At the time that the Debtor filed this bankruptcy proceeding, he was owed a tax refund from a governmental agency which he properly listed on his schedules. However, his attorney failed to advise him that, upon receipt of the refund, the Debtor was required to turn over the refund proceeds to the Chapter 7 trustee. His attorney also failed to thoroughly review the schedules with the Debtor and, as a result, the Debtor omitted two small prepetition loans that he owed to his friends.
After the Debtor filed this proceeding, the Debtor received the refund and used some of the proceeds to pay off the two loans and to make certain purchases. At the meeting of creditors, the Debtor initially testified that his schedules were accurate but, upon direct questioning about the refund, he immediately disclosed that he had received the refund and spent part of it.
On February 13, 2015, the plaintiff in this adversary proceeding, Hampton, obtained a default judgment against the Debtor in state court related to injuries that she allegedly sustained on the Debtor’s premises. Before the amount of damages could be assessed, on February 29, 2016, the Debtor filed for bankruptcy under Chapter 7.
On March 28, 2016, the Debtor filed his Schedules of Assets and Liabilities (“Schedules”) and Statement of Financial Affairs (“SOFA”) and averred, under penalty of perjury, that such documents were true and correct to the best of his knowledge, information, and belief. On Schedule B, the Debtor listed a tax refund of $92,940.83 (“Refund”) owed to him by the City related to a prepetition tax foreclosure sale of commercial property. On schedule F, the Debtor listed Hampton as his only creditor with an unsecured, nonpriority claim in the amount of $50,000. Id. He listed no other creditors on his schedules.
On April 5, 2016, the Debtor received the Refund in the amount of $92,640.83. On April 8, 2016, he opened a new checking account and savings account with TD Bank (“Accounts”) and deposited $45,000.00 of the Refund into the checking account and $46,140.83 in the savings account. Id. The Debtor subsequently spent approximately $20,000 to $30,000 of the Refund: (i) to repay: (A) a loan of $1,100.00 to his friend, Sherman White (“White”), (B) a loan of $2,500.00 to another friend, Charles Major (“Major”) and (C) a loan of $7,000 against his life insurance policy with the Veterans’ Administration, which he had disclosed on his Schedules; (ii) on jewelry for his girlfriend; and (iii) on parts for his car (collectively, the “Transfers”).
On June 8, 2016, the Debtor and his counsel, as well as counsel for Hampton, attended the Section 341 meeting of creditors (“Meeting”) held by the Chapter 7 Trustee (“Trustee”). At the outset of the Meeting, the Trustee asked the Debtor if his Schedules contained any errors or omissions, to which he replied “no.” Ex. The Trustee also asked the Debtor if he had listed all of his assets and creditors on his Schedules, to which he replied “yes.” Id. at 1:00. At the conclusion of the Trustee’s questioning, Hampton’s counsel asked the Debtor if he knew when he would receive the Refund. Id. at 13:00. Without hesitating, the Debtor responded that he had received the Refund about a month prior to the Meeting. Id. He testified that he did not realize that he was not supposed to spend the Refund.
The Debtor also disclosed during the Meeting that he had used part of the Refund to pay back White and Major for lending him money in the past. Throughout the Meeting, the Debtor appeared to have difficulty understanding and answering questions, recalling accurate timelines, and seemed generally confused. The Trustee continued the Meeting until July 6, 2016.
On June 10, 2016, Hampton filed a complaint in this adversary proceeding seeking entry of an order denying the Debtor’s discharge pursuant to 11 U.S.C. §§ 727(a)(2) and 727(a)(4) based upon, inter alia, the Debtor’s fraudulent actions in making the Transfers and failing to disclose receipt of the Refund, the Accounts and the loans from White and Major (“Loans”).
On June 13, 2016, the Debtor’s counsel sent the Trustee copies of bank statements and other records from TD Bank reflecting how the Debtor had spent part of the Refund. On July 6, 2016, the Trustee met with the parties again for the continued Meeting. Remarkably, Debtor’s counsel claimed during the Meeting that the Debtor had never told him that he was entitled to receive the Refund even though Debtor’s counsel had specifically listed it on Schedule B.
By the time the Trustee held the continued Meeting, TD Bank had frozen the Accounts and turned over the remainder of the Refund to the Trustee. The Trustee’s final report reflects that the Trustee distributed $57,243.88 of the Refund to Hampton and $6,646.43 in fees to the Trustee.
At trial, Debtor’s counsel initially argued that, at the time of the Debtor’s filing, Debtor’s counsel did not realize that the Debtor was entitled to receive the Refund. When Hampton’s counsel showed Debtor’s counsel a copy of the filed Schedule B, Debtor’s counsel accused Hampton’s counsel of tampering with Schedule B to falsely reflect the Refund. When the Court pointed out that the docket reflected that Debtor’s counsel had filed Schedule B which actually listed the Refund, Debtor’s counsel acknowledged that he must have known about the Refund at the time of the Debtor’s bankruptcy filing.
The Debtor thereafter credibly testified that his counsel never told him that he needed to disclose receipt of the Refund or that he was not supposed to spend the Refund. He also testified that he thought he had properly disclosed the Loans because he told the Trustee about the Loans during the Meeting. During trial, it was clear that the Debtor relied solely upon the advice of legal counsel to fill out his Schedules and that his counsel failed to tell him that he was required to turn over the Refund to the Trustee and that he was not permitted to spend the Refund.