triggerthe applicability of both § 727(a)(2)(A) and §727(a)(2)(B), but what is a “continuing concealment”?










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A “continuing concealment” is a transaction (orpackage of serial transactions) that facilitate a creditor-hindering transfer of a debtor’s title to nonexempt assets,if the result permits the debtor to nevertheless retainbeneficial usage of such assets, while simultaneouslyputting those assets beyond the reach of creditors.

Also, if such a “continuing concealment” begins pre-petition and is further facilitated by the debtor’s post-petition conduct, it can implicate both § 727(a(2)(A) and§ 727(a)(2)(B).

The Fifth Circuit, has a similar (albeit not identical)view of “extrinsic” fraud-on-creditors evidence, such thatsuch “extrinsic” factors are recognized by the FifthCircuit as proving prima facie evidence of “actual”intent to hinder-delay-and/or-defraud creditors, as isindicated by the Fifth Circuit ruling in In re Chastant, 873F.2d 89 (5th Cir. 1989).

2. In re CookIn the case of Hubbell Steel Corporation v. Cook

(In re Cook), 126 B.R. 261, 268 – 269 (Bkrtcy., E.D.Tex. – Tyler Div. 1991), the court recited the above-listed Chastant factors, yet attributed them to theMassachusetts bankruptcy court which decided In rePeters, 106 B.R. 1, 4 (Bkrcty., D. Mass. 1989). Thecourt (i.e., Bankruptcy Judge Donald R. Sharp) alsoopined that “just one of these factors can maintain afinding of fraudulent intent”, yet added that “theaccumulation of several factors can lead inescapably tothe conclusion that the debtor possessed the requisiteintent” to forfeit the discharge. Id. at 269, citing andquoting from In re Penner, 107 B.R. 171, 175 –176 (Bkrtcy., N.D. Ind. 1989).

Judge Sharp further summarized the relevantevidence of “actual intent”, concluding that debtorMichael Gay Cook’s behavior matches the listed “badgesof fraud”, justifying a denial of his debt discharge:

First, the court finds that the transfer ofthe Florida property was tainted by a lack ofconsideration as to both of the parties. Simplyput, [debtor’s daughter] Caroline Cook paidnothing for the Florida property [to her father,debtor Michael Gay Cook] nor did shereceive any arguable benefit from itsownership. The testimony is clear that shenever lived in the home nor did she receive anyrents through Debtor’s use of the property. Infact, even after the Florida property was sold[,]Caroline Cook not only did not receive controlof any proceeds from the sale but apparentlyincurred a detrimental tax liability to boot.

Second, the Court notes that this transferwas between a father and his daughter undercircumstances that do not suggest an armslength transaction that would belie anysuspicion.

Third, .Debtor retained possession, benefitand use of the Florida property even thoughtitle, subsequent to the transfer, existednominally in the name of Caroline Cook.

Fourth and fifth, the Court is disturbed bythe general chronology of events andtransactions under inquiry as well as theexistence and cumulative effect of the series oftransactions and course of conduct of theDebtor after incurring the debt, experiencingfinancial difficulties and being subject topending litigation by creditors. Debtorexplained the gratuitous transfers to hisdaughter as manifestations of his desire toshare his good financial fortunes with her. TheCourt finds that Debtor’s fortunes were farfrom good at that time. Disputes began toarise between Hubbell and Debtor as early as1983 relating to charges by Hubbell that it hadpaid Debtor consideration for the issuance ofinsurance policies which were never issued.Within this period of time, it appears to thisCourt that

(1) Debtor[’s] financial status at this timecan best be charitably described asunsettled; (2) Debtor gratuitously gifted theHenderson County property toCaroline Cook; (3) The bounds of his generosity werefurther exceeded when the Floridaproperty was transferred to CarolineCook in August in August 1985; and (4) Debtor’s disputes with all of theunderlying parties to the Hubbelltransaction had ... [escalated] into actuallitigation.

To say the least, the Court finds the timing ofDebtor’s generosity, in the face of seriouslitigation, to be somewhat troubling.

Sixth, this Court is troubled by the factthat Debtor’s transfer of the Florida property to[his daughter] Caroline Cook was entirelyvoluntary.

In conclusion, the finding by this Courtthat the fraudulent intent requirement of §727(a)(2)(A) has been met together with the







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earlier findings ... Supports a finding thatHubbell has carried its burden of proof andhence this Court will deny Debtor’s dischargepursuant to 11 U.S.C. § 727(a)(2)(A).

Furthermore, this Court’s findings pursuantto 11 U.S.C. § 727(a)(2)(A) rendersHubbell’s [§ 727(a)(3)-based, § 727(a)(4)-based, and § 523(a)(4)-based] causes of actionsuperfluous[;] accordingly, this Court dismissessaid [other] causes of action as moot.

Quoting from Cook, 126 B.R. at 269 – 270.

3. In re LightfootIn the case of Cullen Center Bank & Trust v.

Lightfoot (In re Lightfoot), 152 B.R. 141 (Bkrtcy., S.D.Tex. – Houston Div. 1993), § 727(a)(2(A) was pled bythe adversary plaintiff as grounds for denying the debtor’sdischarge. One of the important issues in Lightfoot wasthe intent-related issue of “concealment”:

It is not the secrecy of the transfer but theretained benefic ial interest that constitutes theconcealment. [citation omitted] ... The FifthCircuit held an exception to the one yearlimitation of 11 U.S.C. § 727(a)(2) is metwhen the debtor continues “the concealment of[his] secretly retained interest in the property.” ... Due to the continued use and enjoyment ofthe boat, the concealment continued “into themagic one year period.”

Quoting from Lightfoot, 152 B.R. at 147.Lightfoot also analyzed the intent issue using the

“badges of fraud” factor-list, citing the above-noted casesof Cook, 126 B.R. at 268, and Penner, 107 B.R. at 175-176.

After having analyzed the debtor’s pre-bankruptcybehavior in light of those “badges of fraud”, the courtexonerated the debtor of various corporate assettransactions challenged by the adversary plaintiff. Lightfoot, 152 B.R. at 148.

However, the plaintiff also provided proof that thedebtor transferred title of a boat she owned, the CarolinaWind, — yet the debtor continued to retain possessionand usage thereof. This looked to the court like“concealment” of a non-exempt asset, so the court deniedthe debtor’s discharge, finding that the deception-cloakedtitle-transfer suspiciously involved the debtor’s onlynotable non-exempt asset boat. Lightfoot, 152 B.R. at149.

F. “Intent to Defraud” as Applicable to §727(a)(3)And/or (A)(5) Accounting Problems

One duty of a debtor is the duty to disclose his orher financial affairs – truthfully, accurately, completely,and meaningfully. A failure to do so can cost a debtorhis or her discharge.

1. What Proves Debtor’s 727(a)(3)/(5)-defined Failure to Account?

What if the adversary plaintiff proves a prima faciecase of huge cash withdrawals during the 12 monthsprior to bankruptcy? The burden of satisfactorilyaccounting for what happened to this cash effectivelyshifts at trial to the debtors. Reed, 700 F.2d 986, 992(5 th Cir. 1983) (discussing proof burden regardingdebtors’ unaccounted-for cash); In re McBee, 512 F.2d504, 506 (5th Cir. 1975) (discussing proof burdenregarding debtors’ unaccounted-for cash); In re Powell,88 B.R. 114, 117-118 (Bkrtcy., W.D. Tex.) (discussingdebtor’s failure to account for assets; denying discharge).

If joint debtors are involved, the joint he debtorsmust both be concerned about meet their proof burden onthis issue, because their respective debt discharges mayboth be deniable under a combination of §§ 727(a)(3)and 727(a)(5). See again In re McBee, 512 F.2d 504,506 (5th Cir. 1975) (recognizing the proof problemsinherent in spousal collusion; debtors failed to accountwith some kind of written records or receipts, for how$14,000 in cash was disposed of).

2. In re WombleA noteworthy illustration of a debtor’s discharge

being lost due to the debtor’s failure to meaningfullyaccount for financial matters is the case of In reWomble, 289 B.R. 836 (Bkrtcy., N.D. Tex. 2003),discussed hereinafter.

It is the debtor’s duty to provide meaningfuldocumentation showing “how the debtor paid his livingexpenses”. Quoting from In re Womble, 289 B.R.836, 858 (Bkrtcy., N.D. Tex. 2003) (financial recordswere like “spaghetti”). Moreover, “the demands ofoperating a business do not excuse a debtor from keepingbasic financial records”. Id.

The unsurprising back-up for a serious lack ofmeaningful accounting-enabling records may be adebtor’s “self-serving testimony”(which “lackscredibility”), and such a defense may result in “nojustification for [debtor’s] failure to keep adequaterecords and documents”. Womble, 289 B.R. at 860($71,000 unaccounted-for).

Of course, if a debtor’s financial records are merelya mess of “spaghetti”(as in Womble), it is likewise no

















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excuse if the debtor presents only a cash-consumed“empty plate”! Consider how in Reed the unaccounted-for/undocumented cash involved only $19,586.83, yet theFifth Circuit found that unaccounted-for/undocumented$19,586.83 as unsatisfactorily explained (for § 727(a)(3)purposes). See Reed, 700 F.2d 986, 993 (5th Cir. 1983).

3. In re TownsleyIn the case of Mozeika v. Townsley) In re

Townsley 195 B.R. 54, 10 Tex. Bankr. Ct. Reptr. 80(Bkrtcy., E.D. Tex.– Sherman Div. 1996) (per DonaldR. Sharp, Bankruptcy Judge), the court considered adischarge challenge grounded upon 11 U.S.C. §727(a)(5), but found that the objecting creditor had failedto discern the difference between debtor’s “grossreceipts” and estate “assets”:

Mozeika also seeks a denial of the discharge to[debtor] Townsley under § 727(a)(5). Thatsection provides for a denial of discharge whenthe debtor has failed to explain satisfactorilyany loss of assets or deficiency of assets tomeet the debtor’s liabilities. ... Under thissection of the Code, the plaintiff has the initialburden of identifying the assets in question byappropriate allegations in the complaint andshowing that the debtor at one time had theassets but they are no longer available for thedebtor’s creditors. Once the creditor hasintroduced evidence of the disappearance ofsubstantial assets, the burden shifts to theDebtor to explain satisfactorily the losses ordeficiencies. [citation omitted] ...

Mozeika has established that [debtor]Townsley deposited $315,148.88 into his bankin 1991 and 1992. The money was no longerpresent when Townsley filed his schedules inMarch, 1993. Mozeika argues that he hasmade a prima facie showing that the asset wasdissipated and that the burden now shifts toTownsley to satisfactorily explain where themoney went. Upon such proof, the statementby Mozeika that the burden then shifts to theDebtor to explain the loss of the asset iscorrect. However, in this case, Mozeika failsin his initial burden of proving the existence ofsuch an asset. The simple showing of someamount of gross receipts by one who operateda business at a point ranging from a year toseveral months prior to his bankruptcy does notdischarge [pun intended?] the need forestablishing the existence of the asset.

Mozeika’s argument completely misses theaccounting distinction between “gross receipts”and “assets.” A business may have a cashflow statement that shows gross receipts overa period of time but then have a balance sheetshowing no assets at all. The transfer of grossreceipts to assets only occurs when the cashreceipts become surplus funds retained in thebusiness after payment of expenses. There isno proof at all that the periodic deposits madeby Townsley in 1991 and 1992 were ever“assets.”

Additionally, Mozeika asserts thatTownsley is unable to explain the loss of$627,500.00 in existing accounts. (Exhibit202). However, as discussed earlier, this wasa projected or estimated sales account fromexisting clients, not accounts receivable forexisting sales. Consequently, the Court findsno liability for the failure to account for the lossof this “asset.”

Quoting from Townsley, 195 B.R. at 64-65.One of the evidentiary lessons from Townsley, it

seems, is that before an “actual intent” to commit afraud-on-creditors can be grounded upon improperaccounting practices — pursuant to an objection undereither § 727(a)(3), or under § 727(a)(5), — the creditorhas an initial proof burden to show convincingly that theimproperly accounted-for estate “asset” was / is truly anestate “asset”.

4. In re DennisIn the case of Robertson v. Dennis (In re Dennis),

330 F.3d 696 (5th Cir. 2003), the importance ofproviding tax return documentation is illustrated:

The court did not clearly err by finding that[debtor] Dennis kept and filed adequaterecords. [Creditor] Robertson failed his burdenof proof. ... [Creditor Robertson] neverspecifies which records are missing or whytheir absence prevented him fromunderstanding [debtor] Dennis’s financialcondition. ... [For example,] the record containsnumerous bank, payroll, and other records.Dennis also filed several income tax returns,the “quintessential documents” in a personalbankruptcy. [citations omitted] ... Notably,the chapter 7 trustee did not object to thesesubmissions. In sum, Dennis is “anunsophisticated wage earner” who kept and






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filed records appropriate to her commonplaceassets and liabilities.

Quoting from Dennis, 330 F.3d at 703.

G. “Intent to Defraud” as Applicable to§727(a)(4)-relevant Disclosure Deceptions 1. How 727(a)(4)-relevant Are Debtor’s ScheduleNon-disclosures?

The bankruptcy process presupposes honest,complete, and meaningful disclosures of bankruptcy-relevant information by the debtor who seeks a debtdischarge.

Accordingly, it is axiomatic that the bankruptcyprocess cannot function well if debtors abuse the systemwith “false oaths”, — i.e., if debtors lie under oath abouttheir assets, asset transfers, and/or other financial affairs.

One way Congress has encouraged debtors toprovide honest, complete, and meaningful disclosure is §727(a)(4), a statute that can deprive a debtor of debtdischarge if the debtor makes a “false oath” or a similarinformational fraud on the court.

Of course, some debtors try to be excused, in effect,by blaming their own lies on others.

However, “reliance on counsel” is not an slam-dunkaffirmative defense to § 727(a)(4)-oriented falsities,whether those falsities be misleading misstatements of thetruth, misleading incompleteness in the schedules’ entries,or misleading omissions of material information.

Consider what a Pandora’s box it would be “relianceupon advice of counsel” routinely exonerated false oathson a debtor’s Statement of Financial Affairs! See,accord, In re Perel, 51 F.2d 506, 506-507 (S.D. Tex.1931) (debtor “admitted that he did have it; that he didnot schedule it ... But [debtor] defends on the ground ...that he acted as he did under the advice of counsel, andtherefore he could not be guilty of fraudulentconcealment” – discharge denied).

Another “false oath” case, with an analysis of“fraudulent intent” in a § 727(a)(4)-based dischargechallenge context, is the afore-mentioned case of Sholdrav. Chilmark Financial LLP (In re Sholdra), 249 F.3d380 (5th Cir. 2001).

As discussed above, in Sholdra, a creditor of theChapter 7 debtor moved for summary judgment on thecreditor’s discharge challenge complaint, which complaintwas grounded in 11 U.S.C. § 727(a)(4)(A), assertingthat the debtor had made a “false oath” with fraudulentintent.

The Sholdra bankruptcy court recognized a “falseoath” as proven under Rule 7056, and granted thecreditor’s summary judgment motion (and thus

necessarily found the debtor’s “fraudulent intent” wasproven beyond genuine disputability), and denied thedebtor’s discharge. The district court affirmed thedischarge denial.

The Fifth Circuit emphasized that the debtor onlyamended his bankruptcy schedules after a depositionflushed out falsity therein.

Because it is undisputed that [debtor Sholdra]made materially false statements under oath,this appeal involves only whether [debtor]made such statements with fraudulent intent –or reckless indifference to the truth, which canbe proven by circumstantial evidence. Cf.Pavy v. Chastant (In re Chastant), 873F.2d 89, 91 (5th Cir. 1989); ... [debtor]argues that there are genuine issues of materialfact precluding summary judgment. ... [but][w]e disagree because the amended schedulesand statement of financial affairs fail to createa genuine issue of material fact. While it mayhave been better practice for [debtor] todisclose the existence of such amendments ,they do not negate the fact that [debtor] madeknowingly false oaths in his original schedulesand statement of financial affairs. See Mazerv. United States, 298 F.2d 579, 582 (7th

Cir. 1962) (rejecting debtor’s argument that anamended schedule relieved a false oath).Moreover, [debtor] filed the amendments onlyafter the falsity of the original documents wasrevealed in his deposition. See Swicegood v.Ginn, 924 F.2d 230, 232 (11th Cir. 1991) (percuriam) (affirming fraudulent intent findingpartially relying on debtor’s amendment ofschedules made after debtor’s former wiferevealed omitted assets to judgment creditor);FDIC v. Sullivan (In re Sullivan), 204 B.R.919, 943 (Bankr., N.D. Tex. 1997); Banc Onev. Braymer (In re Braymer), 126 B.R. 499, 501-02 (Bank., N.D. Tex. 1991).

* * * *Finally, [debtor physician]’s inexperience withfinancial affairs or reliance on incorrect adviceor information, even if true, cannot withstandsummary judgment. [Debtor’s] purportedinexperience with financial affairs does notnegate the fact that he made false oaths byknowingly swearing to false information.

Sholdra, 249 F.3d at 382-383. (Interesting “aside”: theFifth Circuit also added that it “cannot accept Appellant’s












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attempt to blame the false oaths on his bankruptcycounsel’s and his wife’s conduct”.)

2. In re LightfootIn the case of Cullen Center Bank & Trust v.

Lightfoot (In re Lightfoot), 152 B.R. 141 (Bkrtcy., S.D.Tex. – Houston Div. 1993), a creditor objected to thedebtor’s discharge upon “false oath” allegations.

Besides the “boat” transfer discussed above, thebankruptc y court in Lightfoot had rejected the creditor’sdischarge challenge as asserted on § 727(a)(2)(A)grounds, insofar as it pertains to corporate assettransactions involving Nu-Way and Chero-Key assettransfers. On this ruling the debtor likely rejoiced.Moreover, the court also rejected a § 727(a)(4)-based“false oath” discharge challenge — another occasion fordebtor rejoicing, undoubtedly.

However, any such celebration would have beendoubly premature, because the court in Lightfoot not onlydisapproved the “boat” transaction (discussed above), italso found that the debtor’s schedules also had a “boat”problem — the debtor’s transferred-away boat wasneither disclosed on debtor’s schedules nor in debtor’sstatement of financial affairs.

This material omission was not excused by the court,and the court found this omission as sufficiently egregiousto justify denying the discharge pursuant to 11 U.S.C. §727(a)(4). Lightfoot, 152 B.R. at 149. (One might saythat debtor’s discharge “sailed away” on the CarolinaWind.)

3. In re TownsleyJudge Sharp’s ruling in Mozeika v. Townsley) In re

Townsley 195 B.R. 54, 10 Tex. Bankr. Ct. Reptr. 80(Bkrtcy., E.D. Tex.– Sherman Div. 1996), declined tofind that any estate “assets” had been unaccounted for(as was alluded to, above). Townsley also involved a“false oath” allegation asserted pursuant to 11 U.S.C. §727(a)(4).

The reasoning for why the debtor prevailed on the“asset” accounting allegation was directly related to whythe debtor prevailed on the “false oath” allegation.Because Judge Sharp distinguished between “income”and “gross receipts”, he found that the financialmisstatements in the debtor’s schedules (which were lateramended) were innocently caused by debtor’s mistakenview of the schedules’ terminology, as opposed to beingthe result of any kind of perjured falsification that wouldjustify a discharge denial under § 727(a)(4):

Townsley has admitted to omitting from hisschedules the $315,148.88 he received fromsales [during 1991 and 1992].

Townsley claims that the money inquestion was used to pay [operating] expensesand the omission was inadvertent because hedid no consider it income. The denial ofdischarge under § 727(a)(4) cannot be imposedwhere the false statement was the result of asimple and honest mistake or inadvertence.Rather, to sustain an objection to dischargeunder this section, the debtor must havewillfully made a false statement with intent todefraud his creditors. [citation omitted] ...

The Court does not believe that thecircumstances of this case warrant aninference of fraudulent intent on the Debtor’spart. Mozeika, again, mischaracterizes themoney in question. Mozeika argues that this isincome to Townsley and therefore should havebeen reported as income earned in the year inquestion. This is a misunderstanding of thedifference between income and gross receipts.It may or may not have been income but onedoes not know whether it is income until theongoing expenses of the business have beendeducted from the gross receipts to arrive atwhat would have been the income of thebusiness proprietor. ... [S]imply proving theexistence of some gross receipts is notsufficient to shift the burden of proof to theDebtor to establish that it was not income.There must be proof sufficient to raise aserious doubt in the mind of the trier of fact asto whether or not this could have been income.In this case, there is no question but that it isnot income and therefore, the Plaintiff fails inhis initial burden. The request for dial ofdischarge pursuant to 11 U.S.C. § 727(a)(4)must be denied.

Quoting from Townsley, 195 B.R. at 65.

V. OTHER LEGAL ETHICS ISSUESRELATED TO DISCHARGE TOPICSA. Legal Ethics Issues Involving the TexasPublic Information Act1. Introduction

A debtor’s privacy rights may complicate a lawyer’stasks whenever that debtor’s bankruptcy intersectsgovernmental discovery matters subjected to aconfidentiality agreement. This complication arises from






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the tension between “open records” and theconfidentiality agreement’s terms.

The Texas Public Information Act (Tex. Gov. Code§§ 552.001 - 552.353) is the current version of what wasonce known as the “Texas Open Records Act”, the stateequivalent to the federal Freedom of Information Act.Because governmental agencies routinely acquiregalaxies of private information, there sometimes arisesituations putting private information at risk, includingsituations involving applications of the Texas PublicInformation Act.

So, if a debtor–client’s privacy rights are potentiallythreatened, debtor’s counsel should be aware of theclient’s privacy concerns and rights that may beimplicated.

Privacy concerns are understandably threatened bycomputerized information technology, especially anytimea public information request is submitted to agovernmental agency. For an example of how a Texascourt can order a governmental entity to utilize availableinformation technology so that a public informationrequest can be facilitated without violating the privacyrights of students, see Fish & Dallas NAACP Branch v.Dallas I.S.D., 31 S.W.3d 678 (Tex. App. – Eastland2000, petition denied) (district could provide student testscores database in a manner that electronically redactedstudent names, so that FERPA privacy restrictions werenot violated thereby).

However, sometimes the governmental agencydetermines that withholding information is legally proper.

For an example of withholding governmental entityinformation, in a context involving a request for “publicinformation”, see the case of Harlandale I.S.D. v.Cornyn, 25 S.W.3d 328 (Tex. App. – Austin 2000,petition denied).

In Harlandale I.S.D. v. Cornyn, the school district(and its trustee board) sued the state’s attorney general,seeking a declaratory judgment that certain informationbe protected from public disclosure. The information inquestion was the district’s attorney’s investigative reportabout a campus police officer. The police officer hadfiled a grievance; the school district hired the attorney toinvestigate the grievance. The school district resisted theidea of releasing that investigative file, arguing that theattorney’s investigative report fit a statutory disclosureexception (what is commonly called “attorney workproduct”, prepared in the process of providing legaladvice to the school district and to its board).

The Harlandale I.S.D. trial court (a district court)denied the declaratory relief requested by the schooldistrict, indicating that the investigative report must bereleased on request to the public. The school district (and

its board of trustees) appealed this denial to the Austinpanel of the Texas Court of Appeals.

The Harlandale I.S.D. appellate court, disagreeingwith the trial court, ruled that the investigative report wasa form of “attorney work product”, being informationobtained and recorded for the primary purpose ofenabling the attorney to provide legal advice to the schooldistrict (and to its trustee board).

Consequently, the investigative report was astatutory disclosure exception, so the school districtdeserved a protective declaratory judgment, confirmingits right to withhold the attorney’s investigative reportfrom public disclosure.

Thus, the appellate court reversed the district courtand rendered judgment for the school district. The TexasSupreme Court refused the Attorney General’s appeal,so the ultimate disposition of the case was a “win” forthe school district and its trustee board (and, indirectly,also for the school district’s attorney).

The government agency lawyer has special issuesto consider whenever an “open records act” request ismade — what about the legal ethics issues involved, aretheir any discovery agreements regarding confidentialitythat must be fulfilled prior to releasing what otherwisemight be properly recognized as “public information”?

This problem is illustrated by the case of Word ofFaith World Outreach Center Church, Inc. v. Morales,143 F.R.D. 109, 24 Fed. R. Serv. 1011 (W.D. Tex.– Austin Div. 1992).

Moreover, from the private client’s legalperspective, efforts to protect the privacy of what isarguably non-“public” information (held by agovernmental agency) should not be left to the discretionof the governmental agency. This side of the legal ethicscoin is considered below.

2. Word of Faith World Outreach Center Church, Inc.The bankruptcy courts often process cases involving

companies which have done or which are doing businesswith government entities, such as supplying goods ofservices to a federal, state, or local government agency,pursuant to a government contract.

Consequently, a government contract may result ina dispute, which may grow into litigation, and mayeventually involve the discovery process. During thediscovery process a discovery request (such as aninterrogatory or a document production request) maypertain to confidential information, such as informationinvolving trade secrets or some other type of confidentialinformation.

Confidential information may also be requestedduring an oral deposition, and that confidential information




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may directly (and simultaneously) impact the interests ofboth the debtor company and the individual testifying atthe deposition.

To illustrate this type of problem, consider aconceptually similar situation, involving disclosures ofconfidentiality agreement-protected information, arising ina non-bankruptcy context, in the case of Word of FaithWorld Outreach Center Church, Inc. v. Morales, 143F.R.D. 109 (W.D. Tex. – Austin Div. 1992).

Although the Word of Faith case was not abankruptcy case, the legal ethics problems that arosetherein are the kind which could potentially arise in anylitigation involving a governmental agency that respondsto a request for “public information” regarding a topic thatoverlaps its own litigation efforts, especially if its litigationefforts have resulted in any confidentiality agreements.In a motion for sanctions proceeding, the federal districtjudge discussed the legal ethics problem, and then granteda creative form of sanctions against then-AttorneyGeneral Dan Morales.

Notably, the Court in Word of Faith interrogated thegovernment’s counsel, in conjunction with a sanctionshearing, (and was answered) as follows:

THE COURT: ... So you determined thatyour committee’s decision to release thevideotape because no exemption, including noprotective order, had been entered by anyCourt was valid, and released it when youknew that the lawyers in your [i.e., AttorneyGeneral Dan Morales’s] office had enteredinto an agreement that it would not be releasedso that no motion for protective order would befiled. Is that what you are telling me?

MR. MORALES: That is correct, YourHonor.

Transcript of June 12, 1992 Motions Hearing, at 50.

The Attorney General effectively deniedPlaintiffs of their substantive and proceduralright to seek a protective order under[Fed.R.Civ.P.] Rule 26 twice in this case. ThisCourt has repeatedly asked litigants, includingthe Plaintiffs and the Attorney General, toresolve discovery disputes on their own, ifpossible. In the words of a past attorneygeneral of Texas, “[t]he litigation exception [ofthe Texas Open Records Act] ... was intendedto prevent the use of the Open Records Act asa method to avoid discovery rules” and allow

courts to properly resolve disputes, which theyare in “the best position to resolve.” OpenRec. Dec. 551 (1990) (citing Op. Att’y Gen.JM-1048 (1989)). The Attorney General hasdefeated both of those purposes. Heintentionally breached his own agreement,which had apparently obviated the need forPlaintiffs to come to this Court to receive aprotective order, failed to allow this Court toconsider the need for a protective order by notgiving notice to the Plaintiffs of his intent tobreach , and now hides behind that lack of aprotective order to justify breaching thatagreement. .... The Attorney General has notonly used the Open Records Act to avoiddiscovery rules, he has abused those discoveryrules and undermined this Court’s attempt toencourage lawyers to behave as responsibleadults and conserve judicial resources byresolving their own discovery disputes.

Counsel for [Dan Morales] asks thisCourt to take note of the Office of theAttorney General’s generally good reputationfor integrity and ignore this one lapse. ThisCourt cannot do that. The Attorney General,the highest public official elected to representthe citizens of the State of Texas [in litigation],intentionally and deliberately acted wrongly.The parties and lawyers in this case haveagreed on very little in this case and haveespecially vigorously debated the propriety andcause of the substantial press coverage thecase has received. Of all cases this Court hasseen, this one most required the parties to standby an agreement such as the one made andbreached in this case.

Quoting from Word of Faith, 143 F.R.D. at 117-118. To remove any doubt that the legal ethics governing

Texas lawyers was implicated, the federal district courtspecifically cited to the Texas attorney conduct rules, ina salient footnote:

State Bar Rule 8.04 states that a lawyer “shallnot ... Engage in conduct involving dishonesty,fraud, deceit, or misrepresentation.” Tex.Gov’t Code, State Bar Rule 8.04(3) (Vernon’s1992 Supp.). According to comment 7 to thatrule, the Attorney General, as a lawyer holdingpublic office, “assume[s] legal responsibilitiesgoing beyond those of other citizens” and his“abuse of public office can suggest an inability


25

to fulfill the professional role of attorney.” Tex.Gov’t Code, State bar Rule 8.04, Comment 7(emphasis added). Furthermore, Local RuleAT-4 states that all attorneys permitted topractice in the Western District [of Texas]must be familiar with the State Bar Rules ofProfessional Conduct and “shall not engage inany conduct which degrades or impugns theintegrity of the Court or in any mannerinterferes with the administration of justicetherein.” Local Court Rules for the WesternDistrict of Texas (1990). The AttorneyGeneral has impugned the integrity of the Courtand abused his office.

Quoting Footnote #6 in Word of Faith, 143 F.R.D. at117.

Moreover, the federal district court in Word of Faithcontinued to censure the Texas Attorney General in its“Conclusion”, which included an innovative forms ofsanctions against the attorney general’s office, generally,and against Dan Morales, particularly:

CONCLUSIONThe Court finds that the Attorney General [DanMorales]’s release of the videotape depositionof Robert Tilton to the media, without priornotice to either the Plaintiffs or their counsel,was a deliberate and intentional breach of theexpress agreement made in good faith by hisown lawyers and made for the purpose ofeliminating the need to file a motion forprotective order. The Court further finds thatthe Attorney General’s justification forreleasing the videotape — that there was noCourt order preventing the release —constituted unprofessional and unjustifiableaction, especially under the circumstanceswhen it should have been clear a protectiveorder would have been issued on request,creating an exemption from release under theTexas Open Records Act, the very statute thatMr. Morales testifies mandated him to releasethe videotape to the media.

The Attorney General has not only put intoquestion his integrity and the word of everyassistant attorney general, but he, the highestlegal officer of the state, has threatened thesmooth functioning of this state’s legal systemby not honoring his lawyers’ agreements.

* * * *

The Court GRANTS the motion forsanctions against Dan Morales, AttorneyGeneral of the State of Texas, but will notassess damages which would have to be paidby the taxpayers of the State of Texas.Instead the Court SANCTIONS the DefendantDan Morales by this public reprimand that byhis conduct in this case he has dishonored hislawyers, his office his profession, the courts,and the citizens of the State of Texas, whomhe was elected to represent.

The Court FURTHER ORDERS that forone year whenever an assistant attorneygeneral, representing any governmental body,wishes to make an agreement with an adverseparty, or his or her counsel, in a suit before theUnited States District Court, Western District,Austin Division, the agreement must be signedpersonally by Dan Morales as well as theassistant attorney general initiating theagreement.

Quoting from Word of Faith, 143 F.R.D. at 118.

3. Bankruptcy practice implicationsThe moral of the Word of Faith ruling, for attorneys

representing state administrative agencies, is to take pre-trial discovery-based confidentiality agreements seriously,especially whenever responding to a request for “publicinformation” (under the Texas Public Information Act).

Likewise, a debtor who may be affected by arequest for “public information” might be well-advised toprovide a copy of the Word of Faith ruling to theattorneys who are representing any state agency whichpossesses confidential information provided to thatagency by the debtor, especially if any of theconfidentiality agreement-protected information appearsto be potentially “newsworthy”.

B. Representing the Governmental Employee:Considering Concurring or Future Proceedings

Sometimes representing a governmental agencyemployee in a bankruptcy context is complicated by thatsame employee’s involvement (or potential involvement)in criminal and/or civil proceedings related to the samesubject-matter, — e.g., accusations that the employeecommitted a prosecutable crime and/or a violation of agovernmental agency’s regulation, which misconduc t (ifproven) could provide a basis for serious criminalprosecution and/or administrative enforcementconsequences.


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Although the complexity of this problem lies outsidethis present paper’s parameters (thankfully), thebankruptcy lawyer who represents such an employeeneeds to (1) keep these issues in mind; and (2) work inconjunction with the employee’s other counsel, whetherthat “other counsel’ be a criminal defense attorney or anadministrative law practitioner (or both).

For illustrations of such contexts, please consider thepreceding portions of this paper discussing “parallelproceedings”.

C. Withdrawal from Continued RepresentationWhat if a governmental lawyer – either representing

a governmental entity or representing a governmentalemployee – learns that he or she will be used at trial as afacilitating accomplice to perjury? How can the lawyeravoid violating the ethical rule prohibiting aiding andabetting the client’s continuing fraud and/or the ethicalrule prohibiting lying to a judge or to a quasi-judicialofficer (e.g., an administrative law judge of the TEA or aTEA-appointed hearing examiner)? See, e.g. , TDRPC3.03(a)(1) (prohibiting a lawyer from “knowingly” makingrepresentations to a tribunal); TDRPC 3.03(a)(2) (alawyer may not knowingly omit a disclosure when suchan omission, under the circumstances, would benecessary to prevent a criminally fraudulent act frombeing committed); TDRPC 3.03(a)(5) (a lawyer may notknowingly use false evidence at trial).

The most directly applicable rule governingwithdrawal from further representation of a client isTDRPC 1.15, captioned “Declining or TerminatingRepresentation”:

(a) A lawyer shall decline to represent a clientor, where representation has commenced, shallwithdraw, except as stated in paragraph (c ) ,from the representation of a client, if:

(1) the representation will result inviolation of Rule 3.08, otherapplicable rules of professionalconduct or other law;(2) the lawyer’s physical, mental orpsychological condition materiallyimpairs the lawyer’s fitness torepresent the client; or(3) the lawyer is discharged, with orwithout good cause.

(b) Except as required by paragraph (a), alawyer shall not withdraw from representing aclient unless:

(1) withdrawal can be accomplishedwithout material adverse effect onthe interests of the client;(2) the client persists in a course ofaction involving the lawyers’services that the lawyer reasonablybelieves may be criminal orfraudulent;(3) the client has used the law yer’sservices to perpetrate a crime orfraud;(4) a client insists upon pursuing anobjective that the lawyer considersrepugnant or imprudent or withwhich the lawyer has fundamentaldisagreement;(5) the client fails substantially tofulfill an obligation to the lawyerregarding the lawyer’s services,including an obligation to pay for thelawyer’s fee as agreed, and hasbeen given reasonable warning thatthe law yer will withdraw unless theobligation is fulfilled;(6) the representation will result in anunreasonable financial burden on thelawyer or has been renderedunreasonably difficult by the client;or(7) other good cause for withdrawalexists.

(c) When ordered to do so by a tribunal, alawyer shall continue representationnotwithstanding good cause for terminating therepresentation.(d) Upon termination of representation, alawyer shall take steps to the extent reasonablypracticable to protect a client’s interest, suchas giving reasonable notice to the client,allowing time for employment of other counsel,surrendering papers and property to which theclient is entitled and refunding any advancepayments of fee that has not been earned. Thelawyer may retain papers relating to the clientto the extent permitted by other law only ifsuch retention will not prejudice the client inthe subject matter of the representation.

Quoting TDRPC 1.15 (text from www.txboda.org/pages/txrulesofprocon.htm ).

Sometimes the only ethical solution for the lawyer,when the client insists on committing such perjury, is to


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seek a “noisy” withdrawal5 from continued representationof that guileful client. Sometimes withdrawal is the“lesser of two evils”, especially if necessary to avoidaiding and abetting criminal activity, or to avoid what isdeveloping into an impossible situation (with fiduciary dutyburdens focusing more and more in the direction of legalmalpractice if withdrawal from further representation isnot promptly achieved).

When withdrawing from further representation, acareful process must be observed, in order to comply withapplicable professional laws and in order to mitigate legaldisadvantages to the soon-to-be ex-client. For guidanceregarding the proper process for withdrawing fromfurther representation, see generally R.C. Wynn v.Eriksson, 889 F.2d 644 (5th Cir. 1989); In reMatthews, 154 B.R. 673 (Bkrtcy., W.D. Tex. 1993).

VI. CONCLUDING COMMENTSOf course, once the debtor is awarded a debt

discharge, the debtor’s dangers are “over”, aren’t they?After all, what could go “wrong” after a debtorsuccessfully receives a debt discharge?

In extreme “fraud-on-creditors” scenarios, twoafter-the-discharge-is-granted concerns sometimes loomover the debt-discharged debtor:

(1) whether the discharge, after being granted, willbe revoked, per 11 U.S.C. § 727(d); and(2) whether the debtor will be prosecutedcriminally, pursuant to 11 U.S.C. § 152, as aresult of the debtor’s behavior before and/or duringthe bankruptcy process.

These two after-the-discharge-was-grantedcomplications are readily illustrated in the case of UnitedStates v. Cluck, 87 F.3d 138, 10 Tex. Bankr. Ct.Reptr. 187 (5 th Cir. 1996). In Cluck, the debtor waseventually “found out” — and was held“doubly”accountable for his misconduct:

After an adversary proceeding on the trustee’scomplaint, the bankruptcy court revoked thedischarge pursuant to 11 U.S.C. § 727(d)(2)& (3), and ordered Cluck to turnover variousassets to the trustee. In so ordering, the courtfound that Cluck had failed to disclose propertyand assets; had made false statements in thebankruptcy schedules; had transferred propertywith the intent to defraud, hinder, or delaycreditors; had property as collateral for a loan;and had repeatedly disregarded court orders.The court further fined Cluck $1,000.00 fordiscovery violations. The bankruptcy court’sorder was affirmed by this court. In March1995, a criminal indictment was filed in federal[district] court charging Cluck with bankruptcyfraud pursuant to 11 U.S.C. § 152. Theindictment was based on essentially the sameconduct that served as the basis for revocationof the discharge. Cluck moved to dismiss theindictment, asserting that the Double JeopardyClause [within the U.S. Constitution’s FifthAmendment] barred the prosecution becausethe federal government [acting through theU.S. Trustee’s Office-appointed trustee] hadalready punished him for bankruptcy fraud byrevoking his discharge in bankruptcy. Thedistrict court denied Cluck’s motion, findingthat the bankruptcy complaint and the criminalprosecution were not brought by the samesovereign and that revocation of a bankruptcydischarge does not implicate double jeopardyconcerns.

* * *Cluck’s discharge was revoked for failure tocomply with the requirements of the[Bankruptcy] Code. “The right to a dischargein bankruptcy is addressed to the sounddiscretion of the bankruptcy court, andappellate courts should interfere only for themost cogent, compelling reasons in situations ofgross abuse. In re Jones, 490 F.2d 452,455 (5th Cir. 1974). ... Cluck was not entitledto a discharge, and therefore, the subsequentrevocation of the discharge does not constitute

5Regarding a “noisy” withdrawal fromcontinued representation, consider the following text ofTDRPC 1.15's Official Comment #3:

When a lawyer has been appointed to representa client and in certain other instances in litigation,withdrawal ordinarily requires approval of theappointing authority or presiding judge. See alsoRule 6.01. Difficulty may be encountered ifwithdrawal is based on the client’s demand thatthe lawyer engage in unprofessional conduct.The tribunal may wish an explanation for thewithdrawal, while the lawyer may be bound tokeep confidential the facts that would constitutesuch an explanation. The lawyer’s statementthat professional considerations requiretermination of the representation ordinarily shouldbe accepted as sufficient. See also Rule 1.06(e).






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punishment for the purposes of doublejeopardy. [citations omitted] ...

Because we conclude that revocation ofdischarge is not “punishment” for purposes ofthe double jeopardy clause[,] it is unnecessaryto decide whether the “same sovereign” wasinvolved and whether the elements of the“offenses” are the same. Deceptive debtorloses again.

Quoting from Cluck, 87 F.3d at 139 – 140, 140 – 141.

Enough said6 — protecting the debtor againsthimself or herself can be quite a challenge for abankruptcy law practitioner.

Moreover, protecting the debtor’s rights — withoutrunning afoul the legal ethics prohibitions against aiding acontinuing fraud on the court (and/or without venturingtoo close to one of Title 18 restrictions) – can also bequite a challenge.

In conclusion, the procedural and evidentiary “highseas” of discharge denial adversary litigation include a lotof “rough waters”, — and many opportunities forshipwreck and drowning, metaphorically speaking.

However, just as oceanographers have discoveredthat there exist “paths in the seas”,7 there also existrecognizable evidentiary patterns and proceduralprinciples for surviving the turbulent currents (and“pirate”-menaced waters) of § 727(a)-based dischargechallenge litigation.

For example, the U.S. Supreme Court’s recent rulingin Kontrick v. Ryan is one such important “pathway” thatmust be recognized and mastered in adversary litigation(by bankruptcy practitioners).

But then, there is also the rest of the wild, wild“ocean” of other types of § 727(a)-based dischargechallenge cases!

6 However, it is expected that the case lawcited herein will be supplemented (somewhat), D.v.,during the live presentation of this CLE paper. If so,the extra “blank space” on this page can be used forjotting down such supplemental citations (and notesthereabout).

7 See, e.g., accord, Charles L. Lewis,Matthew Fontaine Maury, Pathfinder of the Seas (U.S. Naval Institute, 1927), citing Psalm 8:8(Maury’s foundation for researching and recordingnaval oceanography).

litigating bankruptcy discharge denials under ...accounts for about 18% of malpractice claims). see...

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