774 F. 2d 1163 - In Re Millsaps Jr

Petitioner-debtor, Lonnie Millsaps, appeals from the bankruptcy and district courts' denial of debtor's proposed amendment to his schedule of exempt property. Sustaining the trustee's objection to the amendment, the bankruptcy and district court judges found that debtor had willfully concealed the impending receipt of a $2,338 tax refund from debtor's estate. Debtor contends that he bankruptcy and district court judges erred in refusing the exempt property schedule amendment to reflect the tax refund. Debtor also argues that the district court erred in applying the clearly erroneous standard of review to the bankruptcy court's finding of fact.

Amendment of a bankruptcy schedule involves traditional, core bankruptcy issues of fact, and the clearly erroneous standard is the proper test to measure the propriety of the judge's actions. Bankruptcy Rule 8013 imposes the clearly erroneous standard of review on findings of fact made by the bankruptcy court. The Rule provides:

On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy court's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.

This standard has been applied by the courts construing Rule 8013. See, e.g., In re Rosinski, 759 F.2d 539, 541 (6th Cir. 1985); In re Morrissey, 717 F.2d 100, 104 (3d Cir. 1983). The district court judge in this case explicitly and correctly stated that he applied the 'clearly erroneous' standard in upholding the bankruptcy court judge's denial to amend debtor's schedule of exempt assets.

Generally a voluntary petition schedule may be amended by the debtor as a matter of course at any time before the case is closed (Bankruptcy Rule 1009). If, however, there is evidence of a debtor's bad faith or fraudulent concealment of an asset, a court may refuse a debtor's proposed amendment. See Rosinski, 759 F.2d at 541; In re Doan, 672 F.2d 831, 833 (11th Cir. 1982); In re Andermahr, 30 Bankr. 532, 533 (Bankr. 9th Cir. 1983). The crucial question in this case becomes whether the debtor's nondisclosure of the tax refund was in bad faith or fraudulent.

After a careful examination of the bankruptcy court's transcript, we do not find the bankruptcy judge's denial of debtor's amendment to his schedule of exempt property to be clearly erroneous. It is particularly within the province of the finder of fact to determine credibility and whether there was intent to conceal the existence of a sizeable tax refund from his schedule of assets.

Debtor filed a voluntary petition for bankruptcy under chapter 7 on December 7, 1983. In his schedule of assets, debtor did not include any amount for his 1983 tax return, and in response to the question 'To what tax refunds (income or other), if any, are you or may you be entitled?,' debtor answered 'unknown.' Neither did debtor claim the 1983 tax refund in his original exemption election schedule, nor did he mention a refund at the January 24, 1984 meeting of creditors. While the debtor did not at either time have his tax return prepared, he could well have been found to know that he was due to receive one, and he failed to mention this to his own attorney.

On February 2 and 4, 1984, debtor had his income tax return prepared by H & R Block. He picked up the completed tax return on February 10, 1984. The completed return showed that debtor was entitled to the $2,338 refund. Even after he learned about the refund, debtor contacted no one about its existence until the Internal Revenue Service notified debtor that the refund would be mailed directly to the bankruptcy trustee. Debtor then attempted to amend his schedule of exempt assets to include the refund. The trustee objected to the proposed amendment on the ground that debtor had tried to conceal the tax refund asset from creditors and should not be permitted to amend his schedule to include this asset.

Debtor's excuses as to why he failed to notify anyone about the impending tax refund are subject to question. It is debtor's failure to disclose the probability of a refund, and not his failure to claim it as exempt, that resulted in the bankruptcy court's refusal to permit him to amend his schedule of exempt property. Second, debtor contends that since he is a blue collar worker with no legal or accounting background, he could not have anticipated a tax refund in December, 1983 when he filed for bankruptcy or in January, 1984 during the creditors' meeting. At the same time, however, this debtor had sufficient tax knowledge to argue that he knew the Internal Revenue Service generally offsets tax refunds against alleged tax deficiencies and knew it would be unreasonable to claim the refund as exempt when he owed outstanding tax deficiencies.

Debtor's credibility was also damaged because he gave incomplete and seemingly evasive answers on cross-examination about his assets, including the tax refund, but specifically remembered exacting details on direct examination about certain aspects of those same assets.

Millsaps did not disclose the refund's existence until the Internal Revenue Service notified him that the refund would be sent to the trustee and not to him. His credibility was fully at issue since he also did not even contact his attorney about it. Debtor's situation in the case at bar is readily distinguishable from a similar case, In re Doan, 672 F.2d 831 (11th Cir. 1982). In Doan, the debtors acknowledged the possibility of a tax refund in their bankruptcy petition and at the creditors' meeting. Finding no attempt to conceal assets, the Doan court permitted amendment to the schedule of assets. Unlike the debtors in Doan, the debtor in this case only disclosed the existence of the tax refund upon discovery that he personally would not receive it directly from I.R.S.

We emphasize that Bankruptcy Rule 8013 requires that 'due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.' Based on the record and deferring to the judge's determination of debtor's credibility, we, therefore, AFFIRM the bankruptcy judge's denial of the amendment and the district court's judgment.