“[A]n explanation by a bankrupt that he had acted upon advice of counsel who in turn was fully aware of all the relevant facts generally rebuts an inference of fraud.” In re Zizza, 875 B.R. 728, 732 (1st Cir.2017) (quoting In re Mascolo, 505 F.2d 274, 277 (1st Cir. 1974)). The court noted, however, that at the same time, even the advice of counsel is not a defense when it is transparently plain that the property should be scheduled. Id.
In re Johnson, 98 B.R. 359 (Bankr.N.D.Ill.1988) stands for the proposition that a debtor’s false schedules, which fail to mention the debtor’s interest in a business, warranted a denial of the debtor’s discharge, notwithstanding the attorney’s attempt to take the blame for the inaccuracies in the schedules by claiming an interoffice proofreading error. Johnson held that it was the debtor’s obligation to read his schedules, to make sure that they were as complete and accurate as possible, before signing them.
In In re Rosenzweig, 237 B.R. 453 (Bankr.N.D.Ill.1999), the debtor also asserted an advice of counsel defense to justify the omission of certain assets on his schedules. Citing to In re Breitling, 133 F. 146 (7th Cir.1904), the court noted that in order to succeed on an advice-of-counsel defense, it was required that the debtor must have fully stated the facts to his counsel, and his intent must be “innocent” with the belief that counsel had correctly advised the debtor. “It would thus appear under Breitling that if a Debtor has not fully disclosed the true facts to his counsel, he does not have an innocent intent.” Id. at 458. In Rosenzweig, the court denied the debtor’s discharge, determining that the debtor had not initially disclosed to his attorney the debt to his father, the second computer, or the tax refund, although he knew of their existence and for a time concealed them.
In In re Bostrom, 286 B.R. 352 (Ballkr.N.D.Ill.2002), the court also held that a debtor could not rely on the “advice of counsel” defense, “where the Debtors have declared under penalty of perjury that they have read the documents, and to the best of their knowledge, the documents were true and correct. Id. at 363. Similarly, in In re Bren, 303 B.R. 610 (8th Cir.BAP 2004), the court found that a debtor who falsely declared, under penalty of perjury, that he had read his statement of financial affairs and bankruptcy schedules and that the statement and schedules were accurate, when in fact he had not read these documents and relied on his attorney to complete and accurately prepare these extensive documents, had to be denied his discharge. The court noted that the documents contained numerous and extensive misstatements or omissions. Further, the debtor’s passivity and disregard for the seriousness of his oath established that he had acted with fraudulent intent, of the kind required by “false oath” discharge exception.
Robinson v. Worley, 849 F.3d 577 (4th Cir.2017) the debtor estimated the value of his interest in a real estate investment company at just 4% of his initial capital contribution. The bankruptcy court found after a bench trial that the debtor intentionally lowballed his valuation and accordingly denied his discharge under the false oath provision of §727(a)(4). As a defense, the debtor relied on an advice of counsel argument. The court noted that while “reliance on counsel generally absolves a debtor of fraudulent intent, the bankruptcy court must still consider whether the debtor acted in good faith.” Id. at 586. To do this the debtor had to establish that he provided the attorney with all of the necessary facts and documentation. Further, the court noted that advice of counsel was no defense when it should have been obvious to the debtor that his attorney was mistaken. Id.
We have little difficulty concluding that the bankruptcy court did not clearly err in rejecting Worley’s advice-of-counsel defense. Worley testified that he made a complete disclosure of his financial affairs, but there is no evidence that he discussed his $65,000 capital contribution or subsequent K–1 statements with his attorney. Given his conspicuous failure to seek the advice of knowledgeable financial professionals like Daniel Crapps, the bankruptcy court could have determined that any purported reliance on legal counsel was a ruse. And even if an attorney had advised Worley to apply the capitalization rate method and submit a $2,500 valuation, a sophisticated investor could not have relied on such patently inappropriate advice in good faith.
Id.
Matthew T. Gensburg
[email protected]