This is a core proceeding for exception and objection to discharge against an anesthesiologist and his wife. I find for the defendants on the exception to discharge count and for the plaintiff on its objections to discharge.

Factual Background

        The defendants Michael C. Norman and Mary J. Norman ("the Normans") operated tourist and charter vessels in Alaska. In 1986 the Normans wanted to build a new boat for tourist use in the Prince William Sound area. They formed a corporation, MV Endeavor, Inc. for the purpose of obtaining and operating the vessel. Michael Norman served as president of the corporation and as one of     2 ABR 249  the four directors. Mary Norman was the registered agent and active in its business affairs.

        The corporation entered into a loan agreement with Cummins Financial, Inc. ("Cummins") on April 16, 1986. Through that agreement Cummins was to finance 80% of the cost of construction of the vessel. The vessel was to have been constructed by Marine Firefighters, Inc. of Bellingham, Washington. Scott Powell was the owner of that company. The Normans guaranteed the promissory note for the corporation.

        Cuminins required that the Normans and other principals of the corporation make a down payment of 20% of the projected cost of the vessel. The projected cost of the vessel was $355,000.00. The down payment was to have been $71,000.00. Three separate documents were provided by the Normans to Cummins which indicated that 80% of the cost of the vessel would be financed and 20% would be paid in cash. Conversations between Cummins representative Frank Shobe and the Normans were consistent with Cummins's 20% down requirement. The down payment was never made. While Dr. Norman did exchange checks with Marine Firefighters, Inc. for a portion of the down payment, Marine Firefighters, Inc. never actually received a down payment.

        Marine Firefighters, Inc. subsequently filed bankruptcy. Cummins agreed to give the defendants time to complete construction of the boat and begin payments. After substantial delays, the defendants eventually obtained possession of the boat and spent     2 ABR 250  approximately $60,000.00 finishing it themselves. The boat was placed in service in 1987 but following the Exxon Valdez oil spill of 1989, it was eventually repossessed by Cummins and sold. After foreclosure and sale, Cummins obtained a judgment against the Normans for approximately $169,000.00.

        Following the entry of judgment against the Normans in Washington, the judgment was domesticated in Alaska on September 27, 1990. Cummins began executing against the Normans' bank accounts. The Normans changed their bank accounts and started dealing in cash and money orders to evade further executions. Dr. Norman evaded service of a writ for garnishment. They filed a chapter 7 bankruptcy on January 15, 1991. There are numerous errors contained in the schedules and other irregularities in conjunction with the case which, according to Cummins, justify denial of discharge.

Fraud

                The elements of nondischargeable fraud endorsed by the Ninth Circuit in In re Rubin, 875 F.2d 755, 759 (9th Cir. 1989) are found in In re Pascucci, 90 B.R. 438, 444 (Bankr. C.D. Cal. 1988), which states:

The elements of a claim for fraudulent misrepresentation under section 523(a)(2)(A) are: (1) a representation of fact by the debtor, (2) that was material, (3) that the debtor knew at the time to be false, (4) that the debtor made with the intention of deceiving the creditor, (5) upon which the creditor relied, (6) that the creditor's     2 ABR 251  reliance was reasonable, and (7) that the damage proximately resulted from the misrepresentation.

        The debtors made a representation of fact: i.e. that a 20% down payment was to be made upon the M/V Endeavor. That representation was material. Both debtors knew at the time the representation was false. They made it with the intention of deceiving Cummins Financial, Inc. The testimony of Cummins's representative is credible. The testimony of the Normans is incredible. They contend that any misrepresentation was a result of Scott Powell's fraud, the owner of Marine Firefighters and not their own. The evidence does not sustain such a contention. It clearly shows that the Normans knew that the scheme with Cummins was fraudulent, made fraudulent misrepresentations and proceeded with the transaction. Moreover, Scott Powell was acting on their behalf. His fraudulent statements are attributable to the Normans. Cummins's reliance upon the Normans' verbal and written statements was reasonable and in accordance with normal business terms.

        Cummins has failed to show, however, that damage proximately resulted from the misrepresentations of the Normans. Cummins failed to link the defendant's fraud with actual damages. Cummins maintains that because there was fraud in the inducement of their financing, they would not have made the loan. Thus any     2 ABR 252  damages resulting from the loan are nondischargeable. I disagree. There must be a link between the fraudulent misrepresentation and the damages. In re Smith, 61 B.R. 742 (Bankr. D. Mont. 1986). If there is no link between the misrepresentation and damage, an exception to discharge claim has not been proved. Here, after some delay, Cummins received a first mortgage upon a completed boat. That boat was completed primarily due to the efforts of the defendants and their expending of approximately $60,000.00 for completion. Despite the fraudulent misrepresentations of the Normans, Cummins eventually received the benefit of its bargain: a first lien upon a completed vessel. While Cummins sold the completed vessel at a loss, that easily could have occurred if no actual misrepresentations had been made. Because Cummins has failed to show that its damages proximately resulted from the misrepresentation, it has failed to sustain its burden of proof. I cannot speculate on its fraud damages. Plaintiff's claim for exception to discharge based on fraud must be denied.

Objections to Discharge

        The plaintiff has alleged violations of 11 U.S.C. § 727(a) (2), dealing with fraudulent transfers within one year of the petition, § 727(a)(4), the making of a false oath, and § 727(a)(5), failure to explain satisfactorily any loss of assets or deficiency of assets to meet the debtor's liabilities.

        Cummins domesticated its judgment in Alaska on September 27, 1990. The Normans attempted to obtain a stay of this judgment but were unsuccessful. At this time, Dr. Norman was earning approximately $10,000.00 per month as an employee of Anchorage Anesthesia Affiliates, Inc. and an additional $20,000.00 a month from his non-corporate practice. Cummins commenced collection efforts against the Normans in November and December of 1990 and levied against bank accounts held by the Normans at National Bank of Alaska and Security Pacific Bank. Following the levies, the Normans ceased depositing funds into the National Bank of Alaska and Security Pacific Bank accounts. They dealt in cash and changed their accounts to Northrim Bank. They deposited checks from Dr. Norman's practice in this bank and, on one occasion, in a daughter's account.

        On November 23, 1990 Mary Norman deposited $3,290.91 into an account in the name of her daughter, Michelle Norman, at National Bank of Alaska. Of those funds, $2,814.59 were funds directly from Michael Norman, deposited in the form of a check made out to Michael C. Norman, M.D. by Medical Care International and endorsed by Dr. Norman.

        Cummins attempted to serve a writ of execution upon Michael Norman as controller for Anchorage Anesthesia Affiliates, Inc. in late 1990. The defendant Michael Norman denied he was Michael Norman and refused process.

        In order to prevail upon objection to discharge under 11 U.S.C. § 727(a)(2), a creditor must show: (1) the debtor transferred or concealed property; (2) the property belonged to the debtor; (3) the transfer occurred within one year of the bankruptcy filing; and (4) the debtor executed the transfers with the intent to hinder, delay or defraud a creditor. In re Aubrey, 111 B.R. 268, 273 (9th Cir. BAP 1990). All the requisite elements are found in this case. Here the debtors transferred property directly from Anchorage Anesthesia Affiliates, Inc. or from Dr. Norman's individual accounts receivable checks to Northrim Bank with the intent of concealing the property from Cummins. The property belonged to the debtors. The transfers all occurred within a year of the filing of the petition, January 15, 1991. The debtors executed the transfers with the intent to hinder, delay or defraud Cummins Financial, Inc. The debtor's proffered explanations of their transfers and their conduct are simply unbelievable and do not merit discussion. The debtors admitted their true intent at the first meeting of creditors: to hinder Cummins. Moreover, by lying about his identity, Dr. Norman effectively concealed his property in Anchorage Anesthesia Affiliates, Inc. from Cummins Financial, Inc. Finally, the debtor's transfer of $3,290.91 into their daughter's account on November 23, 1990 was made primarily to hinder Cummins. The evidence of violations of 11 U.S.C. § 727(a) (2) is overwhelming.

        Pursuant to 11. U.S.C. § 727(a) (4), discharge can also be denied when a debtor knowingly and fraudulently makes a false oath or account in connection with his bankruptcy case. In order to establish a false oath or account, a creditor must prove that: (1) the debtor's oath was made knowingly and fraudulently; (2) the false oath was related to a material fact. In re Aubrey, 111 B.R. at 274.

        The debtor's schedules in this case were filed under oath. In the schedules, the Normans list cash on hand of $65.00 and bank account balances totaling $700.00. As of January 15, 1991 the actual balances in their three accounts at Northrirn bank were $4,952.86, $92.00 and $94.00 respectively, totaling $5,138.86. Additionally, the debtors had substantial amounts of cash on hand, the exact amount of which is undocumented. For instance, the Normans received $5,023.54 on January 14, 1991. On January 15, 1991 they only deposited $3,780.34. Cummins demonstrated that the Normans had several thousand dollars available to them as of the date of the petition through documentary evidence. The Normans' statements as to cash on hand are false and inaccurate.

        In interrogatories propounded by the plaintiff in this action, statements of total income and expenses were to be listed. The Normans, under oath, claimed to list all items of income and expenses received prior to the filing of the petition. However, during cross examination, Mrs. Norman admitted there was in excess of $4,000.00 of cash that was not accounted for in the responses to     2 ABR 256  interrogatories. She said, it was simply spent or "used to pay bills" but could not say how.

        In their schedules, the Normans list the value of their stock in Anchorage Anesthesia Affiliates, Inc. at zero dollars. During cross-examination of Dr. Norman, he admitted that his interest in the corporation had been listed in a March 7, 1989 financial statement as having a value of $150,000.00 for a one-half interest. He further admitted that the corporation had at least $200,000.00 in accounts receivable with no appreciable debt on the petition date. Dr. Norman now has a one-third interest in Anchorage Anesthesia Affiliates, Inc. and such interest had a substantial value on January 15, 1991. The liquidation value alone appears to be at least $60,000.00, but is likely higher due to the debtors' propensity to understate the value of their assets.

        The debtors contend that these misstatements were simply innocent errors and that Cummins is nitpickinq. I disagree. The defendants are well-educated with long experience in business affairs. These were not minor errors. They show a pattern of consistent misrepresentation and concealment in an attempt to mislead the court, the creditors and the trustee. These oaths relate to material facts involving thousands of dollars. Moreover, every error the Normans have made through "inadvertence" has been in their favor. This is further evidence of their knowing and fraudulent intent.

        11 U.S.C. § 727(a)(5) disallows discharge for debtors who have failed to explain satisfactorily any loss of assets or deficiency of assets to meet their liabilities. A financial statement compiled March 7, 1989 by the Normans showed a positive net worth of $780,655.00. The schedules filed in this case show a negative net worth of approximately $1.5 million dollars. The turnaround represented by the debtors' March 7, 1989 financial statement to the January 15, 1991 statement is approximately $2.3 million dollars. While losses concerning the M/V Pacific Star, Inc. were understandable, this massive turnaround in a period of approximately 22 months was never satisfactorily explained. The debtors alluded to the loss of some records. Michael Norman testified vaguely as to his interest in Anchorage Anesthesia Affiliates, Inc. declining due to the lack of a prospective purchaser. I find the debtor's explanations insufficient as a matter of law. In re Stuerke, 61 B.R. 623 (9th Cir. BAP 1986).

Conclusion

        The debtors engaged in fraudulent conduct in procuring a loan from Cummins Financial, Inc. Cummins Financial, Inc. failed to satisfactorily link the fraudulent statements with the damages they allegedly incurred. Their exception to discharge complaint will be disallowed. Cummins did produce substantial evidence supporting their objections to discharge, however. The debtors have failed to rebut this evidence in a reasonable manner. The debtors' discharge will be denied.

        Therefore, IT IS HEREBY ORDERED:

        1.     Count one of plaintiff's complaint seeking exception to discharge under 11 U.S.C. §§ 523(a) (2) and (a)(4) is dismissed with prejudice;

        2.     In accordance with 11 U.S.C. § 727, the discharges of the defendants Michael C. Norman and Mary J. Norman are denied;

        3.     Plaintiff is awarded its costs; and

        4.     Each party shall pay their own attorney's fees.

        Judgment shall be entered and docketed accordingly.

        DATED: December 30, 1991.

BY THE COURT




DONALD MacDONALD IV
United States Bankruptcy Judge