In re Theodore Perez ( 2019 )

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to
6th Cir. BAP LBR 8024-1(b). See also 6th Cir. BAP LBR 8014-1(c).
File Name: 19b0008n.06
BANKRUPTCY APPELLATE PANEL
OF THE SIXTH CIRCUIT
IN RE: THEODORE A. PEREZ, ┐
Debtor. │
│
___________________________________________
│
DANIEL M. MCDERMOTT, United States Trustee, │
Plaintiff-Appellee, > No. 18-8036
│
│
v. │
│
│
THEODORE A. PEREZ,
│
Defendant-Appellant. │
┘
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio at Cleveland;
No. 15-bk-17050, Adv. No. 16-ap-1075—Jessica E. Price Smith, Judge.
Argued: August 13, 2019
Decided and Filed: December 30, 2019
Before: BUCHANAN, DALES, and OPPERMAN, Bankruptcy Appellate Panel Judges.
_________________
COUNSEL
ARGUED: Charles J. Van Ness, VAN NESS LAW, Mayfield Heights, Ohio, for Appellant.
Sumi Sakata, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee. ON BRIEF: Charles J. Van Ness, VAN NESS LAW, Mayfield Heights, Ohio, for
Appellant. Sumi Sakata, Amy L. Good, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee.
No. 18-8036 In re Perez Page 2
_________________
OPINION
_________________
BETH A. BUCHANAN, Bankruptcy Appellate Panel Judge.
ISSUES ON APPEAL
Chapter 7 debtor, Theodore A. Perez (“Perez”), appeals the bankruptcy court’s decision
to deny his discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4). Perez raises three arguments
on appeal: (1) the bankruptcy court erred in denying Perez his discharge pursuant to § 727(a)(2);
(2) the bankruptcy court erred in denying Perez his discharge pursuant to § 727(a)(4); and (3) the
bankruptcy court erred in granting the United States Trustee’s motion to conform the pleadings
to the evidence. This Panel affirms the bankruptcy court’s decision to deny discharge under
11 U.S.C. § 727(a)(4).
JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this
appeal. The United States District Court for the Northern District of Ohio has authorized appeals
to the Panel, and no party has timely sought review in the district court. 28 U.S.C. §§ 158(b)(6),
(c)(1). A disappointed litigant may appeal from a final order of the bankruptcy court as of right.
28 U.S.C. § 158(a)(1). For the purpose of an appeal, a final order is one that “ends the litigation
on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt
Corp. v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989). A denial of a debtor’s
discharge is a final order. Hamo v. Wilson (In re Hamo), 233 B.R. 718, 721 (B.A.P. 6th Cir.
1999).
Findings of fact are reviewed for clear error and conclusions of law are reviewed de
novo. Keeney v. Smith (In re Keeney), 227 F.3d 679, 683 (6th Cir. 2000). A false oath finding is
reviewed on appeal as a question of fact. Id. at 685. A factual finding “is clearly erroneous
when although there is evidence to support it, the reviewing court on the entire evidence is left
with the definite and firm conviction that a mistake has been committed.” Kraus Anderson
No. 18-8036 In re Perez Page 3
Capital, Inc. v. Bradley (In re Bradley), 507 B.R. 192, 196 (B.A.P. 6th Cir. 2014) (quoting
Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir. 2007)
(internal quotation marks and citation omitted)).
FACTS
Perez was a police officer for the City of Cleveland for 20 years.1 He completed high
school prior to entering the police academy. In addition, for about seven years, Perez worked in
private security for Gracetech, a company founded by his best friend, John Grace (“Grace”).
Grace passed away in July of 2007. Shortly after Grace’s death, Perez founded his own security
company, Precision Security Agency LLC (“Precision”).
Gracetech only had one account, Dave’s Supermarkets. Precision began servicing that
account and, at the time of trial, Dave’s Supermarkets paid Precision between $11,000 and
$12,700 each week for security services. In addition, Precision had other clients for which it
provided security. Perez testified that he could not get any new clients because the State of Ohio
had moved to revoke Precision’s security license. Prior to the bankruptcy, Grace’s mother and
Gracetech filed a lawsuit against Precision and Perez alleging the defendants “stole her son’s
business[.]” Tr. of April 26, 2018 Hr’g (“Trial Tr.”) at 111:11–12, ECF No. 54.2 This lawsuit
resulted in a judgment of joint and several liability against Precision and Perez for $450,000 plus
attorney fees. The state court ordered the defendants to post a supersedeas bond in the amount of
$1,106,682.21 as a condition for obtaining a stay pending appeal. UST Exhibits 23 and 24 at 1,
ECF No. 53.3 Perez filed a voluntary Chapter 7 petition on December 13, 2015 to stop collection
on the judgment. The Chapter 7 trustee filed a report of no distribution in April 2017.
1As part of a plea agreement, in May 2017, Perez resigned from the Cleveland Police Department and pled
guilty to the attempted use of state property. Tr. of April 26, 2018 Hr’g at 101, ECF No. 54. To accommodate the
criminal proceeding, the bankruptcy court delayed the trial regarding the United States Trustee’s objection to
discharge.
2Unless otherwise noted, all references to “ECF No.” are to the bankruptcy court docket, McDermott v.
Perez, Adv. No. 16-1075 (Bankr. N.D. Ohio), and were designated as part of the appellate record.
3All of the exhibits cited were admitted at the trial and are found at ECF No. 53.
No. 18-8036 In re Perez Page 4
On question 19 of Perez’s Schedule A/B, he listed a 100% membership interest in
Precision but valued that interest at $0.4 Perez did not list any interest in his other limited
liability company, T69P Properties LLC (“T69P”). Perez listed his occupation on Schedule I as
a detective for the City of Cleveland, and gave a gross monthly income figure of $4,863.45. In
addition, Perez listed under line 8h, other monthly income, $1,337.83 for his net salary from
Precision. On line 17 of Schedule A/B, he listed two bank accounts, one with Dollar Bank, with
a balance of $450, the other with the Cleveland Police Credit Union, with a balance of $20.25.
He did not list his personal Chase Bank account.
In his Statement of Financial Affairs (“SOFA”), question 4, Perez did provide additional
information on income that he omitted from Schedule I. For example, he listed income that he
received from Precision as wages and, as the SOFA provides, separately provided his income
from operating the business. For 2013, Perez listed $11,637 for operating a business and
$71,800 in wages. For 2014, Perez listed $67,276.02 in wages, and “unknown” for operating a
business. For 2015, he listed $75,478.04 for wages and “unknown” for operating a business. In
Perez’s amended SOFA, filed on March 10, 2016 after he completed his 2014 tax returns, he
reported income of $81,374 from operating the business in 2014.5 These figures correspond with
the Subchapter S tax returns for Precision, the K-1 form issued from Precision to Perez, and
Perez’s individual tax returns. These larger income figures are not from the salary Perez took as
the only shareholder of Precision, but represent personal expenses that he paid by using the
Precision debit card. The United States Trustee (“UST”) ultimately disputed the accuracy of
both Perez’s SOFA and Schedule I.
On May 19, 2016, the UST filed a complaint to deny Perez his discharge pursuant to
11 U.S.C. § 727(a)(2)(A) (pre-petition concealment of property) and (a)(4)(A) (false oath or
account). The bankruptcy court conducted a trial on the UST’s complaint on April 26, 2018.
4Question 19 requires a debtor to list any “[n]on-publicly traded stock or interests in incorporated and
unincorporated businesses, including an interest in an LLC, partnership, and joint venture,” the percentage of that
ownership, and the value of that interest. This question is in Part 4 of Schedule A/B, which only provides the
following guidance as to reporting value — “Do not deduct secured claims or exemptions.” UST Exhibit 3.
5Perez testified that his 2015, 2016 and 2017 tax returns were delayed by his criminal proceeding.
No. 18-8036 In re Perez Page 5
Only two witnesses testified at the trial, Catherine Lowman (“Lowman”), an auditor for the UST,
and Perez.
The UST’s complaint and trial presentation focused on the following items: (1) Perez’s
failure to disclose an interest in T69P (false oath and concealment); (2) his failure to disclose all
of his income (false oath and concealment); and (3) his failure to list an accurate value for
Precision on Schedule A/B (false oath). The fourth issue at trial, though omitted from the UST’s
complaint, involved Perez’s failure to disclose his personal deposit account with Chase Bank
(false oath and concealment). After the trial, the UST filed a motion to conform the trial
evidence to the pleadings to include the Chase Bank omission, which the bankruptcy court
granted over Perez’s objection.
Lowman reviewed Perez’s 2013 through 2015 Precision Chase Bank account statements
and found multiple entries that she determined were personal expenses of Perez, rather than
business expenses of Precision. These expenses included cruises, restaurants, tickets, eyeglasses,
and other consumer transactions. Perez used the debit card linked to the Precision Chase Bank
account to pay these expenses. Although he offered explanations for why Precision paid some
expenses, he also acknowledged many of the entries reflected his personal expenses. In addition,
Lowman testified that she could not account for the source of the deposits into the personal
Chase Bank account and Perez could not either.
Lowman estimated that Perez understated his income by $1,500 to $2,000 each month for
the years she reviewed, 2013 through 2015. She also estimated the total personal benefit to
Perez from using Precision’s debit card to be about $74,000 in 2013, $81,000 in 2014, and
$112,000 in 2015. Lowman prepared a summary of withdrawals and purchases that she regarded
as personal expenses. UST Exhibit 22 at 1 (totaling purchases, cash withdrawals, and counter
withdrawals). The 2013 figure was significantly higher than what Perez disclosed as his income
on the SOFA, $11,637, although the 2014 figure is consistent with the amended SOFA.
Lowman indicated that this income should have been included on Schedule I as “other monthly
income” or net income from operating a business. Lowman based her conclusions on a review
No. 18-8036 In re Perez Page 6
of the bank records, although she did not discuss the bank records with Perez, Chase Bank, or
Perez’s accountant before trial.
On cross-examination, Perez’s counsel questioned Lowman about Precision’s status as an
“S Corporation.” Lowman testified that income generated by an S corporation is attributed to the
shareholder on the shareholder’s individual tax return whether such income is distributed or not.
“Distributions,” in contrast to income, refer to property that a shareholder in an S corporation
actually receives on account of his shares. The shareholder, similar to a partner, receives a K-1
form from the S corporation which reports distributions and other relevant tax information.
Lowman had no personal knowledge that the Precision tax return, the K-1 form issued to Perez,
or Perez’s individual tax information were inaccurate, and apparently Perez used the information
from his tax returns to report the business income on the SOFA. Lowman testified that listing
“unknown” for the business income Perez received from Precision for 2015 in his original SOFA
was improper, because although the relevant tax returns were not filed, Perez had access to the
bank records. Lowman also concluded, based on her review of bank statements, that the figures
on the SOFA were “incorrect or understated.” Trial Tr. 79:1.
Lowman further testified that she discovered Perez owned another limited liability
company known as T69P, and that in turn T69P owned real property located at 12703 Triskett
Avenue (the “Triskett Avenue Property”). This was the business location for Precision. See also
Perez Exhibit G (legal description of the Triskett Avenue Property). Other than the Triskett
Avenue Property, T69P has no other assets. Neither the schedules nor the SOFA listed T69P.
Perez gave inconsistent testimony as to the ownership and legal status of T69P and the
Triskett Avenue Property. He testified that T69P purchased the Triskett Avenue Property in July
of 2015. He explained, somewhat inconsistently, that Precision transferred the Triskett Avenue
Property to T69P for insurance purposes. When asked who the controlling member of T69P
was, Perez did not answer the question directly, but instead explained that he prepared the
Articles of Incorporation. See Perez Exhibit J (Articles of Organization for T69P). When asked
why he did not include T69P in his initial filings, Perez indicated he thought it was not necessary
because he had filed a personal bankruptcy. Perez also stated he did not consider T69P to be a
No. 18-8036 In re Perez Page 7
business because it just owned the building that housed Precision. He also referred to the
Triskett Avenue Property as an asset of Precision and did not believe the Triskett Avenue
Property had any equity. Perez stated at trial that he was not the owner of T69P, even though,
during his deposition, he had stated that he was the sole owner of T69P. When asked about the
assets of Precision at the meeting of creditors, Perez did not mention the Triskett Avenue
Property, but did mention various vehicles, office equipment, and the use of Perez’s rental
property as an office for Precision.
The documentary record reflects that T69P was purchased by Precision from a third
party, CMI1977, LLC, on or about June 19, 2015. Perez Exhibit F. The purchase price was
$115,000. Precision granted CMI1977, LLC a mortgage and the related security interest on the
Triskett Avenue Property. In order to purchase the Triskett Avenue Property, Perez and
Precision borrowed $85,000 from CMI1977, LLC and signed a cognovit promissory note to
repay this sum at 6% per annum in interest. With closing adjustments, the balance of the
purchase price ($25,874) was paid using proceeds of a loan Precision obtained in April 2015
from OnDeck Financial. The quitclaim deed transferring the Triskett Avenue Property from
Precision to T69P was recorded on or about August 18, 2015. There is no operating agreement
for the LLC, or any other governing document identifying its members. In addition, nothing in
the record suggests T69P is a subsidiary of Precision even though Perez claimed it was, because
T69P had no other assets besides the deed on the real property that Precision used for its
business.
Lowman also testified about scheduling Precision’s value at zero. When asked if there
was any evidence Precision could be sold for an amount greater than the judgments against it,
Lowman stated that it was impermissible to schedule a business value at zero based solely on the
liens filed against it but also said, “that’s not the United States Trustee’s determination . . . to
market a business. We look at whether or not the business had value that was concealed from
creditors.” Trial Tr. 69:9–10. When asked what value she would place on Precision, she stated
the value should be “[s]omething greater than zero.” Trial Tr. 67:22. Lowman noted that in
2015, Precision had net deposits of $1,512,742.37 and, in 2013, $1,119,700.56. Perez testified
the company had between 30 and 35 employees at any given time. Lowman stated that the
No. 18-8036 In re Perez Page 8
revenue of Precision was “substantial” and the business generated a net profit for the three years
she reviewed. Trial Tr. 68:1.
Perez, as noted, sometimes testified that the Triskett Avenue Property was an asset of
Precision, and other times testified that the hard assets of Precision included five vehicles and
some office equipment. When asked how he valued Precision at zero, Perez stated that he
consulted with counsel and “we could not put the company for sale and somebody say I’m going
to give you an X amount of dollars for it, with a $1.2 million judgment against us.” Id. at 184.
Perez stated that despite any revenue or net profit of the company, he would agree Precision had
value, but for the aforementioned judgment. Perez further testified that the margin for Precision
was “slim” and the business was earning little money.
The last issue was Perez’s failure to schedule his personal Chase Bank Account from his
Schedule A/B, where he listed other similar accounts. He opened the account in December 2014.
Various deposits were put into this account in 2015. The deposits did not include Perez’s wages,
which he directed into an account with Dollar Bank and later Huntington Bank. Perez used the
Chase Bank account frequently in 2015. He could not explain deposits that went into the
account, including one for $17,000, and others totaling over $8,000.
Immediately after the conclusion of the trial, the court defined the adversary proceeding
as having “two big issues”: “omissions” and “intent.” Trial Tr. 234:9–11. First, the court found
the failure to list T69P was an omission because Perez testified that he was a member of T69P
both at the trial and during his deposition. Second, the court raised concerns about the valuation
of Precision at zero. The bankruptcy court said that Perez’s alternative explanation that T69P
was a subsidiary of Precision “raised an additional question for me, which had to do with this
issue of valuing [Precision].” Trial Tr. 235:13. The court explained its concern this way:
When you are valuing an asset, it doesn’t have zero value just because
there are liabilities that are charged against it. You actually need to sit down and
take a look at it. And my concern here is whether it was by recommendation of
counsel that there appears to have been no value attributed to a business that was
able to obtain a loan to purchase a building within the same year that its owner
filed for bankruptcy.
No. 18-8036 In re Perez Page 9
So whereas the Debtor’s credit, based upon the judgment, may not have
been sufficient in order to obtain the loan, this entity’s credit was sufficient to
obtain the loan, and if as was sometimes, the Debtor stated, understanding, if
T69P was the owner of that property and was a subsidiary of Precision, then
Precision had not only the value of the contracts and the funds that were coming
in, but the value then of T69P, which was the building, which apparently
underwent significant renovations at the end of 2015, based upon the testimony
regarding the contractors that were paid in order to make the building a workable
facility.
So it looks like there was value not only in the contracts but value
potentially in the building the Debtor thought was owned by Precision, but
notwithstanding that, it was just given a zero value because it had liabilities. It
was an operating business. So the fact that there was a large liability against it
does not negate the fact that it did have --- that it could have some value.
Trial Tr. 235–36.
The court also stated that “there seemed to be inconsistent representations with respect to
the Debtor’s level of understanding regarding how [the] business operates[.]” Trial Tr. 236:20–
23. Based on the actions Perez took, the bankruptcy court concluded that Perez understood that
the personal benefits he was receiving from Precision as income because he provided this
information to his accountant for income tax purposes.
The bankruptcy court also addressed the failure to disclose Perez’s interest in T69P and
the Triskett Avenue Property, as well as the undisclosed personal Chase Bank Account. Overall,
the court found that various items were either omitted or “not properly disclosed.” Trial Tr.
247:10.
The court ended by mentioning the advice of Perez’s counsel. The court stated:
I am going to state this now, just so that we are all clear, because I am slightly
concerned that what I heard is that the omissions or failures may have been a
result of reliance on counsel. The statement regarding perjury does not
necessarily make that okay. You can’t not tell the complete truth because your
lawyer told you it’s okay. So that needs to be addressed.
Trial Tr. 247:16–23.
No. 18-8036 In re Perez Page 10
Following post-trial briefs, the court ruled on the ultimate legal issues in an oral decision.
Tr. of August 15, 2018 Hr’g (“Decision Tr.”) at 1–9, Bankruptcy Case No. 15-17050, ECF No.
71.6 The bankruptcy court made an initial assessment of Perez:
This is a Debtor who was able to run a company, purchase a building,
facilitate the growth of that business, make determinations of who he would hire
based upon the requirements that needed to be met and how payments for those
individuals were going to be made. And so having had an opportunity to
review the testimony of the parties to determine the credibility of the
witnesses, based upon the statements that were made, I rule as follows[.]”
Decision Tr. 2:18–3:1 (emphasis added). Next, the bankruptcy court recited the elements of both
§ 727(a)(2) and (a)(4). Then, the court enumerated Perez’s several omissions:
Here the material omissions were with respect to the Statement of
Financial Affairs, as well as with the schedules. So as I indicated previously,
there is no dispute that there was information missing from the SOFA,
specifically the T69P entity, as well as the personal Chase bank account, and then
benefits that were received in the nature of payments on behalf of the Debtor for
the benefit of the Debtor by Precision Security Agency.
Decision Tr. 3:21–4:4. The decision then moved on to a discussion of the Precision
valuation issue:
Then there was a valuation of Precision Security Agency. And with
respect to the valuation of Precision, there are many ways of valuing a company,
and I understand Debtor’s counsel’s position that because there was a judgment
against the company that he anticipated was larger than what the value of the
company would be, the determination was made to list that at zero. . . . I don’t
find to be appropriate and I don’t find the Debtor’s reliance on counsel’s
statement sufficient to absolve him of the responsibility of making the
determination of what the actual value of the company was, not just saying that it
has no value because a judgment was taken, for which it might be held
responsible.
Decision Tr. 4:5–24.
The decision next discussed Perez’s failure to disclose income he received by using the
Precision debit card for personal expenses and the intent of his actions:
6Although the oral decision was rendered in the adversary proceeding, the transcript was docketed in
Perez’s underlying bankruptcy case.
No. 18-8036 In re Perez Page 11
But this is a Debtor who, again, had a separate job previously but was also
running a company. It was clear from the documents the Debtor had filled out
prior to and the testimony of the Debtor, the Debtor understood that the benefits
that he was receiving from Precision in terms of the payments that they were
making were income attributable to him because he was able to do that when he
did it in his taxes. And so not doing it in the bankruptcy seems to have been a
way to make it seem as though the Debtor had potentially less than may have
been available for prospective creditors to collect. And then that takes us to the
issue of intent. And the Debtor’s argument seems to be that there would have
been no intent, because why would he fail to disclose seventy some thousand
dollars worth of potential income when there was a million dollar judgment.
And that actually does not weigh in favor of the Debtor, because to the
extent that the Debtor would appear to be collectible, that there would be an
opportunity for funds potentially to be available, it is more in the Debtor’s interest
to appear to have less than appeared to be available as demonstrated by the cash
that was flowing through the bank accounts, the source of which is still not
completely clear, as well as the undervaluing of the business that was not
disclosed, as well as the failure to disclose the benefit in the forms of payment
being made by the Debtor’s company to him by having them pay his bills. The
Debtor knew what he was receiving because he had previously provided that
information as income in other filings outside of the bankruptcy.
So the failure to have included them in the SOFA and the schedules, I find
was done with the intent to actually have hidden that information and, therefore,
to present a false view of his financial condition in the context of this case to the
detriment of creditors.
I appreciate that the Debtor felt the need to describe the ways that he was
running the business. I did find some of the statements that the Debtor made
problematic, just in terms of when he was rehabbing the business and people that
were coming in. It seemed to me that part of this Debtor’s way of doing business
involved particular shortcuts or ways to try to not have to disclose fully what the
financial circumstances of this business was, or his financial circumstance, as
demonstrated by the kind of cash payments going to contractors and things like
that. Those tended to demonstrate that this Debtor had a level of sophistication on
how to hide payments, which also weigh in favor of my finding that it was his
intent to not disclose his full financial position.
Decision Tr. 5:5–7:7. The court also found the failure to disclose T69P was intentional.
Decision Tr. at 7. Finding that T69P was part of Perez’s business operations, the court
continued:
And so the failure to list that entity, I find was done intentionally in order to avoid
questions about financing, funds and where — the Debtor’s financial position,
No. 18-8036 In re Perez Page 12
where money was coming from, where the ability to obtain loans, et cetera, came
from, and to give parties an opportunity to inquire about any other financial
statements or information that has been presented to support the Debtor’s ability
to do business in a way that he doing prior to the filing and prior to the judgment.
Decision Tr. 7:12–23. The decision discussed the failure to fully disclose the Precision income
again:
His income was understated, as demonstrated by the prior benefits and
income that were shown in his tax returns and the fact that he was using Precision
to pay his personal expenses, up to the date of filing. Again, this Debtor knew the
difference between himself and these entities. He knew the difference between
his own accounts and these entities’ accounts, and knew that for tax purposes he
needed to provide documentation, or at least account for the payments that were
being made on his behalf by the company, but did not do that with respect to his
bankruptcy filing.
Decision Tr. 7:24–8:9. Finally, the court gave a short analysis on the omission of the personal
Chase Bank account:
I’m still not clear as to how the personal Chase bank account did not make
it into the schedules and how that information was omitted, other than finding that
it appears that it was a purposeful omission that provided for the Debtor to not
have to address issues with respect to the funds that were flowing through that
account.
Decision Tr. 8:10–16. The court concluded:
And under the totality of the circumstances, listening to the testimony of
this Debtor, listening to his characterization of all the things that have
occurred to him in this matter, including his apparent belief that having
indictments come down from felonies to misdemeanors means that his behavior
was not that bad, leads to a finding that this Debtor’s overall information in terms
of mistake is not credible. This was a Debtor that knew what he was doing. This
was a Debtor who was perfectly attempting to create an entity with the resources
of other people, making payments that would not necessarily be tracked by other
people, with the intent of not having to pay things that he did not want to pay.
And again, one of the things he did not want to pay was the large
judgment that had been taken against him, which gives him an incentive to
attempt to conceal assets and the true nature of his business’s value.
Decision Tr. 8:17–9:5 (emphasis added). The court entered judgment denying Perez’s discharge
on August 16, 2018. Perez timely appealed.
No. 18-8036 In re Perez Page 13
DISCUSSION
The plaintiff bears the burden of proof in a trial seeking to deny a debtor his discharge.
Fed. R. Bankr. P. 4005. The burden of proof is by a preponderance of the evidence.
Barclays/Amer. Bus. Credit, Inc. v. Adams (In re Adams), 31 F.3d 389, 394 (6th Cir. 1994). The
Sixth Circuit has stated in a decision involving a discharge appeal that “[t]he Bankruptcy Code
should be construed liberally in favor of the debtor.” Keeney, 227 F.3d at 683.
Section 727(a)(4)(A) provides an exception to the debtor’s discharge if “the debtor
knowingly and fraudulently, in or in connection with the case . . . made a false oath or
account[.]” “The fundamental purpose of § 727(a)(4)(A) is to ensure that the trustee and
creditors have accurate information without having to conduct costly investigations.” Jahn v.
Flemings (In re Flemings), 433 B.R. 230, 237 (Bankr. E.D. Tenn. 2010) (citation omitted).
To prevail under § 727(a)(4)(A), the Trustee must show that: “(1) the debtor made a
statement under oath; (2) the statement was false; (3) the debtor knew the statement was false;
(4) the debtor made the statement with fraudulent intent; and (5) the statement related materially
to the bankruptcy case.” Warren v. Rowland (In re Rowland), 441 B.R. 281, 286 (Bankr. S.D.
Ohio 2010) (quoting Keeney, 227 F.3d at 685). A statement is material to the bankruptcy case
“if it bears a relationship to the bankrupt’s business transactions or estate, or concerns the
discovery of assets, business dealings, or the existence and disposition of his property.” Keeney,
227 F.3d at 686 (citation omitted).
Statements in a debtor’s bankruptcy schedules are given under penalty of perjury. Hamo,
233 B.R. at 725. Statements made during the meeting of creditors are made under oath.
11 U.S.C. § 343; Ayers v. Babb (In re Babb), 358 B.R. 343, 355 (Bankr. E.D. Tenn. 2006).7
Statements during depositions or a Rule 2004 examination are also under oath. Id. Thus, any
false statement, relating to the debtor’s assets and financial circumstances, made by a debtor in
7A debtor who seeks relief under the Bankruptcy Code must file schedules listing all of the debtor’s assets
and liabilities, and current income and expenditures. Fed. R. Bankr. P. 1007(b)(1); 11 U.S.C. § 521(a)(1)(B). The
debtor must verify “[a]ll petitions, lists, schedules, statements and amendments thereto” or sign them with “an
unsworn declaration as provided in 28 U.S.C. § 1746.” Fed. R. Bankr. P. 1008. Such statements, though unsworn,
are made under penalty of perjury.
No. 18-8036 In re Perez Page 14
his schedules, at a meeting of creditors, or during a deposition could potentially lead to denial of
a debtor’s discharge under § 727(a)(4)(A) if all of the required elements to establish that
exception are proven.
We begin with the UST’s allegation that the failure to disclose Perez’s interest in T69P
was a false oath. The bankruptcy court was within its discretion in concluding that T69P should
have been disclosed in some form on Perez’s schedules or SOFA, and that Perez intentionally
failed to do so. Even accepting Perez’s alternative explanation that Precision owned the
membership interest in T69P, Perez failed, under oath, to mention this significant asset at his
meeting of creditors.
The record does not show that an operating agreement was ever created, and the only
document reflecting the formation of T69P is the articles of organization, which Perez signed. In
short, the bankruptcy court’s conclusion that Perez was a member of T69P or, more precisely,
the only member, is supported by the record. See In re Breece, B.A.P. No. 12-8018, 487 B.R.
599 (Table), 2013 WL 197399, at *3 (B.A.P. 6th Cir. Jan. 18, 2013) (“[A] person owning an
equity interest in an LLC is a member of that LLC”). However, without any operating
documents for T69P, the record might also support that that Perez signed the articles of
organization as the member of Precision. In other words, the membership of T69P lacks the
clarity an operating agreement or other corporate governance documents would provide. See
Stansfield v. On Target Consulting, LLC, 90 N.E.3d 962, 965 (Ohio Ct. App. 2017) (“[W]hen
determining if an individual is a member of a limited-liability company . . . the trial court must
consider records maintained for the purpose of its corporate governance that name those owners
entitled to receive distributions and share in the profits and losses of the company.”); Matthews
v. D’Amore, No. 05AP-1318, 2006 WL 3095817, at *11 (Ohio Ct. App. Nov. 2, 2006)
(concluding that Ohio law looks to the operating agreement to define a membership interest).
See also Ohio Rev. Code § 1705.01(G) and (H) (defining “member” and “membership interest”);
Germano v. Beaujean, 997 N.E.2d 1238, 1241 (Ohio Ct. App. 2013) (noting that absent an
operating agreement, certain other statutory sections within Ohio Revised Code § 1705 govern
the relationship between members and the company’s operation).
No. 18-8036 In re Perez Page 15
Nonetheless, under either circumstance, the outcome is the same. If Perez is the member
of T69P, as he testified, he failed to list this membership interest, and the bankruptcy court’s
finding of fact that this is a false oath is well supported by the record. Conversely, if Precision
had the membership interest in T69P, Perez had the opportunity to clarify these issues at the
meeting of creditors when the Chapter 7 trustee asked about the assets of Precision. In his
testimony at his meeting of creditors, he freely discussed the limited personal property assets of
Precision, and his residential rental property also being used as a home office for Precision. Had
he disclosed at the meeting of creditors Precision’s membership interest in T69P or T69P’s only
asset, the Triskett Avenue Property, the trustee and the UST would have been on notice of this
issue early in the case. He did neither and the UST found out about the property only from its
own independent investigation. T69P was not an ancillary issue to Perez’s financial interests.
See Keeney, 227 F.3d at 686 (quoting In re Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d
174, 178 (5th Cir. 1992)) (“The subject of a false oath is material if it ‘bears a relationship to the
bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings,
or the existence and disposition of his property.’”).
By failing to disclose either Perez’s membership interest in T69P on his schedules, or
alternatively, explaining that T69P was owned by Precision at the meeting of creditors, Perez
effectively kept from the trustee any information about T69P and its only asset, the Triskett
Avenue Property. The bankruptcy court was entitled to conclude Perez committed a false oath
under § 727(a)(4). Beaubouef, 966 F.2d at 178. The bankruptcy court was quite clear as to this
particular point. Decision Tr. 7:8–11 (“In terms of the T69P disclosure, I do not find credible the
determination that he just didn’t really think about that entity when providing the information
regarding his assets and his business.”).
The next issue is the bankruptcy court’s consideration of Perez’s failure to list his
personal deposit account with Chase Bank. The UST claimed that the failure to list this account
on Schedule A/B was a false oath. Perez argues that this assertion was raised as a surprise at trial
and the UST’s motion to amend the pleadings post-trial should not have been granted. If an
issue is not raised in the pleadings, and, as here, an objection is not raised at trial, it may be
treated as part of the pleadings if the parties expressly or impliedly consented. Fed. R. Civ. P.
No. 18-8036 In re Perez Page 16
15(b) (applicable by Fed. R. Bankr. P. 7015). The record is clear that Perez did not expressly
consent to include the omitted personal Chase Bank account as an issue at trial.
The trial record similarly does not show that Perez impliedly consented to this issue being
tried. “Implied consent is not established merely because one party introduced evidence relevant
to an unpleaded issue and the opposing party failed to object to its introduction. It must appear
that the parties understood the evidence to be aimed at the unpleaded issue.” Kehoe Component
Sales Inc. v. Best Lighting Prods., Inc., 796 F.3d 576, 595 (6th Cir. 2015) (quoting Yellow
Freight Sys., Inc. v. Martin, 954 F.2d 353, 358 (6th Cir. 1992)). Implied consent does not apply
if the evidence is also relevant to a claim already pled. Kehoe, 796 F.3d at 595–96. Without
consent, Rule 15(b) does not allow a plaintiff to submit evidence and subsequently determine
which legal allegations the evidence may fit. Id. at 596. Furthermore, the court may not do so
“on the plaintiff’s behalf.” Id.
However, the personal Chase Bank account was also relevant to Perez’s failure to
account for all of his income, the same issue that was central in a review of the Precision Chase
Bank account, and Perez’s use of the debit card for that account for personal expenses. That
issue was known to Perez and his counsel from the earliest days of this case when account
statements were provided in discovery. Indeed, Perez conceded to the bankruptcy court that he
thought any discussion of the personal Chase Bank account was about the allegations related to
the failure to account for all of his income. Obj. to United States Trustee’s Mot. to Amend to
Conform to Evid. at 5, ECF No. 61. Therefore, the Panel will evaluate the bankruptcy court’s
consideration of the personal Chase Bank account solely as it relates to Perez’s failure to account
for the source of deposits in the account, but not for his failure to list this account on Schedule
A/B. The former issue is included in the pleadings but the latter is not, and the Debtor did not
consent to try the issue.
The failure to list significant income on his Schedule I—in terms of both Perez’s personal
Chase Bank account and the Precision Chase Bank account—may be considered as a false oath
and follows a pattern of a lack of disclosure. The bankruptcy court considered, but ultimately
rejected that these failures could be attributed to his counsel. Nor does the listing of this income
on his SOFA render the bankruptcy court’s findings clearly erroneous. Income for Schedule I
No. 18-8036 In re Perez Page 17
requires all regular income to be listed. Regular income in these circumstances was beyond
salary. Perez regularly benefitted from the use of the ATM card on the Precision Chase Bank
account and admitted as much at trial.
In addition, the UST also concluded that the income on the SOFA was not fully
disclosed. The bankruptcy court was entitled to resolve that factual dispute as well. The
unexplained deposits to the personal Chase Bank account follow the same pattern. Perez tried to
explain it at trial as being his children’s earnings, and then conceded later in his testimony that he
could not explain the deposits. In the end, he had no explanation. The bankruptcy court was
entitled to make a reasonable inference from that testimony and conclude that these deposits, like
using the Precision business account debit card, were additional undisclosed income. The
bankruptcy court’s conclusion that the failure to fully account for his income amounts to a false
oath is not clearly erroneous.
The last issue was the valuation of Precision. Valuation of a going concern often is a
complex endeavor and cannot be equated to the comparatively straightforward valuation of an
asset such as a vehicle or a house, in which the valuation of the asset is listed separately from the
liens on the schedules. The listing of Precision, at a minimum, placed the UST and the case
trustee on inquiry notice about a small business with a very significant judgment against it.
Nevertheless, the listing of the membership interest at zero, without any qualifying information,
supports the bankruptcy court’s conclusion that Perez was following a pattern of not being
candid about his assets and income. Ultimately, the bankruptcy court’s conclusion about the
appropriateness of the Precision valuation is fact-specific, and the bankruptcy court had the
opportunity to judge the credibility of the witnesses and the explanations given. Here, the
bankruptcy court made a special initial assessment of the credibility of Perez and followed up
that assessment with an analysis of the evidence. As a trier of fact, the bankruptcy court is in a
unique position to assess credibility that is not available to an appellate panel. Accordingly, this
Panel should give deference to the bankruptcy court’s assessment. Keeney, 227 F.3d at 686
(stating the courts may determine fraudulent intent from the totality of the facts and
circumstances). The bankruptcy court essentially determined that the valuation was part of a
larger pattern of Perez’s lack of truthfulness and desire to conceal assets and the nature of his
No. 18-8036 In re Perez Page 18
business operations, whether accomplished through his schedules, SOFA, or under oath
testimony at the meeting of creditors. See Keeney, 227 F.3d at 685 (quoting Peterson v. Scott
(In re Scott), 172 F.3d 959, 967 (7th Cir. 1999) in concluding that “‘[c]omplete financial
disclosure’ is a prerequisite to the privilege of discharge.”). In any event, the false oaths
regarding T69P and Perez’s income support affirmance of the bankruptcy court’s decision
without regard to the appropriateness of the valuation.
Perez also argued some of the deficiencies in his filings and testimony were based on
counsel’s advice and therefore he lacked fraudulent intent. The evaluation of such a defense is
also fact-specific, and the bankruptcy court was entitled to disbelieve Perez. Buckeye Retirement
Co., LLC v. Swegan (In re Swegan), 383 B.R. 646, 656 (B.A.P. 6th Cir. 2008) (advice of counsel
defense requires good faith and reasonableness); Eifler v. Wilson & Muir Bank & Tr. Co., 588 F.
App’x 473, 478–79 (6th Cir. 2014) (reliance on counsel requires full disclosure of all pertinent
facts to counsel and good faith reliance on counsel’s advice). The bankruptcy court determined
that Perez understood his business operations and the sources of his income, and intentionally
failed to disclose assets and income to avoid collection of the significant judgment against him.
In reviewing the law de novo, the Panel cannot find any legal error justifying reversal
such as the court applying the wrong elements for § 727(a)(4) or misstating the burden of proof.
While Perez complains that the bankruptcy court intermingled the analysis under § 727(a)(4) and
(a)(2), the specific findings discussed above support the bankruptcy court’s conclusion that Perez
had intentionally made material false oaths, with fraudulent intent, on his schedules, SOFA, and
in his testimony at his meeting of creditors and those findings support affirmance under
§ 727(a)(4). The Panel need not address § 727(a)(2) in order to affirm. Hamo, 233 B.R. at 726
(appellate review under § 727(a)(2) unnecessary when § 727(a)(4) provided an independent basis
to deny discharge); Church Joint Venture, L.P. v. Blasingame (In re Blasingame), 559 B.R. 692,
700 (B.A.P. 6th Cir. 2016) (similar and collecting cases). Perhaps another bankruptcy court
would analyze these facts and reach a different conclusion. Perhaps not. But what is relevant for
the Panel is that the specific findings of fact that false oaths occurred are not clearly erroneous
and, therefore, are sufficient to affirm the denial of Perez’s discharge under § 727(a)(4). Any
error by the bankruptcy court in considering the personal Chase Bank account omission as a false
No. 18-8036 In re Perez Page 19
oath is harmless because the other findings of false oaths are supported by the record. Fed. R.
Civ. P. 61 (applicable by Fed. R. Bankr. P. 9005); Tully Constr. Co., Inc. v. Cannonsburg Envtl.
Assocs., Ltd. (In re Cannonsburg Envtl. Assocs., Ltd), 72 F.3d 1260, 1264 (6th Cir. 1996).
CONCLUSION
For the reasons given, the bankruptcy court’s decision to deny Perez’s discharge is
affirmed.