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A Valuable Tale for Creditors: Exposing the Dishonest Debtor

By Rudolph J. Di Massa, Jr. and Walter W. Gouldsbury III
April 1, 2016
The Legal Intelligencer

A Valuable Tale for Creditors: Exposing the Dishonest Debtor

By Rudolph J. Di Massa, Jr. and Walter W. Gouldsbury III
April 1, 2016
The Legal Intelligencer

Read below

Rudolph J. Di Massa
Rudolph J. Di Massa, Jr.

The failure of debtors to accurately list and value assets in their bankruptcy schedules is certainly not a new phenomenon. Recently, however, we are witnessing an increase in bankruptcy cases where debtors are using clever and deliberate means to omit assets or disguise the true value of their assets in an attempt to thwart recovery by creditors. While the U.S. trustee's or a creditor's remedy for such bad acts is to seek a denial of the debtor's discharge under 11 U.S.C. Section 727, the purpose of this article is to highlight that it is often the efforts of creditors (as well as those of the U.S. trustee) that are instrumental in exposing these deceptive and dishonest acts. The recent decision in U.S. Trustee v. Pynn (In re Pynn), No. 2:14-bk-28537-TD (Bankr. C.D. Ca. 2016), is illustrative of this issue.


Darren Pynn (the debtor) filed his ­individual Chapter 7 petition for ­bankruptcy protection Sept. 29, 2014. Pynn listed in "Schedule B-Personal Property" various personal assets, which included a 1966 Porsche 911 that he valued at $5,000, multiple guitars that he collectively valued at $2,750, and several bicycles that he collectively valued at $2,600. Because the stated value of these assets was relatively low, Pynn was able to claim all of these assets as fully exempt pursuant to California's statutory exemption scheme.

Pynn's Section 341 meeting of ­creditors was scheduled for Nov. 7, 2014. Two days before the meeting, and at the request of judgment creditor, Wells Fargo Bank N.A., a third-party appraiser performed an appraisal of the Porsche, the guitars and the bicycles listed in Pynn's Schedule B. The appraiser valued the Porsche at ­between $20,000 to $45,000, the bicycles at $7,710, and the guitars at $6,200. All of the ­appraised values were well in excess of the values that Pynn had assigned to them in his Schedule B.

The 341 meeting went forward as scheduled Nov. 7, 2014. The Chapter 7 trustee appointed in the case, a bankruptcy auditor from the U.S. Trustee's Office, and counsel for Wells Fargo Bank each interviewed Pynn at his 341 meeting.

Pynn testified that he valued the Porsche, the bicycles and the guitars "based on 'yard-sale' type or 'quick sale' liquidation prices," and admitted after further examination that he had undervalued the bicycles and the guitars on his Schedule B. Pynn also testified during the meeting that he would need to amend his Schedule B because he had failed to list certain other musical equipment and an additional bicycle. Shortly after the meeting, Pynn filed his Amended Schedule B listing the additional items, but did not change the values of the Porsche, the bicycles, or the guitars previously listed.

In separate court-approved sales, the Chapter 7 trustee later sold the "$5,000" Porsche to a third party at auction for $83,000. He then sold the "$2,600" bicycles and "$2,750" worth of other musical equipment back to Pynn for $5,450 and $3,900, respectively.

Thereafter, the U.S. trustee filed an adversary proceeding seeking a denial of Pynn's discharge pursuant to 11 U.S.C. Sections 727(a)(4)(A) and 727(a)(2)(A). The trial in the adversary proceeding was held Jan. 28. The evidence presented at trial established, inter alia, that: (1) Pynn was a "hobbyist" and was "­meticulous" about his collections; (2) Pynn had been collecting bikes for over 30 years; (3) Pynn purchased the Porsche in 2003 and attended several Porsche car shows thereafter; (4) Pynn was an avid user of eBay where he often bought and sold items, and "may" have checked the value of the Porsche before preparing his schedules; and (5) the Porsche, the bicycles and the musical ­equipment were sold by the Chapter 7 trustee for approximately $82,000 more than the value assigned by Pynn for these assets.

Following trial, the court issued its ruling denying Pynn's discharge pursuant to Section 727 (a)(4)(A), but found there was insufficient evidence to support a denial of Pynn's discharge pursuant to Section 727 (a)(2)(A).

The Court's Analysis: The Discharge Denial

11 U.S.C. Section 727 (a)(4)(A) provides that "the court shall grant a discharge, unless ... the debtor knowingly and ­fraudulently, in or in connection with the case—made a false oath or account." The court noted that to prevail on a claim under Section 727 (a)(4)(A), a plaintiff "must prove by a preponderance of evidence that (1) debtor made a false statement or omission, (2) regarding a material fact, and (3) did so knowingly and fraudulently," citing Khalil v. Developers Surety and Indemnity (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2004).

In considering the totality of the ­evidence, the court held that each of the factors required for a discharge denial under Section 727(a)(4)(A) had been satisfied.

First, Pynn's representations of value of the Porsche, the bicycles and the guitars on his Schedule B and Amended Schedule B constituted a false oath. While Pynn testified that he had made a "simple mistake" in using a quick-sale valuation, the court found that Pynn's testimony "was not credible, given debtor's attention to detail and intense interest in his collection of assets."

Second, the false statements of value were material. In a case where unsecured creditors' claims totaled $224,000, it was not much of a stretch for the court to conclude that an $82,000 misstatement of value was material and that this "concealment adversely affected the administration of this estate."

Finally, the evidence established that Pynn knowingly and fraudulently "undervalued the property with the ­intention and purpose of deceiving his creditors through the ­stratagem of low-ball statements of value that, for debtor, fit neatly, albeit, falsely, into the California ­exemption scheme."

The Court's Analysis: failure to satisfy burden of proof

11 U.S.C. Section 727 (a)(2)(A) provides, "The court shall grant the debtor a discharge, unless ... the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—property of the debtor, within one year before the date of the filing of the petition."

The court concluded that while Pynn had hidden the true value and substantial equity in the Porsche, the guitars, and the bicycles, Pynn's acts occurred at the time of the filing of his bankruptcy petition and not "within the one year before the date of the filing of the petition" as required by Section 727(a)(2)(A). Accordingly, the court held that there was insufficient evidence to support a denial of the debtor's discharge pursuant to Section 727 (a)(2)(A).

Importance of Creditor Involvement

The Pynn case demonstrates the importance of creditor involvement in a bankruptcy case even if it initially appears that there may be little or no recovery for creditors. All too often, creditors glance over schedules and statements of financial affairs filed by the debtor and accept the information listed at "face value." Pynn serves as a reminder that creditors should take the time to review the debtor's schedules and statement of financial affairs in detail and determine whether any discrepancies exist or any red flags are raised. To the extent a creditor has been provided financial information in connection with the debtor's earlier application for credit, the creditor should cross-reference that information with the debtor's schedules and statement of financial affairs to determine whether any assets previously owned were assigned values significantly different than the values given in the schedules, or whether assets previously identified are even listed at all in the debtor's schedules. In keeping with the saying that "knowledge is power," a creditor armed with reliable information about the debtor (e.g., balance sheets and other financial statements, information about the debtor's line of work, or whether the debtor is a collector or has hobbies that might require the use of valuable equipment) stands a much better chance of "keeping the debtor honest."

While information of this type may not be readily available to creditors, the Pynn case underscores the importance of employing the tools available to parties-in-interest under the U.S. Bankruptcy Code, such as preparing for and appearing at the 341 meeting of creditors, or conducting an examination under Federal Rule of Bankruptcy Procedure 2004. This type of participation requires minimal effort and cost, and could very well result in an increased recovery in the bankruptcy case and a denial of discharge if fraud is uncovered.

Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights. Walter W. Gouldsbury III is an associate at the firm in the Philadelphia office and practices in the areas of business reorganization and financial restructuring.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.