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In re: Nancy Derise

March 27, 2008

IN RE: NANCY DERISE, DEBTOR.
MARC A. PERGAMENT, APPELLANT,
v.
NANCYDERISE, APPELLEE.



The opinion of the court was delivered by: Joseph F. Bianco, District Judge

MEMORANDUM AND ORDER

The instant case is an appeal from the voluntary bankruptcy proceeding of Debtor Nancy DeRise (hereinafter, the "Debtor" or "DeRise"), 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 May 4, 2007 Memorandum of Decision and Order (hereinafter, the "May 4 Memorandum and Order") of the Honorable Stan Bernstein, United States Bankruptcy Judge, dismissing Trustee's complaint under 11 U.S.C. §§ 727(a)(3), (4), and (6), which sought a denial of Debtor's discharge for having made a false oath with respect to her financial disclosures, for concealing or failing to keep or preserve any recorded information regarding the Debtor's financial condition, and for refusing to obey a lawful order of the Bankruptcy Court.

In connection with that decision, the Bankruptcy Court refused to consider certain of the Trustee's exhibits, even though such exhibits were received in evidence at the trial based upon a representation by the Trustee during the trial (which was not contradicted by opposing counsel) that the admissibility of these exhibits was the subject of a stipulation in the Joint Pre-Trial Statement ("JPTS"). When the Bankruptcy Court reviewed the JPTS after the trial and saw no explicit language reflecting a stipulation of admissibility regarding these documents, he refused to consider them in connection with his rulings on the relevant issues. The posttrial decision to refuse to consider these exhibits, even though both sides believed at the end of the trial that such exhibits were part of the record, was made without any notice to the parties and without an opportunity for the Trustee, if the Court believed there was no stipulation of admissibility, to lay a sufficient foundation for the admissibility of these documents under the Federal Rules of Evidence.

The Trustee now appeals from the May 4 Memorandum and Order on the following grounds: (1) the Bankruptcy Court erred in finding that the exhibits annexed to the parties' JPTS were not properly admitted into evidence; (2) the Bankruptcy Court erred in failing to find that the Debtor's failure to comply with an Order of the Bankruptcy Court, dated November 30, 2005, setting forth a deadline by which the Debtor must file her amended schedules and Statement of Financial Affairs, warranted the denial of the Debtor's discharge; (3) the Bankruptcy Court erred in failing to find that the Debtor made knowingly false statements in her Schedules and Statement of Financial Affairs (hereinafter, "SOFA") with fraudulent intent; (4) the Bankruptcy Court erred by considering the Debtor's alleged lack of sophistication in financial matters in determining that the Debtor did not act with fraudulent intent; (5) the Bankruptcy Court erred by failing to find that the Debtor failed or refused to turn over post-petition rents to the Trustee; and (6) the Bankruptcy Court erred in failing to find that the Debtor obstructed the Trustee's administration of the bankruptcy case.

As set forth below, the Court finds that the Bankruptcy Court's refusal to admit certain exhibits annexed to the parties' JPTS and considered at trial was an abuse of discretion which affected a party's substantial right to present evidence the party believed was relevant to the issues that were the subject of the trial. Accordingly, the Court reverses the May 4, 2007 Memorandum and Order and remands this case to the Bankruptcy Court to either consider these exhibits (if the Appellee does not object to their admission), or provide Trustee with an opportunity to seek to admit such documents under the Federal Rules of Evidence. Moreover, because the Appellee also complains that certain of Appellee's exhibits were not considered, the Bankruptcy Court should also follow the same procedure with respect to any other exhibits that were listed by either party in the JPTS.

In addition, because the substance of those excluded exhibits could affect the Bankruptcy Court's determination on several of the Trustee's remaining issues on appeal - namely, that the Debtor did not make false statements knowingly and with fraudulent intent, that the Debtor's failure to comply with an Order of the Bankruptcy Court warranted discharge, that the Debtor failed or refused to turn over post-petition rents to the Trustee, and that the Debtor obstructed the Trustee's administration of the bankruptcy case - the Court will not consider those arguments at this time on appeal.

However, there is one pure legal issue on appeal that the Court can consider despite the remand on the above-referenced issues - namely, whether it was error for the Bankruptcy Court to take into consideration the Debtor's lack of financial sophistication in determining whether the Debtor acted with fraudulent intent. As set forth below, 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 is well within its discretion to do so.

I. BACKGROUND

A. The Debtor's Failure to Appear

On September 13, 2005, the Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. (JPTS ¶ 1.) The Debtor did not file the required schedules nor did she file the SOFA. (Id.)*fn1

The Clerk of the United States Bankruptcy Court issued a notice to the Debtor concerning the deficiencies in her bankruptcy filing. (Id. ¶ 2.) The notice required the filing of Schedules A, B, C, E, G, H, I, and J and the SOFA by September 28, 2005. (Id.) The Bankruptcy Court issued another notice on or about September 13, 2005, which required the Debtor to appear for her 341 Meeting (the "341 Meeting") on October 12, 2005. (Id. ¶ 3.) The Debtor failed to appear for her 341 Meeting on October 12, 2005. (Id. ¶ 4.) The Debtor also failed to file the required schedules and SOFA by September 28, 2005. (Id. ¶ 5.)

On or about November 10, 2005, the Trustee served the Debtor with a "Notice of Presentment" for an Order compelling the Debtor to file the missing schedules and SOFA, and also to appear for her 341 Meeting. (Id. ¶ 6.) The Debtor did not file any objection to the Trustee's "Notice of Presentment." (Id. ¶ 7.) On November 30, 2005, the Bankruptcy Court issued an Order granting the relief requested in the Trustee's "Notice of Presentment" (the "November 30, 2005 Order). (Id. ¶ 8.) By letter dated December 9, 2005, the Trustee served a copy of the Bankruptcy Court's November 30, 2005 Order on the Debtor by certified mail, return receipt requested, and first class mail. (Id. ¶ 9.) The Debtor did not comply with the terms of the November 30, 2005 Order - she failed to file the required schedules and SOFA and failed to appear for her 341 Meeting on December 13, 2005. (Id. ¶ 10.)

On March 13, 2006, Reno & Artura was retained as the Debtor's counsel and filed the required schedules and SOFA on March 16, 2006. (Id. ¶ 13.) The Debtor also appeared for her 341 Meeting on July 18, 2006. (Id. ¶ 19.)

B. The Debtor's Filing of Schedules and SOFA

On Debtor's Schedule I, the Debtor represented that she was receiving alimony, maintenance, and support in the sum of $1,100 per month and that she was receiving rent from "Russ" in the sum of $500 per month. (Trustee's Br., at 6; Schedule I.) On her Schedule J, the Debtor represented that she was making monthly payments on her first mortgage in the sum of $2,005. (Trustee's Br., at 6; Schedule J.) On her Schedule D, the Debtor failed to disclose a HUD mortgage. (Trustee's Br., at 6; Schedule D.)

On her SOFA, the Debtor represented that her income other than from employment during the two (2) years immediately preceding the bankruptcy was; "0.00 Child Support Payments are owed at approximately $275/week but they are received only sporadically." (Trustee's Br., at 6; SOFA.) The SOFA did not reflect any rent paid to the Debtor. (Id.)

On June 22, 2006, the Debtor filed an amended Schedule F. (Trustee's Br., at 6; Am. Schedule F.) The Debtor never amended her Schedules I and J or her SOFA. (Trustee's Br., at 6.)

C. The 220 Spiral Road Property

The Debtor and her estranged husband were owners in fee as tenants by the entirety of the real property known as 220 Spiral Road, Holtsville, New York (the "Property").*fn2 (JPTS ¶ 11.) The Debtor did not disclose to the Trustee until about March 2006 that the Property was being occupied in part by a tenant. (Id. ¶ 12.) The Trustee demanded in Court that the Debtor turn over all rent collected with respect to the Property (id. ¶ 14), but the Debtor did not turn over any of the demanded funds (id. ¶ 15). The Trustee also issued a letter dated June 5, 2006 to Reno & Artura for the Debtor to turn over all rent collected with respect to the Property. (Id. ¶ 16.) The Debtor refused and has continued to refuse to turn over to the Trustee all rent collected with respect to the Property from September 13, 2005 because it is jointly owned property being used as child support. (Id. ¶ 17.)

D. The Trustee's Complaint

On January 6, 2006, the Trustee served a Summons and Complaint seeking an order denying the Debtor his discharge: "(1) under 11 U.S.C. § 727(a)(6)(A), for `refusal to obey an [sic] lawful order of the court'; (2) under [11] U.S.C. § 727(a)(4) for `knowingly and fraudulently . . . ma[king] a false oath or account'*fn3 and (3) under 11 U.S.C. ยง 727(a)(3), for `fail[ing] to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transaction might be ascertained.'" (Trustee's Br., at 5.) The Trustee alleged, inter alia, "that the Debtor violated the November 30, 2005 Order, filed false Schedules and Statement of Financial Affairs, failed to ...


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