                                                                          FILED
                                                                            JUN 4 2019
                           NOT FOR PUBLICATION
                                                                      SUSAN M. SPRAUL, CLERK
                                                                         U.S. BKCY. APP. PANEL
                                                                         OF THE NINTH CIRCUIT



             UNITED STATES BANKRUPTCY APPELLATE PANEL
                       OF THE NINTH CIRCUIT

In re:                                               BAP No. SC-18-1269-KuFB
                                                     BAP No. SC-18-1278-KuFB
JORDON WALLACE SCHULTZ,                              (cross-appeals)

              Debtor.                                Bk. No. 17-01568-LA7

JORDON WALLACE SCHULTZ,                              Adv. No. 17-90126-LA

              Appellant/Cross-Appellee,
v.                                                    MEMORANDUM*

KEYWORD ROCKSTAR, INC.; JON
SHUGART; LUKE SAMPLE,

              Appellees/Cross-Appellants.

                     Argued and Submitted on May 23, 2019
                            at Pasadena, California

                                 Filed – June 4, 2019

               Appeal from the United States Bankruptcy Court
                        Southern District of California



         *
        This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
          Honorable Louise DeCarl Adler, Bankruptcy Judge, Presiding

Appearances:        J. Edward Switzer, Jr. argued for appellant/cross-appellee
                    Jordon Wallace Schultz; Patrick N. Downes of Loeb &
                    Loeb LLP argued for appellees/cross-appellants Keyword
                    Rockstar, Inc., Jon Shugart, and Luke Sample.



Before: KURTZ, FARIS, and BRAND, Bankruptcy Judges.

      Keyword Rockstar, Inc., Jon Shugart and Luke Sample (collectively,

Plaintiffs) filed an adversary complaint against debtor, Jordon Wallace

Schultz, objecting to his discharge under § 727(a)(3), (4), (5), and (7).1 After

a trial, the bankruptcy court found in favor of Mr. Schultz on the

§ 727(a)(3), (4), and (5) claims. However, the court denied his discharge

under § 727(a)(7), finding that Mr. Schultz committed a false oath under

§ 727(a)(4)(A) by undervaluing the customer and lead lists on the schedules

of his solely-owned company, chapter 7 debtor JWS Publishing, Inc. (JWS).

Mr. Schultz appeals from the bankruptcy court's judgment on the

§ 727(a)(7) claim. Plaintiffs cross-appeal on the § 727(a)(5) claim.

      For the reasons explained below, we REVERSE the court's ruling on

the § 727(a)(7) claim and AFFIRM on the § 727(a)(5) claim.




      1
       Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules
of Bankruptcy Procedure.

                                          2
                                     FACTS

A.    Prepetition Events2

      Mr. Schultz, individually and later through JWS, developed

advertising webinars and educational videos marketed through the

internet, and conducted personal coaching of his customers.

Seeking to expand his customer base, Mr. Schultz contacted Mr. Shugart to

participate in a joint venture arrangement through JWS, where Mr. Shugart

would coordinate and manage the marketing of JWS’s products. Their oral

agreement and business dealings were facilitated through Skype and text

messaging.3 They agreed to split the profits 50-50 and create a mutually

accessible customer and sales database containing email addresses.

      Initially, the joint efforts were highly successful. However, sometime

in February 2015, Mr. Schultz began having bouts of strange behavior

including paranoia, forgetfulness, and deep depression. After seeking

medical advice and testing, he was diagnosed with bi-polar disorder,

post-traumatic stress disorder (PTSD), and dissociative disorder.

Mr. Schultz obtained some relief from medication and by participating in

on-going psychiatric therapy. As Mr. Schultz's mental condition became



      2
      Most of the background facts are taken from the bankruptcy court's
memorandum decision.
      3
       Mr. Shugart and Mr. Sample are located in Georgia. Keyword Rockstar, Inc.
was formed and solely owned by Mr. Shugart.

                                         3
worse, the partnership's amicability began to suffer.

      Sometime in May 2015, Mr. Shugart sold copies of JWS's videos to

parties on the customer list without informing Mr. Schultz. Mr. Shugart

claimed that he was testing the strength of the customer list. When

Mr. Schultz discovered this "test," he reacted as though he had been

betrayed and encouraged those who purchased during Mr. Shugart's test to

request refunds or reverse purchases through the merchant accounts that

financed those purchases.

      In a June 2015 face-to-face meeting, Mr. Schultz told Mr. Shugart he

was overwhelmed by providing customer service to JWS’s customers,

creating products (webinars and videos), personally coaching some

customers, and doing all the travel necessary to facilitate these activities.

He asked Mr. Shugart to take on more customer support responsibilities so

that he could focus on preparing and presenting video coaching sessions.

Mr. Shugart offered to bring in Mr. Sample, his longtime associate, to take

over customer service and other duties. Mr. Schultz agreed, and they set a

schedule for periodic accounting to each other and agreed to split the

profits three ways.

      In July 2015, Mr. Schultz discovered information that he believed

showed that either Mr. Shugart or Mr. Sample were marketing copies of his

product without permission or accounting for sales. He also discovered

that Mr. Sample was not performing any customer services. Thereafter, the


                                       4
parties were unable to do a mutually agreeable accounting and the

partnership terminated.

      In August 2015, Plaintiffs filed a civil lawsuit against Mr. Schultz,

JWS, and others, in the United States District Court, Central District of

California (Case No. 2:15-cv-06167-DDP-RAO). Both sides in that lawsuit

alleged that the other must provide an accounting, and that the other side

breached the contract, violated fiduciary duties, and misappropriated trade

secrets. In addition, the ownership of JWS’s customer list was disputed.

The matter was stayed pending the outcome of this appeal and cross-

appeal.

      In addition to this litigation, Mr. Schultz became involved in a

protracted child custody lawsuit with the mother of his infant son. Then, in

October 2016, Mr. Schultz lost virtually everything he owned in a house

fire. Combined, these events pushed him into bankruptcy.

B.    Bankruptcy Events

      Mr. Schultz filed a chapter 7 petition on March 22, 2017. Seven days

later, he filed JWS’s chapter 7 petition. Based on comparable sales,

Mr. Schultz valued JWS’s customer list at $348.60 ($0.10 per lead) and its

lead list at $430.00 ($0.02 per lead) for a total of $778.60.

      Plaintiffs filed an adversary complaint objecting to Mr. Schultz’s

discharge under § 727(a)(3), (4)(A) and (B), (5), and (7), and § 523(a)(4) and




                                         5
(6).4 Plaintiffs alleged that in Mr. Schultz’s personal bankruptcy, he made

false oaths under § 727(a)(4)(A) by failing to disclose jewelry (a Rolex

watch) with a value of more than $100, and by failing to schedule his

Bitcoin account which contained about $30,000. In the § 727(a)(5) claim,

Plaintiffs alleged that had a net worth in excess of $4 million during the

later stages of the partnership but supposedly became insolvent in March

2017. Plaintiffs maintained that Mr. Schultz failed to satisfactorily explain

the loss of his net worth.

      Plaintiffs also alleged that Mr. Schultz had made a false oath under

§ 727(a)(4)(A) in JWS’s bankruptcy case by undervaluing its customer list.

According to Plaintiffs, the list generated millions in income. Using a

revenue-based valuation methodology, Plaintiffs alleged that the list was

worth a six or seven figure number. On this basis, Plaintiffs sought denial

of Mr. Schultz’s discharge under § 727(a)(7).

      1.     The Trial

      The bankruptcy court conducted a four-day trial on the § 727 claims.

Five witnesses testified: Mr. Shugart, Mr. Schultz, Benjamin Rucker

(Mr. Schultz’s accountant), Susanne Morgan (Mr. Schultz’s therapist), and

Joanna Morales (a paralegal in Mr. Switzer's office who assisted

Mr. Schultz with his bankruptcy petitions). Relevant trial testimony is


      4
        The bankruptcy court deferred ruling on the § 523 claims pending the outcome
on the § 727 claims.

                                          6
summarized below.

                   Summary of Mr. Shugart's Testimony

      Mr. Shugart, who had worked in the affiliate marketing space since

2008, testified about how sales are made through a webinar. He explained

that the webinar is about a one-hour sales presentation of a product and

customers are invited to participate by email. According to Mr. Shugart,

either the advertiser of the product or an affiliate would send out the email

invite. If a customer registered for the webinar, they were consenting to be

on the email list, and the sender would know what the consumer was

interested in. Mr. Shugart opined that knowing the purchase behavior of

the consumers on your list is always "really, really good." He also testified

that the customer list contained not only email addresses, but phone

numbers and "that kind of thing."

      Mr. Shugart then testified about the value of JWS’s customer list.

Mr. Shugart testified that he was aware of a list that recently sold for

$12,000. According to Mr. Shugart, this list was not as "curated" as the JWS

list because it did not generate as much income (his understanding was

that the list that sold for $12,000 generated $200,000 in sales). Mr. Shugart

explained that the JWS list was "curated," meaning that the people on the

list spent a lot of money to learn the information Mr. Schultz was selling.

Mr. Shugart testified that at least $4 to $5 million was sold to people on

JWS’s list. By using a revenue based methodology rather than the sales


                                       7
comparison used by Mr. Schultz in JWS’s schedules, Mr. Shugart opined

that JWS’s customer list was worth at least $1 million.

      During Mr. Shugart's testimony, his attorney played a video showing

Mr. Schultz at a webinar. There, Mr. Schultz told his customers that if they

followed his instructions, they, too, could create a customer email list (as he

had done) that generated over $4 million in gross sales, and was worth $1

million.

      At another point, when asked if he had any understanding as to how

Mr. Schultz could have come up with a valuation of $700, Mr. Shugart

testified that there were valuation methods on a per email basis, but he did

not know how Mr. Schultz came up with the $700 valuation.

      When asked about whether he was aware of any other sales that

would be comparable to a sale of JWS’s list, Mr. Shugart explained that

normally lists like JWS’s were not for sale because they are so curated and

are proven producers for sales. Therefore, most people do not sell the lists,

but give third parties a representative share, typically 50% when sales are

made. Mr. Shugart continued: "I can't give you a value on that [JWS] list,

because the value is so high. Would someone actually pay for it versus. . .

generally they just do a rep share on it and that way it's safer for both

parties. It is an expensive purchase if you were to pay what it's really

worth."

      On cross examination, Mr. Shugart testified further about the $12,000


                                       8
sale that he had previously mentioned. He said he knew the owner of the

email list that was sold for $12,000, but did not know the buyer.

Mr. Shugart also testified that the broker had told him the list sold for

$12,000 after he had turned down the sale. According to Mr. Shugart, the

seller of that list owned a company that sends emails.

      Other testimony showed that Mr. Shugart had told Mr. Schultz he

was fine with him controlling and having the say on the customers, "they

will be yours in terms of listening to you." When asked what he meant by

that, he replied that whatever emails he would send on behalf of

Mr. Schultz would come from Mr. Schultz’s voice. Further, Mr. Schultz’s

face was on the registration page of the webinars. Mr. Shugart thought that

in terms of listening to Mr. Schultz, consumers would be more responsive

if the emails were coming from his name or voice.

      Mr. Shugart also testified that Mr. Schultz "has very erratic behavior,"

which he saw in May 2015.

      On recross, Mr. Shugart testified that in his opinion the value of the

list was definitely closer to $1 million than $700. Last, Mr. Shugart testified

that he was not an expert on the sale of email lists, but more of a purchaser.

                   Summary of Mr. Schultz’s Testimony

      With respect to the § 727(a)(5) claim and alleged loss of assets,

Mr. Schultz testified as to line items on the tax returns for JWS. Most of his

answers were "I don't know" and "you'll have to talk to my accountant."


                                       9
      Mr. Schultz further testified that his assistant, Sarah, helped him

prepare his bankruptcy filing, and that at the time he was on many

medications. He answered many of the questions about his bankruptcy

filing and the disposition of assets with "I don't remember."

      Later, Mr. Schultz testified that he did not understand specific

transactions and hundreds of pages of accounting from two to three years

ago. He explained that he did not know the difference between a ledger

and an income statement and similar concepts. "So again, ask my

accountant."

      With respect to JWS’s schedules, when asked why he listed the

internet domain and website of JWS with a value of zero, he replied that he

had "abandoned it, no one bought it; and you can still buy it if you want to,

and it's sitting out there." When asked "you picked revenue-based"

(methodology for the valuation), Mr. Schultz replied: "I don't understand."

Later, he again said that he did not know why he picked a revenue-based

methodology for the domain. When asked about how he came up with the

value for the customer and lead lists using a comparable sale methodology,

Mr. Schultz testified that he asked his "buddy," a fellow affiliated marketer,

Precious Ngwu, about the value. The testimony further shows that in

Mr. Schultz’s previous deposition about how he came up with the value, he

had responded that he "did not know." Evidently, his discussion with

Mr. Ngwu came to him later, but he could not remember when he spoke to


                                      10
Mr. Ngwu.

      When shown the exhibit about his video when he valued his email

list at $1 million, Mr. Schultz replied that he thought the statement was true

"only to me" because he had a relationship with his customers to sell them

his products. Mr. Schultz also testified that Virticode, a company which he

partially owned, was using the list now and making money.

      Finally, Mr. Schultz testified that he did not have a clear memory of

filling out the JWS petition paperwork because he was "like a zombie" and

it "was a really bad time for [him]."

                    Summary of Mr. Rucker's Testimony

      Mr. Rucker, a former tax examiner and forensic accountant for the

IRS, kept Mr. Schultz’s books and had prepared his personal and business

tax returns since 2015. Mr. Rucker explained his customs and practices with

Mr. Schultz. Mr. Rucker had access to all of Mr. Schultz’s bank statements

so that he could enter each transaction into Quick Books and then reconcile

the accounts. During the entry process into Quick Books, if Mr. Rucker

could not tell from the context of the bank statement how to properly

classify a transaction, he would ask Mr. Schultz the purpose of the

transaction. Any transaction that did not have a known business purpose

was booked as a shareholder distribution and not a business transaction.

These distributions, which were personal items, did not show up on the

income statement and were not deducted on the tax return.


                                        11
      Mr. Rucker also explained that a $250,000 transaction on February 4,

2016, was a cashier's check and was for advertising. He testified that he

knew this since he would have called Mr. Schultz as part of the

classification process to ask him what the transaction was for and he would

have booked it based on Mr. Schultz’s explanation.

      Finally, Mr. Rucker testified that based on his experience as an

account and fraud investigator with the IRS, he was extremely confident

that Mr. Schultz’s books and tax returns were an accurate accounting of his

business transactions since January 2015 and, if he had any doubt, he

would not have Mr. Schultz as a client. He also opined that compared to

the other books and records that he reviewed in his tax practice and cases

he reviewed while with the IRS, it was rare that he saw records as

meticulous and detailed as Mr. Schultz’s and he felt that if Mr. Schultz

were ever audited, there would be no tax change involved.

                  Summary of Ms. Morgan's Testimony

      Ms. Morgan is a licensed marriage and family therapist who had

been treating Mr. Schultz since September 2016. She explained that

Mr. Schultz was formally diagnosed with bi-polar disorder, PTSD, and

dissociative disorder, and that she coordinated his care with his treating

psychiatrist.

      Ms. Morgan testified that his bi-polar disorder was severe and made

worse by stress. She further opined that in both the manic and depressive


                                     12
state, Mr. Schultz’s ability to think in a logical fashion and to attend to

details was impaired, albeit in different ways.

      Ms. Morgan explained that Mr. Schultz qualified for PTSD based on

multiple traumas beginning with being abused from a young age in his

family of origin, severe bullying as a young child in social settings, and

even abuse outside the home. According to Ms. Morgan, the trauma of the

house fire and all the events that followed also qualified Mr. Schultz for

PTSD. Ms. Morgan opined that for Mr. Schultz, in particular, it affected his

memory in that he did not have clear memories of the events themselves.

      Ms. Morgan also testified that Mr. Schultz’s dissociative disorder

complicated things in an "elaborate way." In a nutshell, due to his traumas,

Mr. Schultz had distinct differences as to which part of him was in charge

and running the show. She testified that Mr. Schultz exhibited eight

different personalities.

      Ms. Morgan further explained that Mr. Schultz had difficulty filling

out forms. It was difficult for him to get through the standard intake forms

at her office and, therefore, he needed help from another therapist. Even

then, she opined, it was unclear if they were correct. She testified that

Mr. Schultz fills out a mood survey every time he has an appointment with

her and, sometimes, it looks as though it was filled out by a child. She also

testified that he does not always connect the dots, and although she could

not speak to every decision, Mr. Schultz had difficulty with concentrating


                                       13
and cognition, and thinking logically.

      She also explained that Mr. Schultz’s logic was severely impaired

when he had taken some of his medications. One medication prohibits

driving and another medication impairs cognition. She testified that his

medications have been adjusted frequently throughout his care.

                   Summary of Ms. Morales' Testimony

      Ms. Morales, Mr. Switzer's legal assistant, testified that on a scale of

1 to 10, Mr. Schultz’s bankruptcy filings were a 10 with respect to difficulty

and accuracy. According to Ms. Morales, this was due to the voluminous

information and Mr. Schultz’s state of mind. She further explained that

Mr. Schultz had lost many of his papers in the fire. Ms. Morales testified

that the numerous amendments made to the schedules were due to

mistakes and Mr. Schultz’s forgetfulness. Ms. Morales also opined that

Mr. Schultz was confused a lot and that his assistant, Sarah, could keep

Mr. Schultz on schedule, but he definitely needed help.

C.    Summary of the Bankruptcy Court's Findings

      1.    Section 727(a)(5)

      On this claim, the bankruptcy court found that either Plaintiffs had

failed to carry their burden, or that Mr. Schultz had offered credible

evidence and explanation. The court noted that the Plaintiffs took issue

with Mr. Schultz’s ability to explain a number of entries in, for example, the

Quick Books for 2016, a document that is some 194 pages in length with 33


                                       14
lines of entries on each page and over 6,402 entries. The court found that it

was true that Mr. Schultz could not explain some of the withdrawal entries.

However Mr. Schultz testified that he left a lot of the categorization to his

accountant. The court observed that Mr. Rucker corroborated Mr. Schultz’s

testimony, explaining how he sorted various deposits and withdrawals

from JWS’s accounts. The court concluded that there was nothing

unsatisfactory in Mr. Rucker's explanation.

      2.    Section 727(a)(4)(A) via § 727(a)(7)

      The bankruptcy court found that Mr. Schultz grossly undervalued

JWS’s customer list which constituted a false oath. In reaching this

conclusion, the court found that Mr. Schultz’s testimony for the low value

was not credible. Although Mr. Schultz testified that he asked his "buddy,"

a fellow affiliated marketer, Mr. Ngwu, about the value, the court observed

that there was no information on whether Mr. Ngwu was qualified to

opine on value.

      Further, although the bankruptcy court had found that the false oaths

in Mr. Schultz’s personal bankruptcy schedules (the omission of the Rolex

watch and the Bitcoin account) were a result of his mental disabilities (e.g.

forgetfulness, lack of focus, inability to connect the dots), the court decided

that Mr. Schultz deliberately placed a low value on the customer list,

purportedly in consultation with his friend. The court decided that

Mr. Schultz’s conduct in JWS’s bankruptcy case was the result of an


                                       15
intentional act and differentiated its findings as to the false oaths in his

personal bankruptcy based on "a commission rather than an omission." The

court noted that Mr. Schultz did not claim the valuation of the list was the

result of a mistake or inadvertence.

      The bankruptcy court also considered Mr. Schultz’s previous claim in

the webinar that his list was worth $1 million. According to the court,

Mr. Schultz could have chosen the $1 million valuation but, instead, he

chose the $778.60 value from Mr. Ngwu. The court noted that he did not

choose a mid-range value, nor did he state the value was unknown.

According to the bankruptcy court, it was unreasonable for Mr. Schultz to

have chosen the lowest valuation, given that he had touted the list was

worth $1 million.

      In its findings on intent, the bankruptcy court also relied on

Mr. Schultz’s sophistication. The court found that Mr. Schultz was "well-

educated, experienced and [a] creative participant in the internet marketing

field." The court concluded: "He had to have known the list had far more

value than he scheduled."

      As further evidence of value, the court observed that Mr. Schultz was

currently using the customer list to market products to potential customers

in his new business and was making money.

      Finally, the court agreed with Mr. Shugart's testimony that a

customer list containing contact information is not virtually valueless. The


                                       16
court explained that although Mr. Shugart hesitated to put an exact value

on Mr. Schultz’s list, he was aware of a "poorly-curated" list that had sold

recently for $12,000.

       In the end, the bankruptcy court found that Mr. Schultz intentionally

undervalued the list to cause the chapter 7 trustee, who had no

independent knowledge of the potential value of the list, to abandon it.5

The court concluded that Plaintiffs carried their burden of establishing that

Mr. Schultz made a false oath under § 727(a)(4)(A) in connection with

JWS’s bankruptcy case and denied his discharge on that basis.

       The court entered judgment in favor of Mr. Schultz on all claims,

except the § 727(a)(7) claim, which was based on a false oath in JWS’s

schedules.6 Mr. Schultz filed a timely appeal from the judgment denying

his discharge under § 727(a)(7). Plaintiffs filed a timely cross-appeal,

challenging the court's ruling in favor of Mr. Schultz on the § 727(a)(5)

claim.




       5
          The chapter 7 trustee filed her notice of abandonment over a month after JWS
filed its petition. According to the notice, the trustee abandoned the customer and lead
lists on the grounds that (1) the ownership of the lists was disputed in the on-going
litigation between Plaintiffs and Mr. Schultz and (2) the lists contained confidential and
proprietary information.
       6
        Since the court denied Mr. Schultz his discharge under § 727(a)(4)(A) via
§ 727(a)(7), the court dismissed the § 523 claims without prejudice in the event its
judgment was reversed and the discharge restored.

                                            17
                               JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(J). We have jurisdiction under 28 U.S.C. § 158.

                                    ISSUES

      Did the bankruptcy court err by denying Mr. Schultz a discharge

under § 727(a)(4)(A) via § 727(a)(7) on the basis that he knowingly and

fraudulently made a false oath in JWS’s bankruptcy schedules by

undervaluing the customer and lead lists?

      Did the bankruptcy court err when it found that Plaintiffs had not

met their burden of proof under § 727(a)(5) and that Mr. Schultz provided a

satisfactory explanation about any loss of assets ?

                         STANDARDS OF REVIEW

      In objection to discharge appeals: "(1) the [bankruptcy] court's

determinations of the historical facts are reviewed for clear error; (2) the

selection of the applicable legal rules under § 727 is reviewed de novo; and

(3) the application of the facts to those rules requiring the exercise of

judgments about values animating the rules is reviewed de novo." Retz v.

Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010) (quoting Searles v.

Riley (In re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004) aff'd, 212 F. App’x

589 (9th Cir. 2006)).

      Under § 727(a)(4)(A), whether a debtor made a false oath, whether

the false statements were material, and whether the debtor had the


                                        18
requisite fraudulent intent are all questions of fact reviewed under the

clearly erroneous standard. Id. at 1197. Whether a debtor has satisfactorily

explained a loss of assets under § 727(a)(5) is also a question of fact that we

review for clear error. Id. at 1205.

      A factual determination is clearly erroneous if the trial judge's

interpretation of the facts is "illogical, implausible, or without support in

the record.” United States v. Hinkson, 585 F.3d 1247, 1261–62 & n.21 (9th Cir.

2009) (en banc).

      There are other basic tenets that guide us in application of the clearly

erroneous standard of review. A factual determination is clearly erroneous

if the appellate court, after reviewing the record, has a definite and firm

conviction that a mistake has been committed. Anderson v. Bessemer City,

470 U.S. 564, 573 (1985). Where two permissible views of the evidence exist,

the factfinder's choice between them cannot be clearly erroneous. Id. at 574.

In addition, our role in this appeal is not to reweigh the evidence presented

to the bankruptcy court and we give due regard to the trial court's

opportunity to judge the witnesses' credibility. Id. While we give great

deference to credibility determinations, they are still subject to our review.

We may find clear error if the witness' story is so internally inconsistent or

implausible on its face that a reasonable factfinder would not credit it. Id. at

575. We also give deference to inferences drawn by the trial court. Beech

Aircraft Corp. v. United States, 51 F.3d 834, 838 (9th Cir. 1995).


                                        19
                                 DISCUSSION

A.    General Considerations

      The party objecting to discharge bears the burden of proof, which

under § 727 is a preponderance of the evidence. Rule 4005; In re Retz, 606

F.3d at 1196. "The burden of showing something by a 'preponderance of the

evidence,' . . . 'simply requires the trier of fact to believe that the existence

of a fact is more probable than its nonexistence before [he] may find in

favor of the party who has the burden to persuade the [judge] of the fact's

existence.'" Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension

Trust for So. Cal., 508 U.S. 602, 622 (1993) (citations omitted). "Before any

such burden can be satisfied in the first instance, the factfinder must

evaluate the raw evidence, finding it to be sufficiently reliable and

sufficiently probative to prove the truth of the asserted proposition with

the requisite degree of certainty." Id.

      When considering this standard of proof, we are guided by certain

general principles governing denial of discharge claims. To effectuate the

fresh start policy, a claim for denial of a discharge under § 727 is construed

liberally in favor of the discharge and strictly against a person objecting to

the discharge. First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1342

(9th Cir. 1986). However, the bankruptcy discharge and its opportunity for

a fresh start is limited to the "honest but unfortunate" debtor. Grogan v.

Garner, 498 U.S. 279, 286–87 (1991).


                                          20
B.    The bankruptcy court erred in denying Mr. Schultz’s discharge
      under § 727(a)(4)(A) via § 727(a)(7).

      Section 727 states in relevant part:

      (a) The court shall grant the debtor a discharge, unless—
      ....
            (4) the debtor knowingly and fraudulently, in or in
            connection with the case–
                   (A) made a false oath or account;
            ....
            (7) the debtor has committed any act specified in
            paragraph . . . , (4), . . . of this subsection, on or
            within one year before the date of the filing of the
            petition, or during the case, in connection with
            another case, under this title or under the
            Bankruptcy Act, concerning an insider . . . .

      A plaintiff bringing a claim under § 727(a)(4)(A) must prove that:

"(1) the debtor made a false oath in connection with the case; (2) the oath

related to a material fact; (3) the oath was made knowingly; and (4) the

oath was made fraudulently." In re Retz, 606 F.3d at 1197 (quoting Roberts v.

Erhard (In re Roberts), 331 B.R. 876, 882 (9th Cir. BAP 2005)). "To establish a

§ 727(a)(7) claim based on the same type of conduct, the same elements

logically are required, albeit the 'false oath' must be made in another

bankruptcy case."7 Trainor v. Evans (In re Evans), BAP No. CC-16-1356-


      7
         There is no dispute that Mr. Schultz was an "insider" of JWS and that he caused
JWS to value the customer list at $348.60 and the leads list at $430.00, for a total of
$778.60.

                                           21
KuFTa, 2017 WL 3429023, at *4 (9th Cir. BAP Aug. 9, 2017).

      To meet their burden of proof, Plaintiffs must first show that

Mr. Schultz made a false statement in connection with JWS’s bankruptcy

case. The undervaluation of an asset on the schedules or statement of

financial affairs can constitute a false oath. Weiner v. Perry, Settles & Lawson,

Inc. (In re Weiner), 208 B.R. 69, 71–72 (9th Cir. BAP 1997) (denying discharge

on the basis of undervalued jewelry), rev'd on other grounds, 161 F.3d 1216

(9th Cir. 1998).

      The bankruptcy court considered several pieces of evidence when

determining that the value of JWS’s customer list was greater than $700.

First, the court emphasized Mr. Schultz’s previous claim in the webinar

that the list was worth $1 million. Indeed, Plaintiffs' counsel waived the

trial exhibit on the webinar like a flag at oral argument before the Panel.

However, the court's reliance on this evidence for its determination of

"undervaluation" for purposes of a false oath is problematic. Mr. Schultz’s

opinion about the $1 million value was made at a different time and in a

different context. At the webinar where he made this claim, he was selling

a product, which included helping his customers build a profitable

customer email list. In this context, it was an estimate of how much he

could earn from his own list over time because of his relationship with his

list customers. Placed in context, if the customer list were offered for sale

by the chapter 7 trustee to a third party, it is not obvious from the record


                                       22
what value it would have without Mr. Schultz’s involvement.8

Mr. Schultz’s opinion of value at the webinar is not plausible evidence of

the list's value in the hands of the chapter 7 trustee.

       Next, the bankruptcy court agreed with Mr. Shugart's testimony that

a customer list containing contact information is not virtually valueless.

The court considered Mr. Shugart's testimony about the "poorly curated"

list that had sold for $12,000 as an indicator of value for JWS’s customer

list. However, Mr. Shugart offered few, if any, details about this sale: he

had turned down the offer to buy the list, the list generated about $200,000

in sales, and he "heard" that the list was sold, although he did not know

who had bought it.9 Compared to this list, Mr. Shugart opined that JWS’s

customer list was worth $1 million or had a "high value" because it

generated between $4 and $5 million in sales.

       Plainly, the $12,000 sale was not a comparable sale. Indeed,

Mr. Shugart testified that he was unaware of any comparable sales.

According to Mr. Shugart, purchasers do not buy a list such as JWS’s due to

the risk of putting up significant cash for a list that may not return the



       8
        Although Mr. Schultz continues to use the list after it was abandoned by the
chapter 7 trustee, we are similarly unable to tell from this record what value the list
would have without his involvement.
       9
        This testimony, strictly speaking, was "hearsay" within the meaning of Fed. R.
Evid. 801, although Mr. Schultz’s attorney did not object to its admission on this or any
other grounds.

                                            23
investment, especially when a 50-50 profit sharing arrangement is

available. Mr. Shugart does not explain the risks associated with

purchasing an email list and it is not apparent that he applied any discount

to the value he assigned Mr. Schultz’s customer list considering its

illiquidity.

      In the end, Mr. Shugart's testimony about the value of JWS’s

customer list was conclusory, implausible, and inconsistent. There were no

comparable sales, he was unaware of any lists such as JWS’s for sale, and

his testimony was that purchasers do not buy a customer list such as JWS’s

for $1 million because the risk may be greater than the return on

investment. In other words, there is little, if any, market for these lists due

to risks that he did not fully explain. Furthermore, the chapter 7 trustee's

reasons for abandonment — the on going litigation over ownership of the

list and the personal and confidential nature of the content of the list —

were neither mentioned nor considered in the valuation testimony. The

record also shows that Plaintiffs did not attempt to purchase the list from

the chapter 7 trustee prior to abandonment, despite their litigation and

contention of high value.

      In sum, the record contains no competent or plausible evidence that

JWS’s customer list was worth more in the hands of the chapter 7 trustee

than the value scheduled by Mr. Schultz on JWS’s schedules. Since we

liberally construe a claim for denial of a discharge under § 727 in favor of


                                       24
the discharge and strictly against a person objecting to the discharge, we

are left with a definite and firm conviction that a mistake has been

committed. Anderson, 470 U.S. at 573. Since Plaintiffs failed to prove a false

oath, the burden of proof never shifted to Mr. Schultz to show that his

valuation was "more likely than not" correct.

      Furthermore, on this record, even if there was a false oath (which was

not proven), we conclude that the bankruptcy court's finding that

Mr. Schultz knowingly and fraudulently undervalued JWS’s customer list

was clearly erroneous. In connection with the § 727(a)(4)(A) claim in

Mr. Schultz’s personal bankruptcy, the bankruptcy court found that

Mr. Schultz did not knowingly and fraudulently omit the Rolex watch and

Bitcoin account from his schedules due to his mental disabilities. But based

upon the same record, the court found that Mr. Schultz’s undervaluation of

the customer list was knowing and fraudulent. Although the court

explained its latter decision was based on Mr. Schultz’s commission versus

an omission, there is no evidence in the record that allows us to reconcile

the bankruptcy court's inconsistent findings.

      The record shows that Mr. Schultz’s personal bankruptcy and that of

JWS were filed within a week of each other. There is no evidence that

shows Mr. Schultz had a different state of mind when he filed JWS’s

petition or that he was acting with any greater clarity at the time he valued

JWS’s customer list. Rather, there is ample undisputed evidence of


                                      25
Mr. Schultz’s mental disorders in the record and their impact on his

memory and day-to-day functioning. The record shows that he had trouble

filling out simple forms. His personal bankruptcy petition and that of JWS

were complex. He had trouble with remembering — a significant portion of

answers during trial was that he did not remember. The record also shows

that he relied heavily on other people to help him — Mr. Rucker, his

accountant for his books; Sarah, his assistant for help with his filing and

that of JWS; Ms. Morales for help with his bankruptcy filings; and

ultimately his friend Mr. Ngwu for help with valuing his customer and

lead lists. These facts are consistent with the testimony of Mr. Schultz,

Ms. Morales, and Ms. Morgan.

      Moreover, Mr. Schultz’s undisputed testimony was that he initially

had no memory of valuing the customer and lead lists. Only later did he

remember contacting Mr. Ngwu. Even then, he did not remember when or

any of the details, but his testimony showed that he relied on Mr. Ngwu's

opinion of the $0.10 per-email value. While we do not know whether

Mr. Ngwu's opinion was correct or incorrect based on the evidence in this

record, generally, "[a] false statement resulting from ignorance or

carelessness does not rise to the level of 'knowing and fraudulent.'" In re

Roberts, 331 B.R. at 884.

      In sum, the bankruptcy court's finding of a knowing and fraudulent

intent was implausible and clearly erroneous.


                                      26
C.    The bankruptcy court did not err in finding that Plaintiffs failed to
      meet their burden of proof for denial of discharge under § 727(a)(5).

      Section 727(a)(5) provides the court shall grant the debtor a

discharge, unless—

      (5) the debtor has failed to explain satisfactorily, before
      determination of denial of discharge under this paragraph, any
      loss of assets or deficiency of assets to meet the debtor's
      liabilities . . . .

      The objecting party bears the burden of proof under § 727(a)(5) and

"must demonstrate: (1) debtor at one time, not too remote from the

bankruptcy petition date, owned identifiable assets; (2) on the date the

bankruptcy petition was filed or order of relief granted, the debtor no

longer owned the assets; and (3) the bankruptcy pleadings or statement of

affairs do not reflect an adequate explanation for the disposition of assets."

Retz, 606 F.3d at 1205. Once the creditor has established a prima facie case,

"the debtor must offer credible evidence regarding the disposition of the

missing assets." Id.

      In their cross-appeal, Plaintiffs contend that they met their burden of

persuasion on their § 727(a)(5) claim and thus the bankruptcy court erred.

Plaintiffs explain that Mr. Rucker testified about a $250,000 withdrawal by

cashier's check from Mr. Schultz’s account on February 4, 2015 for

"advertising." According to Plaintiffs, this large withdrawal took place

about a year before the bankruptcy. They contend that Mr. Rucker testified

                                      27
that he did not know who the cashier's check was written out to, and no

further explanation was provided about the amount. When questioned

about the $250,000 cashier's check, Mr. Schultz declined to answer and

deferred to his accountant "[a]gain my accountant can tell you that. I don't -

I don't do the books." Plaintiffs maintain that "[c]ulpability under Section

727(a)(5) is on a strict liability basis as, short of explaining where the assets

went, it contains no defense to an unexplained loss or deficiency." Grassman

v. Brown (In re Brown), 570 B.R. 98, 119 (Bankr. W.D. Okla. 2017).

      We are not persuaded by Plaintiffs' arguments. Plaintiffs alleged "on

information and belief" that Mr. Schultz had a net worth in excess of $4

million during the later stages of the partnership, or July 2015, and then

allegedly became insolvent. The first step in prevailing under § 727(a)(5) is

to establish that the debtor owned identifiable assets of substantial value

which were not included in the bankruptcy estate.

      Mr. Schultz provided all his 2014, 2015, and 2016 personal and

corporate tax returns, business financial records recorded in Quick Books,

and bank statements to the chapter 7 trustee in his individual case and that

of JWS, and to Plaintiffs. None of the documentation showed that he had a

positive net worth of $4 million dollars. Rather, as the bankruptcy court

noted, Plaintiffs’ primary evidence was that Mr. Schultz and JWS made a

lot of money in 2016 and 2017, yet wound up filing bankruptcy in 2017.

      Although Mr. Schultz made a lot of money, his 2015 tax returns


                                        28
showed he grossed $2.9 million, but had a net income of $372,992. In 2016,

Mr. Schultz grossed $2.8 million and had a net income of $268,632.

Moreover, the evidence shows that Mr. Schultz’s taxable income rose from

$275,699 in 2014 to $353,278 in 2015. The evidence also shows that his 2016

income from JWS was $268,632, but was offset by loss of another of his

subchapter S corporations, Brave Knight, which reported a loss of $517,264.

      Mr. Rucker, who keeps Mr. Schultz’s books and does his personal

and business tax returns, testified extensively at trial. The bankruptcy court

acknowledged that Mr. Schultz could not explain some of the withdrawal

entries, but he testified that he left a lot of the categorization to his

accountant, Mr. Rucker. Mr. Rucker corroborated Mr. Schultz’s testimony,

explaining how he sorted various deposits and withdrawals from JWS’s

accounts.

      Plaintiffs believe they met their burden of proof since neither

Mr. Schultz nor Mr. Rucker explained the $250,000 cashier's check, which

was categorized as an advertising expense, apparently since they do not

know who the check was made out to. Plaintiffs are mistaken as to what

constitutes a "satisfactory" explanation. "At a minimum, a 'satisfactory'

explanation must say what actually happened to the assets and must be

believable." Kane v. Chu (In re Chu), 511 B.R. 681, 687 (Bankr. D. Haw. 2014).

Here, not only was documentary evidence produced, but Mr. Rucker

corroborated Mr. Schultz’s testimony in great detail. Further, there is no


                                        29
indication in the record that Mr. Rucker or Mr. Schultz withheld any

information about JWS or Mr. Schultz’s business dealings.

      Section 727(a)(5) "does not require that the loss or other disposition of

the asset be proper; it requires only that the explanation satisfactorily

describe or account for the disposition." Ward v. Thompson (In re Thompson),

BAP No. CC-08-1265-MoMkH, 2009 WL 7751298, at *5 (9th Cir. BAP Apr.

20, 2009); see also In re Chu, 511 B.R. at 687 (§ "727(a)(5) does not require that

the explanation itself be meritorious, or that the loss or other disposition of

assets be proper; it only requires that the explanation satisfactorily account

for the disposition."). The Chu bankruptcy court explained: "[t]his

definition of 'satisfactory' is consistent with the basic principle that section

727 must be interpreted in favor of the debtor." In re Chu, 511 B.R. at 687.

Accordingly, even if the propriety of the $250,000 transaction could be

questioned, on this record, it is plausible that it was used for advertising.

Based on our review of the record, the bankruptcy court's decision to grant

Mr. Schultz a discharge under § 727(a)(5) was not clearly erroneous.

                                CONCLUSION

      For the reasons stated, we REVERSE the bankruptcy court's denial of

Mr. Schultz’s discharge under § 727(a)(4)(A) via § 727(a)(7), and AFFIRM

its decision to grant Mr. Schultz a discharge under § 727(a)(5).




                                        30
