Debtors Who Violated Court Order by Following Lawyer’s Advice Would Not Lose Discharge under §727

Debtors Who Violated Court Order by Following Lawyer’s Advice Would Not Lose Discharge under §727

Debtors filed a Chapter 11 petition and later converted to Chapter 7.  While in Chapter 11, the Debtors sold some real property.  The Court ordered the Debtors to distribute the proceeds of a sale of one of their homes to Wells Fargo. The Debtors appealed some matters to the Bankrutpcy Appellate Court. The Debtors  did not comply with the Court order. Neither the Debtors nor Counsel turned the sale proceeds over to Wells Fargo. Instead, they held the check for nearly a year. Counsel and the Debtors communicated numerous times from the day the Debtors deposited the check before converting their case to a Chapter 7. On March 19, 2015, Counsel sent them a letter suggesting that they obtain cashier’s checks payable to the IRS for $95,584.00; $4,250.00 to pay their accountants; and $22,439.72 to him for unpaid legal fees and services.

The U.S. Trustee seeks to deny the Debtors’ discharge for refusal to follow a court order. In its complaint, the U.S. Trustee alleges that Raels failed to comply with the Sales Order when they failed to distribute any proceeds to Wells Fargo. The Debtors responded by noting  that they relied upon their Counsel’s advice, which affected their ability to form the requisite intent.

The Court began its analysis with the  general standard for revoking/objecting to discharge.  In weighing the facts put forward in a contest over a discharge, the court must bear in mind the beneficial policy of allowing honest debtors to receive a fresh start in life. The Bankruptcy Code serves to relieve the honest debtor from the weight of oppressive indebtedness, and permit the debtor to start afresh, free from the obligations and responsibilities consequent upon misfortunes. Jurisprudence is unequivocal that courts construe objections to discharge liberally in favor of a debtor and strictly against creditors in order to further the Code’s fresh start policy. Totally barring discharge is an extreme penalty.

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