A debtor, who had a bachelor’s degree in finance and an MBA degree and had worked in the financial industry for almost a decade, filed for Chapter 7 bankruptcy in 2013. While working as a financial advisor, he personally invested in a real estate venture, in which he contributed $65,0000 for a 49% interest in the company. When the man filed his bankruptcy petition, he estimated his real estate investment interest was worth $2,500. He also claimed he did not have any non-exempt assets that were worth distributing.
In a recent opinion, a federal appeals court considered whether the debtor’s estimation that the value of his interest in the real estate investment company was 4% of his initial capital contribution warranted a denial of a discharge of his bankruptcy case. After the trustee learned that the man had an interest in the company, the trustee told the creditors there would likely be assets available for distribution. The creditors then filed an adversary complaint against the man, alleging that he intentionally misrepresented the value of his interest in the land by more than 95 percent. They requested a denial of discharge under the false oath provision of 11 U.S.C. § 727(a)(4).
The debtor explained that he arrived at this number by taking the largest annual distribution he received, which was $483, rounding it up to $500, and multiplying it by a capitalization rate of five. He acknowledged that the manager of the company would have been able to better evaluate the company’s worth, and he never asked him for his evaluation. The man’s most recent tax return showed an individual capital account in the venture of $67,555. The man claimed he did not make a false statement in valuing his interest, and his method of calculation was reasonable.