MEMORANDUM DECISION AFTER TRIAL
CHARLES NOVACK, Bankruptcy Judge.
Over a five day period, this court conducted a trial in the above adversary proceeding in which plaintiff United States Trustee (the "Trustee") sought to deny debtor and defendant Joshua Hedlund's Chapter 7 discharge under Bankruptcy Code §§ 727(a)(2)(A) and (a)(4). While this adversary proceeding was filed more than seven years ago and has had its fair share of twists and turns, the Trustee's arguments are straightforward: Hedlund committed numerous false oaths by failing to disclose all of his property interests on his bankruptcy schedules and statement of financial affairs, and he concealed his ownership interest in numerous assets with the intent to hinder, delay or defraud his creditors. Hedlund denies the Trustee's allegations, and argues, among other things, that he was incarcerated when his bankruptcy was filed and did not authorize or ratify his bankruptcy filing, that he was represented by incompetent counsel who repeatedly failed to obtain the information necessary to complete his Chapter 11 and (later) his Chapter 7 bankruptcy documents, and that he cooperated with the Chapter 7 trustee and tried to disclose all necessary information to him and the Chapter 7 trustee's counsel. The Trustee has met her burden of proof, and for the reasons stated below, this court denies Hedlund's Chapter 7 discharge.
The following constitutes this court's findings of fact and conclusions of law under F.R.B.P. 7052(b). Defendant Joshua Hedlund is a college educated, experienced real estate investor who, in the early 2000s, owned for development (either directly or through various limited liability entities) significant acreage in Humboldt and Mendocino County in Northern California. Hedlund also owned a house and adjacent, undeveloped land in Santa Cruz, California. While Hedlund employed a bookkeeper, Stacy Speelman (who also provided some property management services), and frequently used the services of a real estate loan broker, Wendy Feltzer, to address the financial needs of his real estate holdings, Hedlund was the controlling figure in all of his real estate enterprises, which involved several limited liability companies and trusts. Hedlund was the sole person who fully understood their organizational structure, holdings, and liabilities. To a third party, be it this court or a Chapter 7 trustee, his real estate investments are difficult to decipher.
Hedlund's financial difficulties began in 2006 when he was indicted on numerous criminal offenses by the U.S. Attorney's Office for the Northern District of California for allegedly participating in a marijuana grow and distribution scheme. Hedlund eventually pled guilty to reduced charges and began serving a thirty three month sentence in May 2009. Until he was released in December 2011, Hedlund's ability to manage his real estate holdings was significantly curtailed. While Speelman initially visited Hedlund several times a month in the Lompoc, California federal prison camp, Hedlund was subsequently placed in solitary confinement and moved to a federal prison in Minnesota. His communication privileges were restricted for several months, and when restored, were essentially limited to emails and phone calls to counsel.
Before surrendering, Hedlund took some steps to ensure that his real estate holdings would remain intact. For example, Hedlund executed certain limited power of attorneys to his brother (Ben Hedlund), mother, and his long-time girlfriend. He did not, however, provide Speelman with a power of attorney.
Hedlund's Chapter 11 case was filed on September 4, 2009 as a "skeletal" bankruptcy filing to stay the foreclosure of Hedlund's Santa Cruz properties. Judson Farley, a long-time bankruptcy attorney, filed the bankruptcy on his behalf. Hedlund was incarcerated when Farley filed the Chapter 11, and Hedlund did not review the bankruptcy petition or initial bankruptcy schedules and statement of financial affairs before they were filed. There is little question, however, that Hedlund orchestrated his bankruptcy filing. Speelman testified that Hedlund instructed her to file a Chapter 11 bankruptcy for him if she could not prevent the foreclosure of his Santa Cruz properties, and to provide all necessary information to the bankruptcy attorney that she hired. After notices of sale were posted on the Santa Cruz properties, Speelman hired Farley and provided him with the information that he used to complete the original bankruptcy petition, schedules, and statement of financial affairs. Speelman did not, however, sign the bankruptcy petition, schedules, or statement of financial affairs on Hedlund's behalf, and she informed Farley that he needed to discuss this directly with Hedlund. Speelman also testified that Hedlund wanted to work with Farley directly, and that he never asked her to sign the bankruptcy documents prepared by Farley.
Hedlund's original bankruptcy schedules and statement of financial affairs were woefully incomplete. While his Bankruptcy Schedule A listed his Santa Cruz properties, his Schedule B and Statement of Financial Affairs listed interests in only three LLCs—Schmook Ranch, LLC, H & H Management, LLC ("H & H Capital"), and Ruby Creek Ranch, LLC—and his Schedule B did not list any vehicles or equipment. Hedlund actually held or claimed membership or equitable interests in several unscheduled real estate LLCs or trusts which controlled thousands of acres of land in Northern California. These unscheduled entities included the Larabee Land and Cattle Trust and Villica LLC.
Hedlund promptly contacted Farley after he learned of his Chapter 11 bankruptcy filing. This correspondence, if nothing else, demonstrates that Hedlund sought and supported the bankruptcy filing and wanted his schedules to be accurate in order to obtain the full protection afforded by the automatic stay. For example, in a September 9, 2009 letter to Farley, Hedlund writes: Dear Judson: Stacy [Speelman] filed Chapter 11 bankruptcy with you on my behalf. Please send me a copy of all documents that have been filed. Please request copies of all financial documents from Stacy that I filed in my federal criminal case, please send them as well. . . . I just sent Stacy a long letter which I would like to be sent by you to Washington Mutual: Chase Bank. Please contact her . .. to get a copy of the letter. I look forward to meeting you on the phone or otherwise, and thank you for representing me. As soon as I am in possession of financial documents (sent by you) showing my current assets and liabilities, as well as my current credit report, I will lay out a plan of action to ensure all creditors are paid."
Hedlund repeated his request for all filed documents in a short letter to Farley dated September 23, 2009, in which he also stated his "concern that some properties I hold in a living trust may not have been submitted." He repeated this concern in a September 29, 2009 letter to Farley, in which he advised Farley that he had received a three day notice for his commercial tenancy in Santa Cruz, and that "this lease should be in my personal bankruptcy. I still have not received a copy of what was submitted to the court. I want to make sure that my bankruptcy is true and correct. Please send me what has been submitted at your earliest convenience."
While there is no evidence that Farley responded to Hedlund's document requests, Speelman testified that she sent the petition, schedules and statement of financial affairs to Hedlund immediately after Farley filed them. There is little reason for this court to question Speelman's testimony on this point. Speelman had worked for Hedlund for several years before his Chapter 11 bankruptcy filing, and was, by all accounts, a trusted employee. She assisted Hedlund not only in his personal bankruptcy, but also in the 2010 Chapter 11 bankruptcy filings of several LLCs in which Hedlund was the controlling member. Moreover, Hedlund acknowledged that he reviewed (in some form or fashion) his bankruptcy documents while he was incarcerated. His familiarity with these documents is manifested in numerous letters and pro se bankruptcy pleadings (that he wrote and/or filed within a year of his bankruptcy filing), all of which state that his bankruptcy documents were inaccurate and required significant amendments. See, e.g., Trustee's Exhs. 11, 12, 120, and 122. Indeed, in a June 15, 2010 letter to Richardson, Hedlund informed him that he is "currently attempting to reproduce accurate bankruptcy schedules of my personal debts."
Despite these admissions and representations, Hedlund only amended his Bankruptcy Schedules A and D once (on November 18, 2010) to list an interest in real property located at 1777 Sprowell Creek Road, Garberville, California and the associated secured debt. See Trustee's Exh. 4
Hedlund's Chapter 11 case was converted to Chapter 7 on March 12, 2010. John Richardson was appointed as the Chapter 7 trustee, and he retained Charles Maher, an experienced trustee counsel (then with the Luce Forward law firm) to represent him. Maher's investigation into Hedlund's assets was stymied by Hedlund's failure to amend his bankruptcy schedules. Rather than file amended schedules A and B to list his interest in his numerous real estate entities and personal property, Hedlund contended that he had disclosed all of his holdings to the United States Probation Department and Department of Justice as part of his guilty plea, and that Maher should obtain the necessary information from these entities. This disclosure was an inadequate substitute for amended bankruptcy schedules, as the United States government refused to release this information to Maher. Hedlund also informed Maher that the Baker & McKenzie law firm had conducted a thorough tax audit which also would disclose his assets and liabilities. In an August 5, 2010 email, Hedlund instructed Scott Frewing (a Baker & McKenzie tax attorney) to release his personal tax returns and certain LLC returns to Maher and Richardson. While Frewing's reply email indicates that he sent the returns for two LLCs and Hedlund's personal 2005 and 2006 tax returns to Richardson and Maher, Maher testified that he did not specifically recall receiving them. Moreover, this court does not know how useful these returns would have been to Maher. Simply, rather than file amended bankruptcy schedules to list all of his real and personal property, Hedlund required Maher and Richardson to ferret out this information. While Hedlund did provide Maher with some specific information regarding assets and liabilities, the release of information was sometimes associated with a pending foreclosure. For example, on May 21, 2010, Hedlund informed Maher by letter that he and H & H Capital had "significant equity in heavy industrial construction equipment that was purchased from Komatsu Financial. My understanding is that this equipment has been repossessed by agents of Komatsu. I believe that the automatic stay in my personal bankruptcy proceeding should extend to this equipment and any related lawsuit. . . . I want to make sure that the equity in this equipment is used to pay my Unsecured Creditors. I am concerned that Judson Farley has not accurately disclosed in the schedules that I have multiple unsecured creditors. I have made a complete disclosure to the DOJ and US Probation in my criminal case." Maher thereafter investigated this matter, only to learn that H & H Capital owned the equipment and that Hedlund had only guaranteed the debt. Hedlund also informed Maher that he had an equitable interest in the Garberville property, for which he did amend his Schedule A in November 2010. Maher thereafter filed an adversary proceeding to stay the foreclosure, which he later dismissed. None of the property pursued by Maher in reliance on Hedlund's statements generated any funds for the bankruptcy estate. While Maher continued to work on the Hedlund Chapter 7, he eventually stopped recording his time due to the futility of his efforts.
Hedlund also testified that he spent a significant amount of time at county recorder offices locating documentation which he provided to Maher or the trustees in the bankruptcies filed by some of his entities. Again, what he failed to do, however, is simply amend his bankruptcy schedules and statement of financial affairs and allow Maher to investigate these assets in his own manner.
Ratification of the Chapter 11 Filing
Hedlund argues that this court should dismiss this adversary proceeding because he never authorized his Chapter 11 filing. This court declines to so, and instead finds that he ratified the Chapter 11 bankruptcy filing. Ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him.
Denial of Discharge
Bankruptcy Code § 727(a)(4)(A) provides in pertinent part that "The court shall grant the debtor a discharge unless . . . the debtor knowingly and fraudulently, in or in connection with the case—(A) made a false oath or account. . . ." This court may deny a Chapter 7 debtor's discharge if 1) the debtor made a false oath in connection with the case; 2) the oath related to a material fact; 3) the oath was made knowingly; and 4) the oath was made fraudulently. Plaintiffs must establish these elements by a preponderance of the evidence.
A false oath may involve an affirmatively false statement or an omission from a debtor's bankruptcy schedules or statement of financial affairs.
The goal of § 727(a)(4) is transparency. "The fundamental purpose of § 727(a)(4)(A) is to insure that the trustee and creditors have accurate information without having to conduct costly investigations."
This court could not find any case where a debtor who ratified his bankruptcy filing was denied his Chapter 7 discharge because his original schedules, which were prepared without his assistance, contained false oaths.
Typically, a false oath is complete when made, i.e. when the offending bankruptcy schedule or statement of financial affairs is filed. Here, the false oath was "made" by Hedlund after he reviewed the bankruptcy schedules and statement of financial affairs, acknowledged that they were incorrect, and then failed to file or attempt to file accurate schedules and statement of financial affairs. Hedlund cannot reap the benefits of the bankruptcy (the automatic stay, among others) without accepting its burdens, which include filing accurate bankruptcy documents. Hedlund repeatedly acknowledged that his schedules were inaccurate, yet he filed only one amendment to Schedule A, which sought to include an asset which was not property of his bankruptcy estate.
Hedlund's false oaths also related to material facts. Hedlund believed that the assets omitted from his bankruptcy schedules and statement of financial affairs had significant value. The same is true with regard to the Garberville property amendment. Hedlund valued the Garberville property on his amended Schedule A at $640,000, with $540,000 of debt against it.
Furthermore, there is little question that Hedlund knowingly omitted to list a) his interests in Villica LLC, Larabee Land and Cattle Trust, and b) Unimog vehicle, and c) his substantial dollar claim against Schmook Ranch, LLC, and knowingly sought to include the Garberville property in his Chapter 7.
Finally, the Trustee has proven that Hedlund's conduct was fraudulent. Hedlund amended his Schedule A to include the Garberville property even though he was never on title before his case was converted to Chapter 7, all in an effort to stop its foreclosure. Such action is the epitome of deceptive conduct, and it alone is sufficient to deny Hedlund's discharge under § 727(a)(4)(A). Hedlund's material omissions, while more perplexing, were also deceptive. Despite his stated desire to pay his creditors in full, Hedlund disclosed his real and personal property interests only in a manner and order that he deemed appropriate. Hedlund's Chapter 7 case was the means by which to satisfy his creditors, and his failure to file accurate schedules underscores that his real desire was to reveal as little as possible in order to retain as much control as possible over the outcome. While the Trustee did not fully explain why Hedlund's conduct did not match his words, this court need not ascertain his true motivation. See
Accordingly, Hedlund's Chapter 7 discharge is denied under Bankruptcy Code § 707(a)(4)(A).
The Trustee also seeks to deny Hedlund's discharge under Bankruptcy Code § 727(a)(2)(A). This code section authorizes the denial of a discharge if the debtor transferred, removed, destroyed, mutilated, or concealed his/her property within one year of the petition date with the intent to hinder, delay or defraud creditors.
The Trustee has not met her burden of proof on this claim for relief. The Trustee has not demonstrated by a preponderance of the evidence which personal assets Hedlund (allegedly) concealed from creditors with the intent to hinder, delay or defraud within a year before the petition date
The Trustee shall prepare an appropriate judgment.