The opinion of the court was delivered by: Joseph F. Bianco, District Judge
The instant case is an appeal from the voluntary bankruptcy proceeding of Debtor Matthew Smorto (hereinafter, the "Debtor" or "Smorto"), pursuant to Chapter 7 of the Bankruptcy Code, in the United States Bankruptcy Court for the Eastern District of New York (hereinafter, the "Bankruptcy Court").
Trustee Marc A. Pergament (hereinafter, the "Trustee" or "Pergament") appeals from the April 18, 2007 Memorandum of Decision and Order (hereinafter, the "April 18 Memorandum and Order") of the Honorable Stan Bernstein, United States Bankruptcy Judge, dismissing Trustee's complaint under 11 U.S.C. §§ 727(a)(3) and (4), which sought a denial of Debtor's discharge for having made a false oath with respect to his financial disclosures.*fn1 The Bankruptcy Court dismissed the complaint, finding that the Trustee has not proven by a preponderance of the evidence that the Debtor knowingly concealed his financial condition or that the Debtor's false statements were made knowingly and with an intent to defraud.
The Trustee now appeals from the April 18 Memorandum and Order on the following grounds: (1) the Bankruptcy Court erred in dismissing the Trustee's complaint under 11 U.S.C. § 727(a)(4); (2) the Bankruptcy Court erred in ruling that the Debtor satisfied his burden of proving that he did not make the false statements knowingly and with fraudulent intent; and (3) the Bankruptcy Court erred in considering the Debtor's level of sophistication in financial matters in determining that the Debtor did not act with fraudulent intent.
As set forth below, the Court finds the Trustee's arguments on appeal to be unpersuasive and affirms the Bankruptcy Court's April 18, 2007 Memorandum and Order dismissing the Trustee's complaint. Specifically, contrary to the Trustee's suggestion that the Bankruptcy Court wrongfully considered the Debtor's lack of sophistication of financial matters in making such a determination, the Bankruptcy Code does not prohibit such consideration and the Bankruptcy Court clearly was well within its discretion to do so. Moreover, the Bankruptcy Court's determination that the Debtor did not make false statements knowingly and with fraudulent intent was not clearly erroneous. In short, having carefully reviewed the record, the Court concludes that the Bankruptcy Court did not err in dismissing the Trustee's complaint.
A. The Debtor's Filing of Schedules
On October 12, 2005, the Debtor, represented by counsel, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. (Joint Pre-Trial Stmt. ¶ 1, 5; Designation of Record - Exhibit 1 (hereinafter, "Exh. 1").) The Debtor also filed the accompanying schedules with the petition. (Exh. 1.)
According to the Debtor's Schedule B, the Debtor held personal property in the sum of $35,532.00. (Id. at 5-9.) According to the Debtor's Schedule F, creditors held unsecured claims in the sum of $37,664.00. (Id. at 13-15.) With respect to income and expenses, the Debtor's Schedule I provided that the Debtor's net monthly available income was $4,610, based on gross wages of $5,062 per month, less deductions of $2,152 per month, plus his wife's gross wages of $1,700 per month. (Id. at 2.) The Debtor's Schedule J provided that the Debtor's total monthly expenses were $4,433, including an estimated income tax obligation relating to the Debtor's wife in the sum of $400 per month. (Id. at 19.) Finally, in the Debtor's Statement of Financial Affairs, the Debtor stated that his gross income for 2004 was $61,000 and that through the date of the filing of the petition, the Debtor's gross income for 2005 was $49,000. (Id. at 20-31.)
B. The Section 341 Meeting
The Trustee was appointed on October 12, 2005. On November 28, 2005, the Trustee conducted an examination of the Debtor under oath pursuant to 11 U.S.C. § 341 (the "341 Meeting"), where Trustee asked the Debtor whether he wanted to make any changes to his petition and schedules. (Joint Pre-Trial Stmt. ¶ 6.) It is undisputed that the Debtor did not make any changes at that time. (Id.)
At the 341 Meeting, the Trustee requested that the Debtor produce certain documents, including copies of his tax returns. (Debtor's Ans. to Compl., at 1.) The Debtor produced his federal and state tax returns for 2003, 2004, and 2005.*fn2 According to these documents, the Debtor's income for 2004 was $63,842. (Exh. 1.) The Debtor also received state tax refunds of $277 for 2003 and $279 for 2004 and federal tax refunds of $5,204 and $4,155 for 2003 and 2004, respectively. (Id.) In 2005, the Debtor received a state tax refund of $918 and a federal tax refund of $8,161. (Id.)
C. The Trustee's Complaint
On May 1, 2006, the Trustee served a Summons and Complaint seeking an order denying the Debtor his discharge pursuant to 11 U.S.C. § 727(a)(4). The Trustee alleged, among other things, that the following fraudulent omissions and misrepresentations were made by the Debtor: (1) the Debtor's Schedules I and J were materially inaccurate, including that (a) "[t]he [Debtor's] Schedule I sets forth that the Debtor's net monthly available income is $4,610.00 and yet his tax returns reflect a higher available combined monthly income"; (b) "[t]he [Debtor's] Schedule J sets forth that the gross monthly income of the Debtor's spouse is $1,700.00 per month and that is not reflected in [Debtor's documents]"; (c) "[t]he [Debtor's] Schedule J identifies expenses that are not consistent with the documents provided by [the Debtor]"; and (d) "[t]he [Debtor's] Schedules as to income and expenses are divergent from his documentation and tax returns";*fn3 and (2) the Debtor's Statement of Financial Affairs was materially inaccurate, because (a) it "does not accurately reflect the Debtor's income for 2004 and 2005 and fails to disclose the income for 2003"; and (b) it "fails to reflect the tax refunds of $4,434.00 collected by the Debtor in the 2004 [sic] nor the tax refunds of $5,431.00 collected in 2003."*fn4 (Compl., at 3-4.)
D. Filing of Amended Schedules
On May 18, 2006, the Debtor served an Answer to the Complaint. (Debtor's Ans. to Compl.) On August 2, 2006, the Debtor filed Amended Schedules I and J. (Designation of Record - Exhibit 13 (hereinafter, "Exh. 13").) In Amended Schedule I, the Debtor increased his currently monthly gross wages to $5,262 and reduced his wife's monthly gross wages to $1,580. (Id., at 2.) In Amended Schedule J, the Debtor increased his monthly expenses by $300 relating to his wife's estimated credit card expense. (Id. at 3.) The Debtor never amended his Schedule B or his Statement of Financial Affairs.
E. The Bankruptcy Court Decision
On October 10, 2006, the Trustee's claim under Section 727(a)(4) was tried before the Bankruptcy Court. The only witness called by the Trustee was the Debtor. By Memorandum and Order, dated April 18, 2007, the Bankruptcy Court dismissed the complaint. With respect to the inaccuracies in the schedules and the Statement of Financial Affairs, the Bankruptcy Court concluded that the Debtor did not make such statements with fraudulent intent:
The debtor testified that the information he provided in his schedules and Statement of Financial Affairs was accurate to the best of his knowledge and honest belief and the debtor's testimony in this regard is not lacking in credibility. The debtor testified that based on his yearly base salary, he estimated what he honestly believed to be his net and gross income. Moreover, as found earlier, the debtor is neither a savvy nor sophisticated businessman and lacks experience or training in accountingrelated matters. There is nothing in the debtor's testimony or the evidence submitted in this case to establish that the inconsistencies noted by the trustee are anything more than carelessness or inadvertent mistakes made by a debtor who is unsophisticated in financial matters. Fraudulent intent cannot be established on this basis . . . . Inasmuch as this Court is satisfied that the debtor ...