In an unpublished decision, the Bankruptcy Appellate Panel for the Ninth Circuit outlined the contours of the shifting burdens in analyzing an objection to discharge proceeding, including the effect of a debtor’s invocation of the privilege under the Fifth Amendment to the United States Constitution. Hazelrigg v. United States Trustee (In re Hazelrigg), BAP No. WW-13-1230-TaDJu (Nov. 19, 2013). To read the decision, click here
Debtor Thomas R. Hazelrigg, III (“Debtor”), was a well-known financier and businessman in the Seattle area, who, along with another associate and developer, was put into an involuntary chapter 7 in 2011. The order for relief was entered in February 2012. The Debtor then filed Schedules and a Statement of Financial Affairs (“Schedules”) that were essentially blank other than the assertion of a blanket Fifth Amendment privilege against self-incrimination.
The Office of the United States Trustee (“OUST”) moved to compel the filing of amended and completed schedules, or, alternatively, to require a specific Fifth Amendment invocation in response to each question and category of information required by the Schedules. The Court granted the OUST’s motion, and in response, the Debtor filed amended Schedules that disclosed ownership of a PT cruiser and the pre-petition sale of two vehicles.
The OUST then issued a subpoena pursuant to a Rule 2004 Order based on the discovery of additional valuable assets identified in a balance sheet that were not disclosed in either set of Schedules. The Debtor did not produce responsive documents, and instead, asserted a blanket Fifth Amendment privilege. In response, the OUST commenced an adversary proceeding objecting to the Debtor’s discharge under 11 U.S.C. sections 727(a)(2), (a)(3), (a)(4) and (a)(5) based, in part, on the Debtor’s failure to disclose assets and to account for their transfer, disposition, or ownership.
The OUST moved for summary judgment on the section 727(a)(3) and (a)(5) claims, relying on the subpoena, the Debtor’s response, and the balance sheet. The Debtor’s response to the motion raised some procedural issues, blamed his failure to produce information and documents on the crash of his bookkeeper’s computer, and addressed the disposition of certain assets.
The Court granted the summary judgment motion on the section 727(a)(5) claim, certified it as final, and denied the Debtor’s motion for reconsideration in which he argued he had properly invoked the Fifth Amendment privilege.
Holding and Analysis
The BAP reviewed the burden of proof and elements of a section 727(a)(5) claim. The BAP explained that the objector bears the burden of proof to show by a preponderance of the evidence that the debtor’s discharge should be denied, even though the grounds for denial of discharge under subsection (a)(5) describe the debtor’s failure “to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor’s liabilities.” The BAP also outlined the elements of this claim as requiring the objector to demonstrate that (1) at a time not too remote from the instant proceeding the debtor owned identifiable assets, (2) the debtor no longer owned the assets on the petition date, and then (3) the Schedules or other pleadings do not adequately explain their disposition.
The BAP found that, as the bankruptcy court did in this case, a court may make a negative inference that corroborating evidence exists to support a claim when a debtor (in a civil matter only) asserts a Fifth Amendment privilege.
The BAP held that the OUST met its burden in demonstrating its prima facie case under section 727(a)(5) in reliance on the balance sheet, including its contents and apparent date of its preparation, and the Debtor’s subsequent failure to explain the loss of or to schedule those assets. Once that burden was met, the burden then shifted to the Debtor to offer a satisfactory explanation for the disposition of the missing assets. The Debtor did not do so as the bookkeeping problem was not a satisfactory explanation.
This case demonstrates the elements of, and shifting burdens related to, an objection to discharge. And making the adverse inference does not often arise in bankruptcy court, but, at least according to the BAP, it does have vitality in an objection to discharge proceeding. This case had some difficult facts from the Debtor’s perspective, including, as noted by the BAP, that there were “undisputed facts of the extraordinary quantum of luxury items” unaccounted for, and clearly the Debtor was a sophisticated and able businessman who nonetheless was unable to carry his burden to explain the loss of those assets. Since a court has discretion to make the adverse inference in a civil case, some of these facts may have played a part here.
These materials were prepared by Jamie Dreher, a partner in Downey Brand, LLP, in Sacramento, California (firstname.lastname@example.org), with editorial contributions from ILC member Asa Hami of Sulmeyer Kupetz, A Professional Corporation in Los Angeles, California. Mr. Dreher is a member of the Insolvency Law Committee.