Monik Chlad v. Mitchell Chapman

Case Type:
Case Status:
18-3056 (7th Circuit, May 02,2019) Not Published
The Seventh Circuit affirmed the Bankruptcy and District Court’s decisions. In so doing, it provided vital guidance as to how it defines “fraudulent intent” under 11 U.S.C. § 727(a)(4). It found that instead of requiring creditors to demonstrate that the debtor intended to obtain a pecuniary benefit through his/her omissions, evidence of “reckless disregard for the truth” is sufficient. Such finding can be based on the circumstances as a whole and a pattern of omissions engaged by the debtor.
Procedural context:
In 2013, Monik Chlad (“Chlad”) and her husband, Eric Vehovc (“Vehovc”), filed a joint Chapter 7 bankruptcy petition seeking a discharge of approximately $5 million of debt. After they filed financial disclosures, two creditors brought an adversary proceeding objecting to the discharge under 11 U.S.C. § 727(a)(4). The creditors alleged that the filings omitted information material to the debtors’ financial condition. The Bankruptcy Court conducted a bench trial, which resulted in a denial of the discharge due to findings that the debtors’ omissions reflected material false statements made with fraudulent intent. The District Court affirmed the decision, and only Chlad filed this appeal.
Chlad was the sole owner of Lockwood Development (“Lockwood”), a real estate company. Vehovc also worked for the company and together they both ran the company. The creditors alleged that Chlad and Vehovc failed to disclose the following: (a) the existence of real estate ownership, (b) a significant creditor, (c) bank accounts that Chlad jointly-owned with her mother and a Lockwood subcontractor, (d) a sizable shareholder loan, (e) certain forms of income (child support and rental), and (f) an alternate first name that Chlad used. At trial in the Bankruptcy Court, Chlad testified that the omissions in her filings were the results of innocent mistakes, and her attorney even testified that he was responsible for some of them. However, Chlad’s testimony also showed that she was actively involved and knowledgeable on her and Lockwood’s financial affairs, and that her attorney not only advised of the consequences of making misstatements in her submissions, but also went through the filings page-by-page with Chlad before the filing. Thus, the Bankruptcy Court determined that the omissions and misstatements were material and reflected false statements under oath that the debtors either knew or should have known to be false. As a result, the Bankruptcy Court concluded that the misstatements and omissions demonstrated a “reckless disregard for the truth,” which was sufficient to support a necessary finding of fraudulent intent to deny a discharge under 11 U.S.C. § 727(a)(4). In regards to 11 U.S.C. § 727(a)(4), the Seventh Circuit stated that it requires the party opposing discharge to prove that: (a) the debtor made a material false statement under oath, (b) the debtor knew the statement was false, and (c) the statement was made with fraudulent intent. The crux of the appeal lied in the requirements that the statements were made “knowingly” and “fraudulently.” The Seventh Circuit had no issue concluding that Chlad had knowledge of the omissions and misstatements. However, it did note that it did not read § 727(a)(4)’s knowledge requirement as the need to be aware of a legal obligation to disclose information. Instead, Chlad’s actual knowledge of the omitted information sufficed. As for the finding that Chlad acted “fraudulently,” the Seventh Circuit noted that the creditors did not need to demonstrate that she intended to gain a pecuniary benefit through her omissions. Instead, “evidence of reckless disregard for the truth is sufficient to prove fraudulent intent.” A finding of such “reckless disregard for the truth” can be based on the circumstances as a whole and a pattern of omissions engaged by the debtor. The Seventh Circuit affirmed this aspect of the Bankruptcy Court’s finding as the fact that “two permissible conclusions” regarding Chlad’s intent could be found, indicating that the Bankruptcy Court’s finding was not clearly erroneous. While her appeal essentially asked the Seventh Circuit to reweigh evidence in her favor, the Seventh Circuit refused to do so and disturb the factual findings of the Bankruptcy Court, as it found ample support in the evidence.
Wood, Scudder and St. Eve

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