Appealing an order by itself won’t protect a debtor from revocation of discharge for failure to comply with the order.
In other words, debtors put their discharges at risk by refusing to comply with an order or failing to obtain a stay pending appeal, according to an April 30 opinion by Bankruptcy Judge Jim D. Pappas of Boise, Idaho.
A couple were real estate brokers in chapter 7. When a sale closed, the brokerage for which they worked paid their commission to the debtors’ closely held corporation, which paid the couples’ salaries and other business expenses.
Several sales were pending on the filing date. The couple contended that commissions paid after filing were for post-petition personal services rendered to their corporation and were therefore not estate property.
Judge Pappas disagreed and previously ruled that commissions paid after filing on pending sales were estate property. He ordered the debtors to turn over about $52,000.
Although the debtors had not complied with the turnover order, the trustee did not object to the debtors’ discharges, which were granted.
The debtors appealed the turnover order to the Bankruptcy Appellate Panel. The couple sought and were denied stays pending appeal by both the bankruptcy court and the BAP. The BAP later upheld the turnover order.
The couple appealed to the Ninth Circuit but did not seek a stay pending appeal. During the appeals, the trustee demanded several times that the debtors turn over the $52,000.
Although not mentioned in Judge Pappas’ opinion, the debtors’ appeal to the circuit court was dismissed in February for lack of jurisdiction because the couple did not file a timely notice of appeal.
About a month after the debtors appealed to the circuit court, the trustee initiated an adversary proceeding seeking to revoke the debtors’ discharges under Sections 727(d)(3) and 727(a)(6). The former provides that the court “shall revoke” a discharge if the debtor has “refused . . . to obey any lawful order of the court” under Section 727(a)(6).
To be a “lawful order,” Judge Pappas said that the court must have had personal and subject matter jurisdiction. Although the debtors argued that the turnover order was erroneous, he said the turnover order was “lawful.”
Because a discharge is integral to the bankruptcy process, Judge Pappas said that complaints under Section 727 are construed “strictly against a person objecting to discharge.” To invoke the court’s discretion, he said the court must find that the violation of the order was “so serious as to require a denial of discharge,” although the trustee need not prove that the debtors acted with “malicious intent.”
Judge Pappas said that the trustee had proven after a trial that the debtors had received and spent the $52,000. Indeed, he said their corporation’s bank account held $25,000 on the date of the turnover order and $36,000 the following month.
Consequently, Judge Pappas found that the trustee had “met his burden of showing that [the] debtors willfully or intentionally refused to obey the turnover order,” even though the debtors believed it was “improper.”
If the trustee were to be criticized, it was because “he was too patient with the debtors,” Judge Pappas said.
Judge Pappas revoked their discharges because, he said, the debtors “were aware of the turnover order” but “willfully and intentionally refused to obey it.” Denial of discharge, he said, was an “appropriate consequence.”