Debtor’s Failure to Explain Loss of Assets Leads to Denial of Discharge

Debtor’s Failure to Explain Loss of Assets Leads to Denial of Discharge

Two debtors were denied a discharge under Section 727(a)(5) of the Bankruptcy Code after failing to satisfactorily explain the loss of $446,897.00 during the two years preceding bankruptcy.

In Crilly and Crilly v. Jacks and Jacks, the U.S. Bankruptcy Court for the Western District of Oklahoma found that the debtors’ “failure to produce a single piece of documentary evidence corroborating the expenditure of funds to support their testimony” required a denial of discharge, particularly since even their testimony did not account for more than $200,000 in loss of assets.

Of interest to practitioners in the First Circuit, in the absence of controlling precedent from the Tenth Circuit, the bankruptcy court cited Aoki v. Atto Corp. (In re Aoki), 323 B.R. 803, 817 (1st Cir. BAP 2005), among other cases, for the proposition that, under Section 727(a)(5), a debtor’s explanation must:

• be supported by some corroboration; and
• be sufficient to eliminate any speculation as to what happened to

the assets. See also In re Simmons, 810 F.3d 852, 860 (1st Cir. 2016) (“The debtor's explanation “must be supported by at least some corroboration,” and it “must be sufficient to eliminate the need for any speculation as to what happened to all of the assets.” Id. Something more than vague allusions is required.”).