Revocation of a Bankruptcy Discharge

Palm Beach County Bar Association Bulletin, October 2008

The primary goal of filing an individual bankruptcy is to be granted a discharge. The discharge is essential to the “fresh start” which all debtors hope to obtain. Equally important to obtaining a bankruptcy discharge is not having it revoked. Pursuant to 11 U.S.C. § 727(d), the grounds for revocation of a discharge are if:

1. such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge;
2. the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee;
3. the debtor committed an act specified in subsection (a)(6) of this section; or
4. the debtor has failed to explain satisfactorily
   1. a material misstatement in an audit referred to in section 586(f) of title 28; or
   2. a failure to make available for inspection all necessary accounts, papers, documents, financial records, files, and all other papers, things, or property belonging to the debtor that are requested for an audit referred to in section 586(f) of title 28.

In a recent opinion, the Eleventh Circuit addressed and clarified revocation of discharge as it relates to sections 727(d)(3) and (a)(6)(A) which provide for revocation of a discharge where “the debtor has refused, in the case-(A) to obey any lawful order of the court, other than an order to respond to a material question or to testify. . . ” In re Matos, 2008 WL 596744 (11th Cir. 2008).

In re Matos, after the debtor received his Chapter 7 discharge, a creditor sought revocation based upon, among other grounds, the debtor’s failure to obey a court order directing production of documents within a certain deadline. The debtor produced 694 documents prior to the deadline, and another 5,300 after the deadline. On appeal, the Eleventh Circuit affirmed the Bankruptcy Court’s denial of the discharge revocation and found that late production of documents alone was insufficient to show the requisite willful or intentional refusal to obey an order, or that the order was ignored. The Eleventh Circuit Court also noted that the Bankruptcy Court’s analysis had fully comported with the relevant factors set out in In re Jones, 490 F.2d 452 (5th Cir. 1974). The factors to be considered in Jones are: (1) the detriment to the proceedings and the dignity of the court versus the potential harm to the debtor if discharge is denied; (2) whether the Debtor’s acts were willful, or was there a justifiable excuse; (3) whether there was injury to creditors; and (4) whether there was some way the debtor could make amends for the conduct.

In another revocation of discharge case, In re Eckert, 375 B.R. 474 (Bankr. N.D. Ill. 2007), the court joined the majority view that the plaintiffs, in a revocation of discharge action, had to establish that the debtor willfully and intentionally refused to obey a court order and not just failed to obey the order as a result of inadvertence, mistake or inability to comply.

As a result of the Eleventh Circuit’s recent opinion, trustees and creditors should be mindful of the high standard of proof required in order to successfully seek revocation of a debtor’s discharge pursuant to sections 727(d)(3) and (a)(6)(A) of the Bankruptcy Code.