Transactions Can Be Outside The "Ordinary Course" And Require SOFA Disclosure Without Being Fraudulent
STAMAT v. NEARY (March 24, 2011)
Nicholas and Penny Stamat filed a joint petition for bankruptcy in May 2007. Nicholas is a pediatrician with his own practice. Penny is a college graduate and handles the billing for Nicholas' practice through her own billing company. The Stamat’s sought the discharge of over $1.5 million in debt. The couple's Statement of Financial Affairs (SOFA) was inaccurate with respect to their 2006 gross income, past investment interests, part-time employment, among other things. The Trustee objected to the discharge on the grounds that the Stamat's concealed property, made false oaths with fraudulent intent, and failed to explain the loss of substantial assets. After a bench trial, the bankruptcy court agreed and determined that the debts were not dischargeable. Judge Gottschall (N.D. Ill.) affirmed, relying solely on the false oath grounds. The Stamat's appeal.
In their opinion, Judges Rovner, Judge Evans, and Williams affirmed. The Court noted that the "fresh start" afforded by the Bankruptcy Code has exceptions. One of those exceptions is for the debtor who "knowingly and fraudulently" makes a false oath. In order for the exception to apply, the Trustee must prove, by a preponderance of the evidence: an oath, that is false, that the debtor knew was false, that was made with fraudulent intent, and that was materially related to the petition. The Stamats raised several arguments on appeal: a) that some of the alleged omissions disclosures were not required, b) that some of the transactions were "in the ordinary course" and did not require disclosure, c) that they had no fraudulent intent, d) that they amended their filings, and e) that the filings were not material. The Court rejected each of these arguments and affirmed, relying heavily on the bankruptcy court’s findings of fact and discussion of the Trustee’s evidence. The Court did hold that transactions outside the “ordinary course” were not limited to those where there was evidence of an intent to conceal or fraudulently convey. They can simply be not normal or ordinary.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select