Lowballing the value of an estate’s only significant, non-exempt asset can result in denial of discharge if the debtor is a financial professional, the Fourth Circuit held in affirming the bankruptcy court.
The debtor had an undergraduate degree in finance and an MBA. He worked 10 years at a brokerage, but ended up in chapter 7 when personal investments went sour.
His assets included a $65,000 minority investment in woodland and farmland that generated minimal income. The objective was to sell the property eventually for development.
The debtor filed his petition as a “no asset” case. In the schedules, he listed the minority investment as worth $2,500. To arrive at this value, he testified that he used the income capitalization method, multiplying his largest annual distribution, $500, by five.
For making a false oath or account, the bankruptcy court denied the debtor’s discharge under Section 727(a)(4), deciding that the asset was worth at least $13,200. The district court affirmed, as did the Fourth Circuit in a Feb. 28 opinion by Circuit Judge J. Harvie Wilkinson, III.
Judge Wilkinson rejected the debtor’s argument that undervaluation of a single asset is insufficient for denial of discharge. The circuit court found no “clear error” in the bankruptcy court’s decision that the debtor made a false oath because conclusions “often boil down to an assessment of a debtor’s credibility.”
The capitalization method, Judge Wilkinson said, can be proper in valuing income-producing property. Using an income-based valuation for property that has only incidental income “was bound to assign a paltry figure to the property,” Judge Wilkinson said.
There was abundant evidence that the value was considerably higher than $2,500. In addition to his $65,000 investment, the debtor’s K-1 showed his capital account at $67,555. Evidence also showed that he valued the investment without consulting his co-investors or the property manager, who were unable to arrive at a precise amount but testified that the value was higher than $2,500.
Judge Wilkinson said that the bankruptcy judge “reasonably inferred fraudulent intent from [the debtor’s] background, course of conduct, and absence of credibility.” Filing the petition as a “no asset” case suggested “an effort to persuade the trustee and creditors to abandon the property.”
Since the investment was the debtor’s “only significant, non-exempt asset,” Judge Wilkinson said that “lowballing” the value “sent a message” to the trustee “that there was no reason to conduct any further investigation.”
Judge Wilkinson explained that the “advice of counsel” defense did not apply because there was no evidence that the debtor told his lawyer about his $65,000 investment or his $67,555 capital account.