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In re Ross

United States District Court, N.D. Indiana, South Bend Division

September 9, 2019




         This case is before me on appeal from various orders of the Bankruptcy Court for the Northern District of Indiana. Appellant Heather O'Connor's was unsuccessful in her efforts to prevent Appellee Thomas Ross from being discharged from bankruptcy, and she seeks review in this court. O'Connor offers a multitude of arguments relating to how the bankruptcy court decided the issues in this case. The main thrust of her appeal, however, is that Ross was a dishonest debtor who sought to conceal valuable assets in order to get an unwarranted clean slate from the bankruptcy court. She says that Ross failed to disclose an investment property. Then, once it was disclosed, he tricked the bankruptcy trustee into undervaluing the property. After that, while the bankruptcy was still pending, he transferred the property to his mother-in-law for no consideration prior to the discharge order being entered in this case. She says these and other actions violated multiple sections of the Bankruptcy Code.

         As discussed below, while I do not agree with all of O'Connor's argument completely as to Ross's supposed level of dishonesty, the mandate of the Seventh Circuit is clear on the transfer of the property and I must reverse the discharge and remand the case to the bankruptcy court for further proceedings.


         Thomas Ross filed a petition for voluntary bankruptcy on July 2, 2016 under Chapter 7 of the Bankruptcy Code. [See DE 8 at 9-68.][1] Ross was self-employed as a general contractor, but costly lawsuits relating to two of his home remodeling jobs forced him into bankruptcy. [See id.] Ross listed Heather O'Connor, one of those unsatisfied customers, on his bankruptcy petition as a creditor. [Id. at 57.] Put mildly, O'Connor and Ross have a contentious history. In 2015, Ross filed a mechanic's lien against O'Connor's property after she, citing her dissatisfaction with his work, refused to pay him. [Id.] Ross later filed a lawsuit in state court against O'Connor, and she filed a counterclaim. [Id. at 142, ¶ 10.] This legal sparring preceded Ross's bankruptcy, which is why O'Connor is listed her as a creditor noting their pending litigation on his statement of financial affairs. [Id. at 31, 4.]

         Shortly after Ross filed bankruptcy, O'Connor discovered that Ross had not disclosed a house he owned at 408 G Street in LaPorte, Indiana, on his bankruptcy schedule of assets. [Id. at 567-68.] O'Connor alerted her lawyer, who in turn brought it to the attention of the court-appointed bankruptcy trustee Joseph D. Bradley. [Id.] This property, along with some tools and a truck trailer of lesser significance, are at the center of this appeal.

         On August 2, 2016, trustee Bradley conducted the Section 341 examination of Ross's financial affairs. [Id. at 531.] After discussing Ross's personal residence in LaPorte, Indiana, Bradley asked Ross if he had any other interest in real estate. [Id. at 191-92.] Ross informed Bradley that he owned another property, 408 G Street, also in LaPorte. He testified that he bought it with financial assistance from his mother-in-law as a HUD foreclosure with plans to remodel for profit. [Id.] Ross then said that despite doing some preliminary work on the house, he no longer planned to remodel the property, and he incorrectly stated that it was in foreclosure-perhaps mistakenly believing that Bradley was referring to the fact that Ross purchased it out of foreclosure, not the current status of the property [id. at 531-32]. In any event, Ross said the property was “in foreclosure” when it plainly wasn't. After the 341 meeting with Bradley, Ross filed amended schedules on September 21, 2016, listing the property as “condemned” and worth $10, 000. [Id. at 70.]

         Bradley then conducted further investigation into Ross's financial affairs. [Id. at 494-95.] He determined that the 408 G Street property had a current, fair market value of $10, 000-$15, 000 and that it “may be subject to the equitable lien of the purchaser of that property, Ms. Pam Koehn, the Debtor's mother-in-law.” [Id. at 494.] How Bradley learned of the equitable lien is unclear; it's not reflected in the record. But the parties agree that title was solely in Ross's hands at the time he filed bankruptcy and that no lien in favor of Koehn was ever recorded. [See Id. at 506-521.]

         The price range Bradley gave for the 408 G Street property came, in part, from a third-party appraisal provided to Bradley by Ross and his attorneys. [See Id. at 473-493.] It valued the property at $13, 500, and “in inferior condition now as compared to the condition at the time of the December purchase. This is due to demolition work” which had been done on the property by Ross. [Id. at 477.] The appraisal also contained “comparables” to other foreclosed properties in the area. [Id. at 493.] As a result, Bradley determined the property had little value to Ross's creditors given the amount of money which would be necessary to put the home in marketable condition as well as the supposed lien from Ross's mother-in-law. [Id. at 494-494.] Further, Bradley concluded that Ross had no substantial interest in machinery or tools in his name, as all the tools Ross used for his business were the personal property of his father and leant to Ross to use. [Id.] In sum, Bradley concluded that Ross had no interest in property of recoverable value and filed a Report of No Distribution, asking the bankruptcy court to discharge Ross's bankruptcy as a no asset case. [Id. at 495.]

         O'Connor was not satisfied with trustee Bradley's conclusions. She filed an adversarial complaint on September 30, 2016, opposing the discharge of Ross's bankruptcy under 11 U.S.C. § 727(a), alleging Ross concealed assets and made false oaths on his bankruptcy pleadings. [Id. at 141-45.] Ross filed a motion to dismiss with sanctions on December 6, 2016. [Id. at 146-147.] The motion to dismiss was denied, and the matter was eventually set for trial approximately fourteen months later, in February 2018. [Id. at 237-41, 255.]

         On April 21, 2017, however and before the trial, Ross deeded 408 G Street to his mother-in-law via quitclaim deed. [Id. at 396-97.] This transfer is at the center of this appeal. All agree that it occurred after trustee Bradley indicated he would not pursue a sale of the property, but unquestionably while Ross's bankruptcy was pending and before any discharge. During the trial 10 months later, Ross testified that he transferred the property on the advice of his previous counsel (Ross obtained new counsel before the trial), because of alleged back-taxes owed on the property that he says he couldn't afford. [Id. at 533-534.] Ross further testified that he bought the property in December 2015 for $21, 500, and that on a multitude of different purchase documents, he was the only person listed as purchaser or owner. [Id. at 506-16.] He also testified that the only lien on the property was from a company called Von Tobel Lumber, for materials for a different property Ross was working on. [Id. at 519-521.] Ross testified that his mother-in-law, Pam Koehn, gave him all the money to purchase the G Street property-some through a joint account and the remainder in cash. [Id. at 535-36.]

         But there are some holes in the record about where the money to buy the property came from. Ross and Koehn had a joint bank account for his remodeling business, but Koehn testified at trial that she only transferred $500 to Ross, one time, and that she had no mortgage on the property. [Id. at 561-62.] Neither Ross's nor O'Connor's counsel asked Koehn about the rest of the payment that she allegedly provided Ross. So that remains unknown. [See Id. at 557-63]. Furthermore, Koehn testified that she did not pay any back-taxes on the property when Ross deeded the property to her in April 2017 for nominal consideration. [Id. at 563, 396-97.] And that's basically the extent of the evidence regarding the transfer of the 408 G Street property introduced at trial.

         Trustee Bradley also testified at the trial. He testified that, in his opinion, Ross's initial omission of 408 G Street was not an “intentional deception or omission.” [Id. at 578.] In fact, trustee Bradley stated that accidental omissions occur in approximately “five to ten percent” of bankruptcy cases, and he thought that was the case here. [Id. at 577.] He based this on his decades of experience as a bankruptcy trustee and interactions with Ross. On cross-examination, Bradley noted that he used an appraisal to assist in determining the value of the 408 G Street property but did not visit the property himself. [Id. at 582-83.] He said that personally visiting properties subject to a bankruptcy proceeding is not typical if he has “other information that satisfies [him] as to the valuation of the property.” [Id. at 583.] Photographs of the property showing it in a relatively dilapidated condition were also introduced at trial as evidence of its value, or lack thereof. [Id. at 483-91.] When counsel asked Bradley if he knew what an “REO” (real estate owned[2]) property was-the comparable properties on the appraisal were REOs-trustee Bradley testified that he did not know. [Id. at 582-83.]

         O'Connor's counsel attempted to call a witness-the Chief Deputy Assessor from the LaPorte County Assessor's Office-to discuss the valuation of 408 G Street. [Id. at 564-65.] Ross had testified earlier in the trial that he met with the LaPorte County Assessor's Office to reduce the tax assessment on the G Street property, though his memory of the meeting was sparse. [Id. at 521.] This meeting occurred on July 2, 2016, one month before Ross filed for bankruptcy. [Id.] O'Connor's attempt to call the deputy assessor as a witness was to fill in gaps in Ross's testimony. In addition, O'Connor's counsel wanted this testimony in order to rebut the idea that Ross's initial nondisclosure of the property was anything but innocent, the theory being that Ross had so recently taken an active role in the property that it was improbable he would accidentally forget to list it.

         The bankruptcy court didn't allow the deputy assessor to be called as a witness because she wasn't listed on the pretrial order. [Id. at 564-65.] But O'Connor's counsel did introduce the underlying evidence of the fact that Ross met with the LaPorte County Assessor's Office and had the tax assessment (and assessed value) of the property reduced shortly before filing his petition. One month before filing bankruptcy, Ross had the property value reduced to $38, 200 [id. at 522], nearly four times the value that Ross listed on his amended schedules three months later when he valued the property at $10, 000. [Id. at 98.]

         After trial, the bankruptcy court ruled that O'Connor failed to meet her burden of proof under Section 727(a) and dismissed her objection. [Id. at 280-91.] The court found that “[n]othing in the record presented by O'Connor leads the court to plausibly infer fraudulent intent by Ross or concealment of assets.” [Id. at 291.] The court pointed to “Ross's quick action to amend his schedules” as “discredit[ing] any assertion that he was trying to hide property.” [Id. at 288.] He continued, finding Ross to be credible witness and “a complete absence of fraud in his statements and unintentional omissions[.]” [Id. at 290.] The court also found trustee Bradley's testimony and conclusions credible, pointing to his “many years of experiences as a trustee.” [Id. at 287.] Put simply, the bankruptcy court expressed no concern that Ross was anything but “the honest but unfortunate debtor” that bankruptcy is designed to benefit.

         Yet there is something missing in the initial opinion of the bankruptcy judge. The April 2017 transfer of the 408 G Street property by Ross to his mother-in-law for no consideration went unremarked in the written opinions. O'Connor claims that the transfer - done ten months prior to trial and while the bankruptcy was still pending --was a significant event. O'Connor's counsel raised the transfer as part of the concealment at trial [id. at 560] and referenced it again in post-trail briefing. [Id. at 261.] Yet the bankruptcy judge didn't discuss the transfer whatsoever.

         And the saga doesn't end there. Two weeks after the bankruptcy court dismissed O'Connor's objection to discharge, she learned that 408 G Street was listed for sale on a realtor's website with an asking price of $114, 900. [Id. at 303-08.] It was listed with the same realtor that Ross used to purchase the home. O'Connor moved to set aside or amend the bankruptcy court's order. In her Motion for Relief under Fed.R.Civ.P. 60(b) and Motion to Alter or Amend Judgment under Fed.R.Civ.P. 59(e), O'Connor cited the listing as evidence of Ross's alleged intent to defraud and as “new evidence” justifying relief. [Id. at 296, ¶ 4.]

         The bankruptcy court denied both of O'Connor's motions, noting that “the relevant date for the valuation of [408 G Street] is the date Ross filed for [bankruptcy], July 2, 2016[, ]” and the “real estate listing from April 2018 is irrelevant” and not new evidence justifying relief under Rule 60(b). [Id. at 339.] The court reiterated its earlier findings that Ross's amendment of his asset schedule did not demonstrate fraudulent intent and trustee Bradley's conduct and testimony were credible. “The court found the credible testimony of Ross' experienced chapter 7 trustee convincing.” [Id. at 340.] Further, the court found no evidence to “support any inference of [fraudulent intent] by Ross[.]” [Id. at 341.] The court found “no basis” for O'Connor's arguments and dismissed her motions. [Id. at 346.] And once again, the bankruptcy court did not reference, and thus it seems did not take issue with, the fact that Ross transferred the property without consideration prior to his discharge from bankruptcy.

         O'Connor appeals these orders, asking me to overturn the bankruptcy court's denial of her Motion to Alter or Amend the Judgment and the denial of her Motion for Relief. She wants the bankruptcy court's discharge order reversed and the bankruptcy reopened, presumably so she can force an unwinding of the transfer of the 408 G Street property and sell it to satisfy Ross's debts.

         Legal Standard

         My review of a bankruptcy court's decision is generally a deferential one. The bankruptcy court's factual findings are upheld unless they are clearly erroneous-“in other words, with a serious thumb on the scale for the bankruptcy court.” U.S. Bank Nat. Ass'n ex rel. CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge, LLC, 138 S.Ct. 960, 966 (2018). Legal determinations are subject to de novo review. In re Dennis, 927 F.3d 1015, 1017 (7th Cir. 2019). “Under the clearly erroneous standard, if the bankruptcy court's factual findings are plausible in light of the record viewed in its entirety, a reviewing court may not reverse even if it would have weighed the evidence differently.” Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir. 2004) “This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because . . . it would have decided the case differently.” Anderson v. City of Bessemer City, N.C. , 470 U.S. 564, 573-74 (1985). “Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.” Id. (quoting United States v. Yellow Cab Co., 338 U.S. 338, 342 (1949) (internal quotation marks omitted)).

         Further, I must give the bankruptcy court's assessments of a witness's credibility great deference. Anderson, 470 U.S. at 575. “[O]nly the trial judge can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener's understanding of and belief in what is said.” Id. (citing Wainwright v. Sykes, 433 U.S. 72 (1977)). Unless I find that “[d]ocuments or objective evidence . . . contradict the witness'[s] story; or the story itself . . . [is] internally inconsistent or implausible on its face”, the bankruptcy court's findings based on a witness's credibility “can virtually never be clear error.” Id.

         A motion for relief under Fed.R.Civ.P. Rule 60(b), and a motion to alter or amend a judgment under Fed.R.Civ.P. Rule 59(e), achieve similar ends, but they are substantively different. Harrington v. City of Chicago, 433 F.3d 542, 46 (7th Cir. 2006). Despite their differences, denial of both motions is reviewed only for abuse of discretion. Gleason v. Jansen, 888 F.3d 847, 851-52 (7th Cir. 2009). “A finding based upon no reliable evidence whatever is a clear error of judgment and an abuse of discretion.” First Girl, Inc. v. Reg'l Manpower Adm'r of U.S. Dep't of Labor, 499 F.2d 122, 124 (7th Cir. 1974); Harrington, 433 F.3d at 550. (finding that there was a factual basis for the lower court's holding that circumstances surrounding a lawyer's personal life did not justify a relief from judgment under Rule 60(b)); see also Gonzalez v. Crosby, 545 U.S. 524, 540-45 ...

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