Memorandum of Decision Re: Objection to Discharge

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re WILLIAM G. DUNN,                                                                              No. 585-02911A      Debtor. ____________________/ NANCY VAN DYNE,      Plaintiff,    v.                                                                                                                 A.P. No. 850521 WILLIAM G. DUNN,      Defendant. _____________________/
Memorandum of Decision
     By this action plaintiff, an objecting creditor, seeks denial of the debtor's discharge on several grounds. Most of plaintiff's arguments have little merit, but one matter does appear serious enough to warrant denial of a discharge.      The debtor is a middle-aged attorney who has been in practice for several years. He uses a professional corporation form of practice pursuant to California Business and Professions Code sections 6160 et seq. Plaintiff argues that the debtor's discharge should be denied because the debtor comingled his personal affairs with those of the corporation and undervalued the corporation on his schedules. Neither argument has merit.      There was no testimony that the debtor concealed the nature of any of his affairs regarding the corporation. While the corporation was admittedly used by the debtor for some purely personal purposes, such as making loans to his children, it is clear that this information was never concealed or withheld by the debtor. The grounds for denial of a discharge are specifically set forth in section 727(a) of the Bankruptcy Code; they do not include such comingling as was demonstrated at the trial.      Plaintiff argued that the debtor's discharge should be denied because he valued his corporation at $2,000.00 when its true value as a "going concern" was much higher. To support this contention, plaintiff produced an expert to testify as to the going concern value. However, his opinion of the value was rapidly deflated when he was informed by the court that section 541(a)(6) of the Bankruptcy Code would prohibit a trustee from including the debtor's services or a noncompetition clause in any sale. His opinion of value then became $11,000.00, and he admitted on cross-examination that even this figure was based upon assumptions as to what any law practice must contain and not on actual knowledge of the corporation's assets.      The debtor scheduled his only interest in real property as an "equitable interest " in a condominium in Palm Desert and valued the interest at zero. Plaintiff claims that the debtor's tax returns show that he is actually a fee owner, but the significance of this assertion is not apparent. The only testimony before the court was that there was no equity for the debtor in the property. Even if the evidence had established fee ownership by the debtor (which it did not), full disclosure of the existence of the property and its true value to the debtor's estate negates any basis for denial of the discharge.      Plaintiff identifies as a ground for discharge the debtor's failure to schedule a 1982 Cessna airplane as an asset. The debtor's uncontradicted testimony was that the airplane was not owned by him but rather a syndicate he formed to purchase the airplane and that the airplane is encumbered for more than its value, a fact plaintiff admits. Even if the airplane was truly owned by the debtor, fraudulent intent to conceal it cannot be inferred where the debtor stands to gain nothing by concealment. In re McCloud (Bkrtcy.M.D.Tenn.1980) 7 B.R. 819; 4 Collier on Bankruptcy (15th ed.), p.727-15.      One matter alone stands out as a glaring example of conduct sufficient to deny the debtor his discharge, yet it was hardly touched upon by the plaintiff. The debtor testified that in April, 1985, about five months before the filing of his bankruptcy petition, he transferred his interest in a commercial lot in Lake Tahoe to his corporation's pension plan in return for forgiveness of unsecured loans previously made to him by the pension plan. However, the debtor failed to mention this transaction in answer to either question 11a of his Statement of Affairs (which asks what debts have been paid within the last year) or question 12b (which requires a listing of all assets transferred within the year). The debtor claimed that he did not understand the questions, but his demonstrated knowledge of real estate law makes that excuse untenable. Since the debtor estimated the value of his interest in the property at $55,000.00, it is clear that he made a knowingly false oath regarding an asset of considerable value. Such conduct justifies the denial of his discharge. 4 Collier on Bankruptcy (15th ed.), p.727-60.      While freely admitting that his responses to the questions in his Statement of Affairs were not true, the debtor testified that he fully disclosed all details of the Tahoe property transaction to the trustee and plaintiff in the proceedings immediately after the petition was filed. This testimony was uncontradicted, and negates the element of intent necessary to deny a discharge. Several courts have held that even when the debtor's schedules are inaccurate if the true and correct information is disclosed by the debtor soon after the petition was filed the erroneous schedules are not enough to warrant denial of his discharge. See, e.g., In re Doody (7th Cir.1937) 92 F.2d 653, 655; In re Wolmer (Bkrtcy.N.D.Ill.1986) 57 B.R. 128; In re Waddle (Bkrtcy.W.D.Ky.1983) 29 B.R. 100, 103.      In order to deny a debtor his discharge, actual intent to hinder, delay or defraud creditors must be shown; section 727 must be construed liberally in favor of the debtor and strictly against the objector. In re Devers (9th Cir.1985) 759 F.2d 751, 753-54. For this reason, although the court is very close to denying the discharge because the debtor's false statements under oath, it cannot find clear and convincing evidence of fraudulent intent and therefore cannot deny the discharge. The court understands that debtors rarely admit fraudulent intent and the court may infer fraudulent intent from the circumstances. However, the debtor's uncontradicted testimony that he made full disclosure of the true facts together with the plaintiff's lack of further evidence showing fraudulent intent leave the court with the feeling that while this debtor may well not deserve his discharge, such a finding is not justified by the record before the court.      It is accordingly the decision of the court that plaintiff take nothing by her complaint and that this adversary proceeding be dismissed. This memorandum shall constitute findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. The debtor shall submit an appropriate form of judgment together with proof of its service on counsel for the plaintiff.
Dated: October 1, 1987                                                                              ________________________                                                                                                                      ALAN JAROSLOVSKY                                                                                                                      U.S. BANKRUPTCY