Concealing assets from the Bankruptcy Court rarely, if ever, turns out well for a debtor. In a recent First Circuit case, a debtor concealed proceeds from prepetition sale of his former marital home, claiming that all of the proceeds were paid to his former wife. Nevertheless, the debtor actually received nearly $27,000, which he used post-petition to pay off his credit card debt. Because the funds were no longer available to satisfy other creditors’ claims, the Bankruptcy Judge surcharged the debtors exempt property, and the First Circuit upheld the surcharge as a valid exercise of the Bankruptcy Court’s jurisdiction under § 105(a).
As all creditors and bankruptcy practitioners understand, a debtor has a statutory duty to disclose all property and assets under § 521 of the Bankruptcy Code. Many such assets are exempt from the reach of creditors as they attempt to collect their prepetition claims. Nevertheless, when a debtor breaches his duty under § 521, and such concealed assets are removed from the bankruptcy estate, the debtor “has perpetrated a fraud upon the court,” which the judge, trustees and general creditors did not take lightly.
In the case of the First Circuit, the debtor’s interest in a truck used in business was “the only significant property mentioned in the briefs that [the debtor] might use in making a fresh start in life, one of the bankruptcy scheme’s objectives for the benefit of an honest debtor.” The court held that the debtor should not be allowed to exempt his truck when such exemption would “consummate a fraud on creditors by giving the debtor a greater exemption in fact than the code entitles him to claim in law.”
The Supreme Court previously held that the bankruptcy court has a “broad authority…to take any action that is necessary or appropriate to prevent an abuse of process described in § 105(a) of the Code.” Although the First and Ninth Circuits have applied this broad authority to surcharge exempt assets in the case of a debtor’s violation of § 521, the Tenth Circuit held in a 2008 case that such remedies were not available to a bankruptcy court under the § 105(a).
It is incumbent upon creditors and their attorneys to work closely with the bankruptcy trustees, especially when there are indications that a debtor may have concealed assets. Although the First and Ninth Circuits’ position is not universal, when a debtor perpetrates a fraud upon the court, it is universally accepted that § 105(a) provides a range of remedies to the bankruptcy court.