F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
May 17, 2007
UNITED STATES CO URT O F APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
In re:
RICH AR D A . FORD and TON DA L.
FO RD, also known as Tonda Yung,
Debtors.
___________________________
DUANE H. GILLM AN, Trustee,
Appellant,
v. No. 06-4029
RICH AR D A . FORD AN D TO ND A L.
FORD, individuals,
Appellees.
APPEAL FRO M TH E TENTH CIRCUIT
BANK RUPTCY APPELLATE PANEL
(BAP NO . UT-05-036)
Duane H. Gillman (Steven J. M cCardell and M ichael F. Thomson with him on the
briefs) D urham Jones & Pinegar, Salt Lake City, Utah for A ppellant.
Thom as D. N eeleman (Jennifer L. Neeleman with him on the brief) Thomas D.
Neeleman, Esq., L.C., Salt Lake City, Utah, for Appellee.
Before H E N RY, M cW ILLIAM S, and TYM KOVICH, Circuit Judges.
T YM K O VIC H, Circuit Judge.
The question presented in this appeal is whether Tonda Ford, a debtor in
Chapter 7 bankruptcy, is entitled to keep a personal injury settlement arising from
a claim she failed to disclose in her bankruptcy proceedings. The bankruptcy
court concluded that Ford acted in bad faith in delaying disclosure of her interest
in the personal injury suit, and thus denied an exemption that ordinarily applies to
personal injury settlements under U tah law . Ford appealed to the Tenth Circuit
Bankruptcy Appellate Panel, which reversed.
Two issues are raised by the parties on appeal. One, what is the proper
burden of proof in assessing whether a debtor has concealed assets in bad faith;
and, two, was the bankruptcy court’s finding of bad faith clearly erroneous on this
record? W e conclude that the applicable burden of proof is the preponderance of
the evidence standard and that sufficient evidence supported the bankruptcy
court’s finding of bad faith.
Taking jurisdiction pursuant to 28 U.S.C. § 158 (d), we therefore AFFIRM
the bankruptcy court’s denial of Ford’s exemption.
I. Background
A. Factual Background
Tonda Ford was seriously injured in a car accident in D ecember 2003. As a
result of the accident, Ford was treated for extensive head injuries which caused
her to miss work as a paralegal and required followup therapy. Shortly after the
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accident, Ford retained a law firm to represent her in bringing a claim against the
driver of the other vehicle. The firm filed a complaint on Ford’s behalf in
February 2004 seeking general damages for pain and suffering, past and future
medical expenses, lost earnings, loss of earning capacity, and loss of property.
Encountering financial difficulties after the accident, Ford and her husband
filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in
M ay 2004. For her bankruptcy matter, Ford retained different lawyers from a
different firm than those working on her accident case. At that time, she was
working as a project assistant for a law firm specializing in medical malpractice.
Along with her petition for bankruptcy, Ford and her husband completed
schedules listing their assets and debts. On the schedule requiring the Fords to
disclose all of their assets— including legal claims they might have against
others— Ford did not disclose her damages claim in the pending accident case. 1
During the pendency of her bankruptcy case, moreover, Ford never informed her
bankruptcy counsel of the accident litigation. The bankruptcy case was closed in
August 2004, when the Trustee filed a no-asset report. 2 The personal injury suit
was still pending at this time.
1
Under the Bankruptcy Code, any claim with potential value must be
disclosed in a bankruptcy proceeding, even if contingent. 11 U.S.C. § 521(a)(1).
2
In “no-asset” cases the debtor has no property available to satisfy
unsecured claims. 1-1 Collier on Bankruptcy, ¶ 1.03 (15th ed. rev. 2006).
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Ford says she did not become aware of her obligation to disclose the
personal injury suit until shortly after her bankruptcy case closed. According to
Ford, she w as meeting at the office of her personal injury lawyer in late August
when a paralegal asked if she had filed for bankruptcy. W hen Ford answ ered in
the affirmative, the paralegal asked if she had listed the accident claim in her
schedules. Ford said no, and the paralegal notified her of her duty to do so. Ford
claims that she immediately called her bankruptcy attorney to disclose her interest
in the suit. Aplt. App. 132–133. Nevertheless, the record reflects that Ford did
not move to reopen her bankruptcy case until October 2004, Aplt. App. at 116,
and did not file amended schedules until D ecember 2004. Aplt. A pp. at 7–12.
In September 2004, Ford’s personal injury suit settled for $50,000. At this
time, Ford moved to reopen the bankruptcy proceedings in order to list her
interest in the civil suit. After the bankruptcy court agreed to reopen the case on
December 2, 2004, Ford filed amended schedules listing the settlement and
seeking an exemption for the proceeds under Utah Code Ann. § 78-23-5. 3 The
3
Under Utah law, personal injury awards— though part of the bankruptcy
estate— are exempt from attachment by creditors:
78-23-5. Property Exempt from Execution
(1)(a) An individual is entitled to exemption of the following property:
***
(x) proceeds of insurance, a judgment, or a settlement, or other rights accruing
as a result of bodily injury of the individual or of the wrongful death or bodily
injury of another individual of whom the individual was or is a dependent to
the extent that those proceeds are compensatory.
(continued...)
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bankruptcy Trustee objected to the exemption, however, claiming that Ford had
intentionally concealed her interest in the suit in bad faith and had disclosed it
only after learning she could not access the settlement proceeds otherw ise.
B. The Bankruptcy Court Proceedings
The bankruptcy court held an evidentiary hearing on the Trustee’s objection
to the exemption claim. Ford was the only witness to testify. After considering
the admitted evidence, hearing Ford’s testimony, and assessing her credibility, the
court concluded that Ford intentionally concealed the personal injury claim in
order to benefit herself and prejudice creditors.
At the hearing, Ford maintained her initial failure to disclose was based on
her innocent misapprehension of the law and that she moved to disclose as soon
as she became aware of her obligation to do so. She provided two explanations
for her failure to disclose. First, she explained that based on her paralegal
training she intentionally failed to disclose the claim because she believed
personal injury aw ards w ere exempt from creditors under state law. 4 Second, she
3
(...continued)
Utah Code Ann. § 78-23-5 (2005). W hile settlement funds for personal injuries
are exempt under Utah law, the debtor’s potential interest nevertheless must be
disclosed so that the bankruptcy trustee may conduct a proper accounting.
4
Ford’s belief was wrong. Under both state and federal rules, Ford was
required to disclose the settlement as an asset of her estate— contingent or
otherwise— and then seek an exemption. These rules allow the trustee to
investigate w hether the claimed exemption is valid and ensure the debtor’s estate
is complete. See, e.g., In re Robinson, 292 B.R. 599, 607 (Bankr. S.D. Ohio
(continued...)
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claimed that she failed to schedule the suit because she thought she was only
required to list claims brought against her, and not claims she was asserting
against others.
In a terse ruling from the bench, the bankruptcy court made the following
findings: (1) Ford had “knowledge of the undisclosed claim, and had a motive for
its concealment;” (2) “because of her paralegal training [Ford] knew that [the
claim] w as exempt and therefore made a conscious decision not to disclose it;”
(3) Ford “falsely failed to schedule [the claim] on her schedules;” and (4) Ford’s
failure to disclose the claim “was a blatant dishonesty resulting in her intent to
hinder the Trustee’s administration of the estate which would prejudice [sic].”
Aplt. A pp. at 154.
Concluding that Ford sought the exemption in bad faith, the bankruptcy
court denied the exemption.
C. The Bankruptcy Appellate Panel Proceedings
Ford appealed to the Tenth Circuit Bankruptcy Appellate Panel (BAP). The
BAP reversed, concluding the bankruptcy court’s findings of bad faith were
clearly erroneous and that its denial of the exemption was an abuse of discretion.
Specifically, the BAP found there was insufficient evidence in the record to
4
(...continued)
2003) (“[D ]ebtors have the absolute duty to report whatever interests they hold [],
even if they believe their assets are worthless or unavailable to the bankruptcy
estate. This is because the bankruptcy court, not the debtor, decides what [asset]
is exempt from the bankruptcy estate.”).
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support a finding of bad faith and that Ford’s delayed disclosure could just as
easily be attributed to inadvertence as to intentional concealment. It reached this
conclusion for three reasons: (1) Ford’s minimal legal training could not be used
to support an inference of bad faith; (2) the Trustee failed to articulate a motive
for concealment in light of the fact that the settlement proceeds would be exempt
anyway; and (3) there w as an absence of a showing of prejudice to creditors
arising from Ford’s non-disclosure. BAP Decision at 5–6.
Finally, while the BAP agreed that debtors have a duty to schedule exempt
assets so that “the trustee can investigate the legitimacy of the exemption,” id. at
6, it nevertheless concluded a debtor ought not to be penalized for inadvertent or
innocent non-disclosure. In the absence of evidence to support a finding of “bad
faith, illicit motive, or an intent to conceal an asset from the Trustee and the
creditors,” the BAP held that denying an exemption was an abuse of discretion
and reversed the bankruptcy court. Id.
II. Standard of Review
“Although this appeal is from a decision by the BAP, we review only the
Bankruptcy Court’s decision.” Alderete v. Educ. Credit M gmt. Corp. (In re
Alderete), 412 F.3d 1200, 1204 (10th Cir. 2005) (internal citations omitted). The
bankruptcy court’s denial of an exemption is reviewed for abuse of discretion. In
re Calder, 973 F.2d 862, 868 (10th Cir. 1992). “A [] court abuses its discretion
where it commits a legal error or relies on clearly erroneous factual findings, or
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where there is no rational basis in the evidence for its ruling.” Davis v. M ineta,
302 F.3d 1104, 1111 (10th Cir. 2002) (citations omitted).
Here, the bankruptcy court denied Ford’s exemption based on its finding
that she concealed her interest in the pending accident litigation in bad faith. A
court’s “determination that a debtor willfully concealed assets is a finding of fact
. . . review[ed] for clear error.” Dalton v. IRS, 77 F.3d 1297, 1302 (10th Cir.
1996) (internal citations omitted). 5 A finding is not clearly erroneous unless “it is
w ithout factual support in the record or if, after reviewing all of the evidence, w e
are left w ith the definite and firm conviction that a mistake has been made.”
Connolly v. Harris Trust Co. of Ca. (In re M iniscribe Corp.), 309 F.3d 1234,
1240 (10th Cir. 2002) (internal quote omitted); United States v. Clark, 415 F.3d
1234, 1246 (10th Cir. 2005).
Under the clearly erroneous standard, moreover, we defer to the trial
court’s assessment of the credibility of w itnesses and other disputed facts:
It is the responsibility of an appellate court to accept the ultimate
factual determinations of the fact-finder unless that determination
either (1) is completely devoid of minimum evidentiary support
displaying some hue of credibility, or (2) bears no rational
relationship to the supportive evidentiary data.
5
The abuse of discretion standard is satisfied if the lower court commits a
legal error or relies on a clearly erroneous factual finding. Davis v. M ineta, 302
F.3d at 1111. No legal error is at issue here, and thus the bankruptcy court did
not abuse its discretion in denying Ford’s exemption unless its determination of
bad faith was clearly erroneous.
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Gillman v. Scientific Research Prods. (In re M ama D’Angelo), 55 F.3d 552, 555
(10th Cir. 1995) (internal citation omitted). In addition, we are required to “view
the evidence in the light most favorable to the [] court’s ruling . . . and must
uphold any [] court finding that is permissible in light of the evidence.” Exxon
Corp. v. Gann, 21 F.3d 1002, 1005 (10th Cir. 1994) (internal citation omitted).
W ith this background in mind, we turn to the two issues before us: (1) what
is the correct burden of proof in determining debtor bad faith; and (2) was the
bankruptcy court clearly erroneous in concluding Ford concealed her litigation
interest in bad faith?
III. Discussion
A. Burden of Proof
The bankruptcy court, at the Trustee’s urging, reviewed the objection as
requiring a clear and convincing showing of bad faith, relying on In re Grogan,
300 B.R. 804, 807 (Bankr. D. Utah 2003) (“[A]n exemption may be denied upon a
clear and convincing showing of bad faith by the debtor.”). W hile the Trustee
prevailed under the higher burden of proof, he now advocates on appeal a lesser
burden— a preponderance of the evidence standard. W e agree that the appropriate
burden of proof is a preponderance of the evidence standard. 6
6
Ford argues it is too late for the Trustee to advocate a different legal
standard on appeal. But unlike a legal argument that is forfeited unless raised
below, we are not obligated to apply an erroneous evidentiary standard.
M oreover, we have “authority[] to affirm the bankruptcy court’s decision on an
(continued...)
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The Bankruptcy Code is silent as to the applicable burden of proof to
establish bad faith in exemption proceedings pursuant to 11 U.S.C. § 522.
Nevertheless, the Supreme Court has clarified the applicable burden in a closely
analogous section of the Code. Specifically, § 523 precludes a debtor from
securing a discharge from any debt “to the extent obtained by [bad faith].” 11
U.S.C. § 523(a)(2)(A). In interpreting the proof requirements in discharge
proceedings under § 523, the Supreme Court has held that preponderance of the
evidence is the correct burden of proof. Grogan v. Garner, 498 U.S. 279, 286–87
(1991); see also Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th
Cir. 1996) (same).
In our view , discharge of debt under § 523 is analytically similar to
obtaining an exemption in bankruptcy— in each case, the debtor is seeking a
preference vis-a-vis creditors that will be sustained absent bad faith on the part of
the debtor. As the Supreme Court explained in reviewing the debt discharge
provisions of the Bankruptcy Code in Grogan, “a clear-and-convincing standard”
is not “required to effectuate the ‘fresh start’ policy of the Bankruptcy Code.”
498 U.S. at 286. Rather, the fresh start philosophy of the Code “limits the
opportunity for a completely unencumbered new beginning to the ‘honest but
unfortunate debtor.’” In re Young, 237 F.3d 1168, 1178. In sum,
6
(...continued)
alternative ground which is supported by the record.” Sampson v. Sampson (In re
Sampson), 997 F.2d 717, 721 (10th Cir. 1993).
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The statutory provisions governing nondischargeability reflect a
congressional decision to exclude from the general policy of discharge
certain categories of debts— such as child support, alimony, and certain
unpaid educational loans and taxes, as well as liabilities for fraud.
Congress evidently concluded that the creditors’ interest in recovering
full payment of debts in these categories outweighed the debtors’
interest in a complete fresh start. W e think it unlikely that Congress, in
fashioning the standard of proof that governs the applicability of these
provisions, would have favored the interest in giving perpetrators of
fraud a fresh start over the interest in protecting victims of fraud.
Requiring the creditor to establish by a preponderance of the evidence
that his claim is not dischargeable reflects a fair balance between these
conflicting interests.
Grogan, 498 U.S. at 286–287 (internal citations omitted) (emphasis added).
This rationale applies with equal force to exemption proceedings. For the
same reasons set forth by the Supreme Court in Grogan, we conclude a
preponderance of the evidence standard governs the evaluation of bad faith in the
context of a debtor seeking an exemption. The preponderance of evidence
standard strikes a fair balance between the goal of encouraging disclosure and
protecting creditors. Accord In re Park, 246 B.R. 837, 840 (Bankr. E.D. Tex.
2000) (applying preponderance standard); In re Ciotta, 222 B.R. 626, 629 (Bankr.
C.D. Cal. 1998) (“If the trustee fails to carry the burden of proving by a
preponderance of the evidence that the exemption should be disallowed, the
exemption will stand.”) 7
7
Our decision in In re Calder, 973 F.2d 862, 867 (10th Cir. 1992), does not
support a clear and convincing evidence standard as Ford contends. Calder did
not specify the applicable burden of proof, concluding only that there was
“sufficient showing of bad faith and/or prejudice to creditors to support the denial
(continued...)
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Accordingly, we hold that a trustee seeking to establish a debtor’s bad faith
in an exemption proceeding under § 522 must do so by a preponderance of the
evidence.
B. Bad Faith or Prejudice
Debtors may amend bankruptcy schedules as a matter of course. But an
“amendment may be denied, however, if there is bad faith by the debtor or
prejudice to creditors.” In re Calder, 973 F.2d 862, 867–68 (10th Cir. 1992); see
generally Fed. R. Bankr. P. 1009(a). The bankruptcy court found that Ford
sought to amend her schedules to claim an exemption for her settlement proceeds
in bad faith, and that the concealment prejudiced creditors. W e agree.
Under both state and federal rules, Ford was required to disclose the
settlement as an asset of her estate— contingent or otherwise— and then seek an
exemption. These rules allow the trustee to investigate whether the claimed
exemption is valid and ensure the debtor’s estate is complete. 8
7
(...continued)
of the [amended schedules].” Id. at 868.
8
See, e.g., BAP D ecision at 6 (“An asset is required to be scheduled even
if exempt so that, among other things, the trustee can investigate the legitimacy of
the exemption.”). See also In re Robinson, 292 B.R. 599, 607 (Bankr. S.D. Ohio
2003) (“[D]ebtors have the absolute duty to report whatever interests they hold in
property, even if they believe their assets are worthless or unavailable to the
bankruptcy estate. This is because the bankruptcy court, not the debtor, decides
what property is exempt from the bankruptcy estate.”).
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The Bankruptcy Code does not define bad faith. Like most questions of
motive and intent, bad faith is a question of fact. In re Vincent J. Fasano, Inc.,
55 B.R. 409 (Bankr. N.D. N.Y. 1985). Bad faith may be established by
circumstantial evidence, or by inferences drawn from a course of conduct.
Farmers Coop. Ass'n of Talmage v. Strunk, 671 F.2d 391, 395 (10th Cir. 1982).
In exemption proceedings, the burden to establish bad faith rests on the party
challenging the amended schedule. Jenkins v. Hodes (In re Hodes), 402 F.3d
1005, 1010 (10th Cir. 2005); Fed. R. Bankr. P. 4003(c).
W e also recognize that an inadvertent omission may be an affirmative
defense to a debtor’s failure to disclose an asset in bankruptcy. Inadvertence can
be established by showing, among other things, either (1) the debtor had no
knowledge of the undisclosed asset, or (2) the debtor had no motive to conceal it.
In re Grogan, 300 B.R. 804, 809 (Bankr. D. Utah 2003) (citing In re Coastal
Plains, Inc., 179 F.3d 197, 210 (5th Cir. 1999)). The burden of establishing
inadvertence lies with the debtor. Id.
The bankruptcy court concluded Ford met neither one of these safe havens.
The court found that Ford intentionally concealed her potential litigation interest
and that the concealment prejudiced the Trustee’s administration of the estate.
For several reasons, we conclude these findings are not clearly erroneous.
Primarily, Ford’s shifting explanations of why she failed to disclose the
asset suggests bad faith. She first testified at her deposition (which became a trial
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exhibit) that she knew the litigation proceeds “would be exempt” based on her
training at “paralegal school.” Aplt. App. at 34–35. This might be true, although
it would not excuse her duty to list the asset and then claim an exemption. Ford
further claimed she thought she was under no obligation to disclose the litigation
interest because it did not involve a law suit brought against her. She added yet
another twist to her rationale for nondisclosure in her testimony before the
bankruptcy court: “[W]e had [not] gone to trial on this case or any mediation or
anything.” Id. at 130. Finally, even though she was told the lawsuit should be
disclosed before her settlement, she took no steps to do so until well after the
settlement had been reached. Id. at 116, 7–12.
Ford’s explanations thus tend to support an inference that (1) she was
uncertain about the scope and application of the personal injury exemption and
how it might affect her litigation at the time she prepared her schedules; (2) she
intentionally concealed the asset to prevent scrutiny of it as part of the bankruptcy
proceedings; and (3) she only disclosed the asset when she learned that the
settlement proceeds could not be disbursed without reopening the bankruptcy
case. W hile the evidence may also support a more benign explanation of her
state of mind, the bankruptcy court had some evidence that Ford was not entirely
candid about her reasons for concealing the asset and thus acted in bad faith in
preparing her asset schedules.
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In addition, the record suggests Ford’s accident settlement could have
included recovery for non-exempt property damages (e.g., damage to her car).
Ford testified that she became aware of her duty to disclose the asset in August,
but failed to amend her schedules until after she participated in a settlement
conference in September that directed all proceeds to be characterized as
compensation for Ford’s personal injuries. As the Trustee argued at the hearing
below, that meant Ford would be entitled to all of the settlement proceeds under
Utah’s exemption laws. But had the Trustee been afforded timely notice he may
have participated in or helped structure the litigation settlement to include a
property allocation for the benefit of creditors. See In re Grogan, 300 B.R. at
809–10. 9 This evidence, in sum, tends to support the bankruptcy court’s
conclusion that Ford “hinder[ed] the Trustee’s administration of the estate” to the
prejudice of creditors. Bankr. Ct. Order, A plt. App. at 154.
In its review, the BAP discounted this testimony in concluding Ford had
neither the expertise in bankruptcy law nor the motive to conceal. We agree with
much of the BAP’s analysis, and would have had little trouble affirming a
bankruptcy court decision going the other w ay, given our standard of review.
9
Grogan also describes other forms of prejudice that might arise from
debtor concealment, including the time and expense of subsequent litigation, or
unnecessary investigations by the Trustee “to ferret out” undisclosed assets. 300
B.R. at 810. See also Calder, 973 F.2d at 868.
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This is a close case. But as we discussed above, the evidence as a whole allow s a
different interpretation of the facts.
In the end, while the bankruptcy court’s order could have provided more
detail in support of its conclusions, we are satisfied it meets the minimal standard
for clear error review. The court’s conclusions were based on the exhibits and
testimony presented in adversarial proceedings. It had an opportunity to consider
and assess Ford’s demeanor and candor. “W hen findings are based on
determinations regarding the credibility of witnesses, Rule 52(a) demands even
greater deference to the trial court’s findings.” Dalton v. IRS, 77 F.3d at 1302
(quoting Anderson v. Bessemer City, 470 U.S. 564, 575 (1985)). And, as is
typical in these types of proceedings,
The problem in ascertaining whether a debtor acted with fraudulent intent is
difficult because, ordinarily, the debtor will be the only person able to
testify directly concerning his intent and he is unlikely to state that his
intent was fraudulent. Therefore, fraudulent intent may be deduced from
the facts and circumstances of a case.
In re Calder, 907 F.2d at 955–956. In short, the bankruptcy court’s conclusions
satisfy the clear error standard— they are not “completely devoid of minimum
evidentiary support” and bear a “rational relationship to the supportive
evidentiary data.” Gillman, 55 F.3d at 555.
On the whole, we are satisfied that the bankruptcy court’s finding of bad
faith is supported by some credible evidence, and therefore find no clear error.
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The bankruptcy court likewise did not abuse its discretion in denying the
exemption.
IV. Conclusion
For the foregoing reasons, we AFFIRM the decision of the bankruptcy
court.
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