In Travelers Casualty and Surety Company of America v. Steven Brice and Erin Michele Wibracht, (Case No. 18-05203), Watt Tieder attorneys obtained a significant decision in favor of Travelers Casualty and Surety Company of America (“Travelers”), in the U.S. Bankruptcy Court for the Western District of Texas (San Antonio Division). The court revoked the discharge of a debtor whom had filed jointly with her spouse rejecting the debtor’s defense that she was an innocent spouse in the numerous false statements and fraudulent transfers made before and during the bankruptcy case.
It is commonplace for two spouses to jointly file a bankruptcy petition. By the joint filing, each spouse expects to receive a discharge, allowing both members of the couple to exit bankruptcy with debt forgiveness and a clean slate. Although the joint bankruptcy filing is given one case number, in actuality, the filing is two bankruptcy cases, one for each spouse. Travelers argued, correctly, that each spouse has independent duties to meet all of his or her obligations under the Bankruptcy Code that are required in order to be eligible to receive a discharge. Those independent duties include, among other things, ensuring that all the information contained in the debtor’s bankruptcy schedules is accurate and complete.
The Wibrachts filed a joint chapter 7 case as husband and wife with the chief purpose of skirting their obligations under a general agreement of indemnity and discharging approximately $18,500,000 million in debt, inclusive of approximately $12,500,000 owed to Travelers. Travelers moved to revoke the Wibrachts discharge under several grounds set forth in section 727 of the Bankruptcy Code, including among other things, failure to produce records, false statements on their bankruptcy schedules relating to their personal and business affairs, and pre- and post-petition fraudulent transfers.
In ruling in Travelers’s favor and denying discharge, the court noted:
Discharge obligations are some of the most difficult cases we have because the stakes are high, and there’s a lot of emotion. The Debtors in this case, obviously, filed Chapter 7 in order to obtain a discharge. And it’s a very important thing to people that are filing Chapter 7.
But there’s no constitutional right to a discharge. It’s a privilege, not a right. And in order to receive a discharge, a debtor must abide by the rules set out in the bankruptcy code and the bankruptcy rules, must be completely truthful, and be completely cooperative with the trustee and the creditors in the bankruptcy case.
(April 5, 2019 Decision at 4).
The day before the trial, Mr. Wibracht, in the face of substantial evidence that his discharge should be denied, waived his discharge. In doing so, Mr. Wibracht left his wife to face trial alone. Successful denial of Mrs. Wibracht’s discharge, however, was necessary to prevent her and her husband from using her discharge to shield the Wibrachts’ future assets from Travelers’s collection of the approximately $12.5 million owed to it by shifting the assets to her name.
As Chief Judge King framed the issue, “[i]f I had to sum it up, I would say that Mrs. Wibracht is claiming innocent spouse as a defense. And this is a doctrine that sometimes can be used as a defense to IRS tax claims against a spouse, where one spouse owns and controls a business, and the other spouse, the so-called innocent spouse, has no knowledge of or involvement in the business. But in a Chapter 7 joint bankruptcy case, that doctrine doesn’t fit.” Id. at 5. In short, Mrs. Wibracht’s defense was that she knew nothing about her husband’s business, their family expenses, their family debts, and other basic financial information.
In rejecting the defense, Chief Judge King explained that “[a] debtor in Chapter 7 or any other chapter of the bankruptcy code is not allowed to claim ignorance of her assets and debts. She must disclose and diligently investigate her assets, liabilities, transfers, and other relevant transactions both pre- and post-petition. Merely relying blindly on the other spouse does not satisfy the requirement of disclosure under penalty of perjury.” Id. at 6.
There appear to be very few bankruptcy cases addressing the innocent spouse defense in the context of the spouse’s behavior during bankruptcy. Accordingly, the Wibracht decision is useful for future cases in which two spouses jointly file a bankruptcy case in the hopes of discharging their liabilities. The bankruptcy court’s rejection of the innocent spouse defense can be used in the scenario in which one spouse has day-to-day knowledge and responsibility for control over the bonded principal and the other spouse has little to no involvement in the business. In such cases, the spouse with little to no involvement in the business and glib knowledge of his or her duties as an indemnitor argues ignorance (or innocence as Chief Judge King describes it) in the hope of holding on to a bankruptcy discharge. Chief Judge King recognized that such cases are emotional. However, a bankruptcy discharge is a privilege, not a right, for the honest, but unfortunate debtor. Thus, to receive a discharge, each debtor has an independent obligation – separate and apart from their spouse – to abide by the requirements of the Bankruptcy Code and the Bankruptcy Rules, to be completely truthful, and to cooperate with the trustee and the debtor’s creditors. In this case, the bankruptcy court reaffirmed these fundamental bankruptcy principles and rejected the “innocent spouse” defense based on Ms. Wibracht’s own, independent failures to satisfy her obligations as a debtor.