X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:Four months after filing for bankruptcy, debtor Jack E. Pratt Jr., a millionaire’s son who had drug problems and chronic debt for most of his life, died of a heart attack. The Cadle Co., which had purchased two judgments against Pratt, brought an adversary action against him in which it contended that his discharge in bankruptcy should be denied under 11 U.S.C. 727 for making false statements in his schedules and Statement of Financial Affairs (SOFA) and for concealing or removing assets. Pratt’s estate was substituted in his bankruptcy case, and the adversary action proceeded. The bankruptcy court found that Cadle had failed to meet its burden of proof to establish an exception from discharge. In particular, the bankruptcy court found that Cadle had failed to establish that Pratt’s omissions of assets from his schedules and SOFA were made with fraudulent intent. The bankruptcy court found instead that the evidence showed that the omissions were due to Pratt’s drug problems and not fraudulent intent, and granted Pratt a discharge. Cadle appealed to the district court. The district court determined that the bankruptcy court did not clearly err in making its factual determinations and affirmed the judgment. HOLDING:The court affirms the judgments of the district and bankruptcy courts. Cadle first argues that Pratt’s discharge should have been denied under three subsections of 11 U.S.C. 727, subsections (a)(2)(A), (a)(2)(B), and (a)(4)(A). To establish that discharge should be denied under 727(a)(2)(A), a creditor must show four elements: 1. a transfer or concealment of property, 2. belonging to the debtor, 3. within one year of the filing of the petition, and 4. with intent to hinder, delay, or defraud a creditor or officer of the estate. Discharge may also be denied if the debtor makes a false oath in connection with his bankruptcy filings. 11 U.S.C. 727(a)(4)(A). Cadle argues that Pratt failed to disclose two separate bank accounts: first, an account he held with his son and second, his wife’s bank account, which Cadle contends Pratt used. Cadle also argues that Pratt’s use of his wife’s account amounted to concealment. Pratt had opened an account at Texas Community Bank & Trust under two names � his own and that of his son, Jack Pratt III. Pratt used this account for household expenses. His son never deposited any money in the account. Pratt’s estate contends that Pratt’s failure to disclose was immaterial because the account had no money in it and had been entirely inactive for almost a year. The estate further argues that Pratt’s failure to disclose the account was unintentional. The bankruptcy court concluded that although Pratt’s failure to disclose the account was troubling, it was neither material nor intentional. The court holds that, although the account Pratt held with his son might be material, Cadle has not presented a compelling case that Pratt had any fraudulent intent in failing to list it. Cadle points to no specific evidence indicating that the bankruptcy court erred in making its finding. Cadle also argues that Pratt should have disclosed his access to his wife’s bank account and that he concealed his income by depositing checks into this account. The court holds that Cadle’s allegations all have the same shortcoming: they all concern deposits occurring more than one year before bankruptcy. The court holds that Cadle’s reliance on the theory of continuing concealment is misplaced. Under this theory, when an asset is concealed � such as by nominally transferring it while retaining interest in it � before the one-year period, but the debtor’s interest in the asset continues, 727 may still apply. The court finds that Cadle has not satisfied its burden of showing that Pratt’s interest remained during the relevant time period. The court also affirms the bankruptcy court’s finding that Pratt lacked the intent to defraud his creditors about these assets. The court notes that Cadle does not present evidence that this finding is clearly erroneous. Cadle next contends that Pratt concealed money from his creditors by keeping large amounts of cash around his house. The court holds that, while the conclusion that Cadle reaches that Pratt kept large amounts of money hidden from his creditors could perhaps be drawn from the facts presented at trial, those facts do not require the court to reach that conclusion. On this record, the court holds that the district court’s failure to find concealment and fraudulent intent was not clearly erroneous. Cadle also argues that Pratt made a false oath when he failed to disclose that he served as trustee for his children’s trusts. The court concludes that Pratt’s failure to list his trustee status, assuming without deciding that it was required, was not material because this knowledge would not assist Pratt’s creditors. Cadle’s principal argument about the children’s trusts is that Pratt abused his position as trustee. Cadle claims that Pratt improperly removed money from the trust accounts for his own purposes. The court affirmed the bankruptcy court’s finding that Pratt’s alleged misuse of trust assets was irrelevant to whether he made a false oath when he failed to list the trusts as someone else’s property that he held or controlled. Consequently, the court holds that it does not provide a reason for denying him a discharge in bankruptcy under 727. Cadle also contends that Pratt failed to disclose a retained interest in a partnership Pratt’s mother formed for estate-planning purposes. More than one year before filing for bankruptcy, Pratt entered into a contract under which he assigned his interest in the partnership. Cadle challenges how much of his rights Pratt actually transferred under that contract and, less directly, challenges the amount of consideration for the transfer. But the court holds that the fact Pratt lied about not transferring the asset does not prove that he intentionally hid an alleged interest in the partnership. The court points out that there was evidence that Pratt did not retain an alleged .0549 percent interest at all, and that a transposition of the numbers was a clerical error in part of the contract. Thus, the court holds that none of the evidence about the transfer of Pratt’s partnership interest justifies overturning the bankruptcy court’s findings concerning intent or its decision not to deny discharge. Finally, the court rejects Cadle’s contentions that Pratt made a false oath when he failed to disclose his continued interest in a piece of real property and that the district court erred in excluding evidence about it. Cadle’s contentions are based on a complicated foreclosure. The bankruptcy court found that, even if Pratt retained his interest because the foreclosure and sale were invalid, he did not know about it. Therefore, Pratt had no fraudulent intent when he failed to disclose any interest. The court holds that the bankruptcy court’s conclusion is supported by the record; even Cadle’s description indicates that Pratt was unaware of this problem with the foreclosure. Cadle presented no evidence that Pratt intentionally concealed the results of an invalid sale of the property and no evidence that Pratt was even aware of his “technical” ownership. The court holds that the bankruptcy court did not err in its rulings about the property. OPINION:Prado, C.J.; Prado, C.J., Eavley and Jolly, JJ.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.