                                                                              F I L E D
                                                                       United States Court of Appeals
                                                                               Tenth Circuit
                                       PUBLISH
                                                                              MAR 12 1997
                       UNITED STATES COURT OF APPEALS
                                                                           PATRICK FISHER
                                                                                   Clerk
                                   TENTH CIRCUIT



 In re GUY BENNY BROWN,

        Debtor.


                                                             No. 96-3145
 RONALD D. GULLICKSON,                                       No. 96-3148

        Plaintiff-Appellee,
 v.
 GUY BENNY BROWN,

        Defendant-Appellant.



            APPEALS FROM THE UNITED STATES DISTRICT COURT
                      FOR THE DISTRICT OF KANSAS
                          (D.C. No. 95-4021-RDR)


Robert D. Lantz, (Robert D. Kroeker, with him on the brief), Martin, Leigh & Laws,
Kansas City, Missouri, for the Plaintiff-Appellee.

Carl R. Clark, (F. Stannard Lentz and John J. Cruciani, with him on the brief), Lentz &
Clark, Overland Park, Kansas, for the Defendant-Appellant.


Before BALDOCK, KELLY, and LUCERO, Circuit Judges.


BALDOCK, Circuit Judge.
       Debtor-Appellant Guy Benny Brown appeals from the district court’s affirmance

of the bankruptcy court’s order denying his discharge pursuant to 11 U.S.C.

§ 727(a)(2)(A) and (a)(4)(A). Creditor-Cross-Appellant Ronald Gullickson appeals the

district court’s reversal of the bankruptcy court’s denial of Brown’s discharge pursuant to

11 U.S.C. § 727(a)(3). We exercise jurisdiction pursuant to 28 U.S.C. § 158, and affirm

in part, reverse in part, and remand.

       The bankruptcy court found three discrete bases for denying Brown’s discharge.

These were (1) the making of a transfer within one year of the bankruptcy with the intent

to hinder, delay or defraud a creditor, 11 U.S.C. § 727(a)(2)(A), (2) the failure to keep

records, 11 U.S.C. § 727(a)(3), and (3) the knowing or fraudulent making of a false oath

in connection with the bankruptcy, 11 U.S.C. § 727(a)(4). Our review of the bankruptcy

court’s legal conclusions is de novo. In re Schnieder, 864 F.2d 683, 685 (10th Cir. 1988).

However, we review the bankruptcy court’s findings which underpin its conclusions

under the more deferential clearly erroneous standard. In re Wes Dor, Inc., 996 F.2d 237,

241 (10th Cir. 1993). We review de novo mixed questions consisting primarily of legal

conclusions drawn from the facts. Id. Finally, we are cognizant in our review of the

requirement that the Bankruptcy Code must be construed liberally in favor of the debtor

and strictly against the creditor. In re Adlman, 541 F.2d 999, 1003 (2d Cir. 1976). With

these standards in mind, we turn to the resolution of the case.




                                              2
                                            I.

       Brown’s first contention is that the bankruptcy court erred by ruling that he should

be denied a discharge pursuant to 11 U.S.C. § 727(a)(2)(A). The bankruptcy court found

that Brown’s grant of a security interest in an asset, an antique car collection, prior to

filing bankruptcy violated § 727(a)(2)(A).

       In order for a debtor to be denied a discharge under § 727(a)(2)(A), the objector

must show by a preponderance of the evidence that (1) the debtor transferred, removed,

concealed, destroyed, or mutilated, (2) property of the estate, (3) within one year prior to

the bankruptcy filing, (4) with the intent to hinder, delay, or defraud a creditor. 11 U.S.C.

§ 727(a)(2)(A). It is clear on the record that all but the last of the four elements of this

provision were proven.1 Brown admits that he transferred a security interest in his

antique car collection four days prior to filing bankruptcy. Accordingly, the contested

issue is whether Brown had the intent to hinder, delay, or defraud a creditor when he

transferred the interest.



       1
               Although the bankruptcy court found that Brown had “concealed his
property, just four days before filing bankruptcy, by placing his vintage automobile
collection beyond the reach of Gullickson,”(emphasis added), we believe the more correct
term is that he transferred property. See 11 U.S.C. § 727(a)(2)(A). There is no evidence
in the record that Brown had attempted to hide this transaction. In fact, this loan
transaction appears in the bankruptcy schedules. However, there is no question that the
grant of a security interest does constitute a transfer. See 11 U.S.C. § 101(54).
        This distinction does not affect the determination of whether the first element is
fulfilled, but we believe the inference of fraudulent behavior flowing from a concealment
is greater than from a transfer, and thus we must note this discrepancy.

                                                 3
       Gullickson argues that Brown’s course of conduct, discrepancies between earlier

financial statements and the bankruptcy schedules, and the presence of “badges of fraud”

prove Brown’s fraudulent intent. The bankruptcy court cited these reasons in denying

Brown’s discharge. The first badge on which the bankruptcy court relied is that Brown

transferred a security interest in his antique car collection four days before he filed

bankruptcy. The mere fact that a transaction occurred soon before the filing of

bankruptcy does not necessarily support the inference of fraud. See 6 Collier on

Bankruptcy § 727.02(3)(a) (15th ed. rev. 1996). The circumstances of the transaction

must be examined. See 6 id. In this case, the corporations of which Brown was a fifty

percent owner required a cash infusion to pay attorneys and suppliers. The granting of a

security interest in his only unencumbered asset in order to obtain much needed capital

for his businesses, which were his sole source of income, does not evince fraud. See In re

C.A. Thurman, 901 F.2d 839, 842 (10th Cir. 1990) (holding that business purpose for

transfer supports finding of no fraudulent intent). See also In re Miller, 39 F.3d 301, 307

(11th Cir. 1994). There was no evidence that the money was not reasonably used or that

it was squandered. Indicia of fraud are totally lacking. See id.

       The bankruptcy court also found that Brown’s continued possession and use of the

automobiles and the fact that the collection would be exempt in bankruptcy as a result of

the transaction constituted badges of fraud. However, it is an unwarranted leap to infer

fraud anytime a person transfers a security interest in an item and maintains possession of


                                              4
it. There is little question that if an individual transfers title of an item but continues to

exercise dominion over it, that fraud could be inferred. However, that is not the present

case. It is uncontroverted that the security interest was granted in an arm’s length

transaction. Thus, Brown’s mere possession of the vehicles does not constitute evidence

of fraudulent intent. Although some inference of fraudulent intent might be drawn from

the fact that Brown’s car collection became exempt due to this transaction,2 such an

inference is de minimis at best. See In re Carey, 938 F.2d 1073, 1078 (10th Cir. 1991)

(holding that the desire to convert non-exempt assets to exempt status is, by itself,

insufficient to support inference of fraud).

       In finding that Brown should be denied a discharge under § 727(a)(2)(A), the

bankruptcy court also looked at the differences in valuations of Brown’s assets reported

on his pre-bankruptcy financial statements and his bankruptcy petition, his failure to list

an automobile on his bankruptcy schedules, and the court’s finding that Brown had failed

to adequately keep records. The bankruptcy court clearly erred in denying discharge

based on the differences in asset values Brown reported on some of his financial

statements and his bankruptcy petition. Uncontroverted evidence introduced by Brown

explained many of the disparities. For example, the financial statements included


       2
              Gullickson argues that Brown’s bank’s attorney’s testimony demonstrates
fraudulent intent as to the automobile collection. We disagree. A fair reading of the
passage clearly demonstrates that the attorney’s testimony was that Brown had never
wanted anyone to obtain a security interest in his cars. The passage falls far short of
saying that Brown was granting the security interest to defraud Gullickson.

                                                5
Brown’s wife’s retirement plan and other assets, items which were omitted from the

bankruptcy schedules because she was not a debtor in the case. Moreover, an

examination of the financial statements reveals a consistent downward trend in Brown’s

financial condition. Accordingly, it would not be unexpected that this degeneration

would accelerate as he and his businesses approached the brink of bankruptcy.

Additionally, Brown explained at trial that the earlier financial statements had been to

some extent the result of puffery. Though we do not condone such behavior, it does

explain the disparity and no creditor is now claiming harm from this behavior. In this

case, based upon the record before us and keeping in mind the importance of liberally

construing the code in the debtor’s favor, we hold that the inference of fraud does not

flow from the facial discrepancy in the financial statement and bankruptcy schedule

values absent other evidence.

       The bankruptcy court’s final two bases for finding fraudulent intent also fall short

of the mark. As to the failure to list the automobile on the bankruptcy schedules, it is

undisputed that the debtor raised the omission of the automobile at the § 341 creditors’

meeting. Although Brown should have amended his bankruptcy schedules to correct the

error, we believe as a matter of law that no inference of fraudulent intent can be drawn

from an omission when the debtor promptly brings it to the court’s or trustee’s attention

absent other evidence of fraud. The purpose of the bankruptcy code is to give the honest




                                              6
debtor a new start. See Dalton v. Internal Revenue Service, 77 F.3d 1297, 1300 (10th Cir.

1996). Thus, we must not penalize the debtor for an inadvertent mistake.

       Similarly, as will be explained in greater detail in section III, the bankruptcy

court’s reliance upon Brown’s alleged failure to keep records is also an inadequate basis

from which to infer fraudulent intent. Therefore, the district court and bankruptcy court

rulings that Brown should be denied a discharge pursuant to § 727(a)(2)(A) are reversed.

                                           II.

       The second issue Brown raises is the district court’s affirmance of the bankruptcy

court’s holding that he should be denied a discharge for making a false oath. 11 U.S.C.

§ 727(a)(4)(A). In order to deny a debtor’s discharge pursuant to this provision, a creditor

must demonstrate by a preponderance of the evidence that the debtor knowingly and

fraudulently made an oath and that the oath relates to a material fact. In re Hadley, 70

B.R. 51, 54 (Bankr. D. Kan. 1987). It is undisputed that Brown made incorrect entries on

his bankruptcy schedules and that he made oaths upon them. Therefore, the crux of the

dispute is whether the oaths were knowing and fraudulent and relate to a material fact.

We need not decide whether the oaths were related to material facts because we conclude

from the record that the oaths were not knowing and fraudulent.

       A debtor will not be denied discharge if a false statement is due to mere mistake or

inadvertence. In re Butler, 38 B.R. at 889. Moreover, an honest error or mere inaccuracy

is not a proper basis for denial of discharge. See In re Magnuson, 113 B.R. 555, 559


                                                 7
(Bankr. D. N.D. 1989). In finding that Brown’s false oaths had been knowing and

fraudulent, the bankruptcy court stated, without further analysis, that “In light of the

pattern of nondisclosure and Brown’s failure to amend his schedules, the court cannot

find that Brown’s omissions were merely inadvertent.” However, the bankruptcy court

does not further support its ruling. We find the bankruptcy court’s reliance on the

“failure to amend” and “pattern of non-disclosure” is not justified based upon this record.

Although Brown did not amend his schedules to reflect the inclusion of the omitted

vehicle, he did rectify the omission very early in the process and of his own accord. The

fact that a debtor comes forward with omitted material of his own accord is strong

evidence that there was no fraudulent intent in the omission. See 6 Collier on Bankruptcy

§ 727.04(2) (15th ed. rev. 1996) (stating items omitted by honest mistake should not be

grounds for denial of discharge).

       We also find that neither the record before us nor the bankruptcy court’s opinion

supports the bankruptcy court’s findings of a “pattern of non-disclosure.” The pattern the

court apparently found was that Brown had omitted a 1962 Chevrolet from a schedule,

failed to record an alleged transfer of title of two cars made prior to bankruptcy, and,

finally, failed to keep records on four cars sold sometime in 1990-91.

       The first piece in the bankruptcy court’s pattern--the alleged transfer--apparently

did not actually occur. The record reflects that a bankruptcy schedule mistakenly

reflected that two cars were jointly titled to Brown and his wife when in fact this wasn’t


                                              8
the case. This alleged error, which made it appear that Brown had potentially

fraudulently transferred title to the two cars, was corrected by him orally at trial and no

other evidence appears in the record which supports a finding that he transferred the title.

       With regard to the four cars which were sold, there is no evidence that the

transactions were not disclosed for fraudulent reasons. The bankruptcy occurred in mid-

1992 and the cars were apparently sold in late 1990 and in 1991, quite possibly outside of

the one-year reporting window. These facts hardly support a “pattern of non-disclosure.”

       Finally, as to the omission of the Chevrolet in the bankruptcy schedules, we find

no basis for drawing an inference of fraudulent intent. The car was one of at least ten

vehicles Brown owned, and the record reflects that he raised its omission early in the

proceeding. A debtor that comes forward in order to inform the bankruptcy trustee of

errors in the filings would not seem to be engaged in a “pattern of non-disclosure” absent

other indicia of fraud. We hold that it was clear error for the bankruptcy court to find that

Brown knowingly and fraudulently made false oaths. The evidence before the court did

not support the bankruptcy court’s legal conclusions. We reverse the bankruptcy court’s

ruling that Brown should be denied a discharge pursuant to § 727(a)(4)(A) and the district

court’s affirmance of that ruling.

                                           III.

       The bankruptcy court also denied Brown’s discharge pursuant to § 727(a)(3). The

district court reversed, and Gullickson cross-appealed. In order to state a prima facie


                                              9
case, Gullickson had to demonstrate that Brown had failed to maintain and preserve

adequate records and that the failure made it impossible to ascertain his financial

condition and material business transactions. In re Folger, 149 B.R. 183, 188 (D. Kan.

1992) (emphasis added). Only if Gullickson met his burden did it shift to Brown to

justify his failure to maintain the records. In its analysis, the district court noted that it

was uncontroverted that the car collection was a hobby, not a business entered into for

profit, and cash sales in this hobby were commonplace. Thus, the district court found that

any failure to keep records was justified on the facts of the case. We agree with the

district court that a failure to keep records was justified on the record and hold that the

bankruptcy court clearly erred. Thus, we affirm the district court’s reversal of the denial

of discharge pursuant to § 727(a)(3).



       AFFIRMED IN PART, REVERSED IN PART, AND REMANDED for

proceedings consistent with this opinion.




                                               10
