Elite Construction Design Management, LLC v. Kerschner

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF OHIO

EASTERN DIVISION

ELITE CONSTRUCTION DESIGN :

MANAGEMENT LLC, et al., :

:

Plaintiffs, :

Case No. 2:23-cv-820

:

v. :

District Judge Jeffery P.

:

Hopkins

WALTER EVERETT KERSCHNER, :

JR. et al., :

:

Defendants. :

OPINION AND ORDER

Elite Construction Design Management, LLC and Timothy Reeves (collectively, the

“Plaintiffs”) brought this action seeking to deny the Debtors, Walter (“Sonny”) and Angela

Kerschner (hereinafter the “Debtors” or the “Kerschners”), a discharge under 11 U.S.C.

§ 727. The Plaintiffs allege that the Kerschners made false oaths on their bankruptcy petition

and subsequent filings in violation of § 727(a)(4)(A) by making numerous false statements

about their income, expenses, and household size in order to satisfy the eligibility

requirements for Chapter 7 relief. Following a bench trial, the Court finds, for the reasons

stated below, that the Debtors violated § 727(a)(4)(A) and that the Debtors should therefore

be denied a discharge in their bankruptcy case.

I. Jurisdiction and Constitutional Authority

This adversary proceeding was filed and heard before the undersigned while a judge

on the United States Bankruptcy Court for the Southern District of Ohio. After being

appointed to the district court, a court which has original jurisdiction over bankruptcy cases

filed in this district, the undersigned entered an order withdrawing the reference under 28

U.S.C. § 157(d) for cause and on joint motion of the parties. Distr. Doc. 3.1 When the trial

was held, the bankruptcy court had jurisdiction, under 28 U.S.C. § 1334(b) and the general

order of reference entered in this district under 28 U.S.C. § 157(a), to hear and determine this

matter—a core proceeding under 28 U.S.C. § 157(b)(2)(J). Because a debtor’s entitlement to

a discharge “stems from the bankruptcy itself,” Stern v. Marshall, 564 U.S. 462, 499 (2011),

the bankruptcy court had the constitutional authority to enter a final judgment in this

proceeding. See Dilbay v. Demir (In re Demir), 500 B.R. 913, 918 (Bankr. N.D. Ill. 2013). The

Court continues to have jurisdiction over this proceeding since the withdrawal of the

reference.

II. Procedural History

The Kerschners filed a voluntary petition for relief under Chapter 7 of the Bankruptcy

Code through counsel, Gary Kenworthy, on December 26, 2018. The Plaintiffs timely

brought this adversary proceeding seeking a determination not only that the debt allegedly

owed to them was nondischargeable under § 523(a)(6), but also that the Debtors should be

denied a discharge altogether under § 727(a)(4)(A). The parties agreed to bifurcate the matter,

holding the § 523 claim in abeyance pending the outcome of this § 727 denial of discharge

action. See Adv. Doc. 58.

1 The Court will refer to any documents filed in the Debtor’s main bankruptcy case, In re Kerschner, No. 18-bk-

58000 (Bankr. S.D. Ohio), as “Bankr. Doc. —” and any documents filed in the bankruptcy court adversary

proceeding, Elite Construction Design Management, LLC, et al. v. Kerschner, et al., No. 19-ap-2026 (Bankr. S.D.

Ohio), as “Adv. Doc. —.” Any references to this Court’s docket will be “Distr. Doc. —.”

Before the trial, the parties filed certain stipulations (Adv. Doc. 67), and the Plaintiffs

filed a pretrial brief (Adv. Doc. 107). During the bench trial held April 8–9, 20212 the Court

heard the testimony of the two Debtors, Walter Kerschner, Jr. and Angela Kerschner; Blaine

Hardin, an individual who the Debtors included as a dependent in certain filings; Gary

Kenworthy, the Debtors’ former attorney who represented them at the time of their Chapter

7 bankruptcy filing and amendments; and the then-attorney Mina Nami Khorrami, who was

called by the Plaintiffs to testify as an expert witness regarding the Debtors’ eligibility for

Chapter 7 bankruptcy relief and to review the Debtors’ petition related filings.3 The parties’

Joint Exhibits 1–18 and 21–39 were admitted into evidence. See Adv. Docs. 119 & 119-1 (the

“Transcript”) at 409. The parties requested to submit their closing arguments through post-

trial briefs following the docketing of the Transcript. Id. at 409, 416; see also Adv. Docs. 121

& 124. With the filing of those briefs, see Adv. Docs. 127, 128, & 131, the Court took the

matter under advisement.

III. Findings of Fact

Based on the evidence adduced at trial, including the documentary evidence and the

testimony provided, and having considered the demeanor and credibility of each of the

witnesses, the Court makes the findings of fact set forth below.

2 This case was tried during the COVID-19 pandemic. To protect the health and safety of the litigants and court

staff, the case was tried remotely with lawyers and witnesses appearing via Zoom for Government. See Bankr.

S.D. Ohio Gen. Order 35-8, Order Regarding Matters Scheduled Before the Court Until Further Notice (Sept. 17, 2020);

Bankr. S.D. Ohio Gen. Order 44-1, Order Regarding Virtual Hearings (Aug. 21, 2020).

3 At the time of her testimony, Judge Nami Khorrami was a licensed practicing bankruptcy and commercial

litigation attorney at Mina Nami Khorrami, LLC. See Joint Ex. 21 at 7–9. Subsequently, on September 10, 2021,

she was appointed by the U.S. Court of Appeals for the Sixth Circuit to serve as bankruptcy judge for the

Southern District of Ohio. Hereinafter, Judge Nami Khorrami will be referred to as “Plaintiffs’ bankruptcy

expert” or “Ms. Khorrami,” given her status at the time of her testimony.

A. Background

1. Debtors’ Employment and Sources of Income

The Debtors testified that in the months leading up to their bankruptcy filing they had

four sources of income: (1) income from Mr. Kerschner’s handyman work through Home

Advisor, paid to TLK Mechanical Solutions, LLC (“TLK”); (2) income from TLK’s work for

Rhoads Construction, Inc.; (3) income from Rhoads Construction paid directly to Walter

Kerschner; and (4) Angela Kerschner’s salary from the U.S. Department of Agriculture. See

Tr. at 70–73, 76, 163–66.

Debtor Walter Kerschner testified that he worked as a field supervisor for Tim Reeves

at Elite Construction Management from March 2017 until September 2017. Id. at 126–27.

Two weeks before quitting his position at Elite Construction Management, Mr. Kerschner

was offered a job at Rhoads Construction. Id. at 128–29. Mr. Kerschner testified that for the

majority of his time working for Rhoads Construction he “was 1099 . . . as TLK Mechanical

Solutions.” Id. at 130. That is, Rhoads Construction hired TLK, and Mr. Kerschner worked

for Rhoads via his own entity, TLK. From Mr. Kerschner’s recollection, he believes that

Rhodes was paying TLK this way for about a year, but then converted to paying him

personally as a W2 employee during his final months working for the company. Id. at 131.

2. Debtors’ Financial Records

a. Record of Income

At the time of the bankruptcy filing in December 2018, Mr. Kerschner had not yet

received a W-2 from Rhoads Construction and did not have a 1099 form to provide to the

Debtors’ bankruptcy attorney, Mr. Kenworthy. Id. at 131–32. Without the benefit of these

documents, the Kerschners calculated their income at the time of the bankruptcy filing by

providing their bankruptcy attorney, Mr. Kenworthy, with hard copies of paystubs and the

invoices and associated checks that TLK received for the work completed for Rhoads

Construction. Id. at 131–32. However, testimony revealed that the documentation of income

provided to Mr. Kenworthy was incomplete, and income was understated in initial filings due

in part to computations errors. See id. at 263–265.

b. Bank Accounts

The Debtors disclosed three bank accounts in their bankruptcy filings: (1) a personal

account held by Angela and Walter Kerschner (the “Personal Bank Account”), (2) a business

account held by TLK Transportation LLC (the “TLK Bank Account”), and (3) an account

for the Debtors’ son, Tanner Kerschner (the “Tanner Kerschner Bank Account”). See id. at

168; Joint Exhibits 7–9. The Debtors and their trial attorney referred to the TLK Bank

Account as “the gold standard,” meaning that it reflected all records of the income and

expenses for TLK. See, e.g., Tr. at 32, 92, 137, 206. However, as it turns out, the Debtors used

the TLK Bank Account for both business and personal expenses. Id. at 33, 93–95, 279.

Because the TLK Bank Account was used to pay for personal expenses, the Debtors’

Bankruptcy Attorney, Mr. Kenworthy, was unable to rely entirely upon those bank statements

to determine the Debtors’ business expenses. Id. at 279. Instead, Mr. Kenworthy turned to

Angela Kerschner to prepare spreadsheets of TLK’s expenses, which he then relied on to

complete the bankruptcy filings.4 Id. at 185, 251–52; Joint Exhibit 11 Page 22 of 23; Tr. 181–

82, 265–66, Joint Exhibit 18.

4 The Debtors testified that Mrs. Kerschner was solely responsible for maintaining the family’s financial records.

See Tr. at 140, 161–62.

c. General Ledger

The TLK General Ledger, marked as Joint Exhibit 14, was created using TLK’s bank

account records, and purportedly included all TLK’s income and expenses. Tr. at 171–72.

The General Ledger was created by the Debtors’ accountant, Eddie Gomer, who

unfortunately passed away just prior to the bench trial commencing. Id. at 203. On direct

examination, Mrs. Kerschner said the following with respect to the creation of the General

Ledger:

Q. Ms. Kerschner, you testified that the general ledger that we

marked as exhibit number, Joint Exhibit 14 is true and accurate

information that you entered into it, correct?

A. I entered QuickBooks and then Eddie went through and redid

any expenses he took out that he didn’t need. So that’s off of,

that’s created off of Eddie redoing my input.

. . .

A. Which would be our final taxes.

Q. Okay, but any individual, you know, money coming in,

money coming out, TLK, what’s in the general ledger, that’s all

based off of information that you entered into QuickBooks,

correct?

A. Yes, correct.

Id. at 212.

With respect to what financial information was available at the time of the bankruptcy

filing, Mrs. Kerschner testified that she reconciled her bank statement monthly, but did not

input any information into QuickBooks until the end of the year. Id. at 213–14. However, she

acknowledged that the business expense information entered into QuickBooks was generated

from the TLK Bank Account statements, which were available at the time of filing. Id.

d. Expense Spreadsheets Created by Angela Kerschner

Mrs. Kerschner testified that she created multiple spreadsheets listing TLK’s expenses,

which Mr. Kenworthy used for the initial bankruptcy filing and subsequent amendments. Id.

at 185, 251–52; Joint Exhibit 11 Page 22 of 23; Tr. 181–82, 265–66, Joint Exhibit 18. Prior to

the initial filing, Mrs. Kerschner created a spreadsheet for Mr. Kenworthy that included a

monthly breakdown of TLK’s expenses for 2018. See Joint Exhibit 11, page 22 of 23 (the “First

Expense Summary”); Tr. at 184–85, 251–52. Mr. Kenworthy used this information to prepare

the First Means Test. Id. at 251–52. Two years later, Mrs. Kerschner created another expense

summary for Mr. Kenworthy, which details TLK’s expenses from June through November

of 2018. Id. at 181–82, 185–86, 265; Joint Exhibit 18, pages 2–3 of 3 (the “Second Expense

Summary”, collectively the “Expense Summaries”).

None of the expense figures contained in the Second Expense Summary match the

figures contained in the First Expense Summary. See Tr. at 265–69 (discussing differences

between the Expense Summaries); Id. at 185–87 (Testimony of Angela Kerschner

acknowledging that the Expense Summaries did not match). While the figures provided by

some months only vary slightly, compare First Expense Summary ($3,238 for September of

2018) with Second Expense Summary ($3,193.78 for September of 2018), others vary

significantly, compare First Expense Summary ($2,304 for October) with Second Expense

Summary ($5,733.01 for October). Tr. at 268. The Expense Summaries also cannot be

reconciled with the expenses listed in TLK’s general ledger, even though all three documents

were created by Mrs. Kerschner using the TLK Bank Account statements. Id. at 184–85, 212–

213, 215–217.

B. Bankruptcy Filings and Amendments

The Debtors filed their petition on December 26, 2018. Joint Exhibit 1. The Debtors’

first means test reflected that they had an annual income of $77,180.28 and three dependents.

Bankr. Doc. 1 at 52; Jomt Ex. 1 at 52 (the “First Means Test’’). By claiming three dependents,

the Debtors’ remained under the median income of $95,721 for a household of five, thereby

resulting in no presumption of abuse. The Debtors later filed two amended means test

calculations—first on November 4, 2020 (Bankr. Doc. 34) (the “Second Means Test”), and

then on January 7, 2021 (Bankr. Doc. 36) (the “Third Means Test”).

The Debtors’ bankruptcy attorney, Mr. Kenworthy, testified that the First Means Test

was amended to reduce the household size from five to two in order to “clean things up” and

avoid creating issues for the bankruptcy litigation. Tr. at 282-84. Then, the means test was

amended again in January 2021 but only after Mr. Kenworthy reviewed the Plaintiff's Expert

Report and discovered that pay checks for both Debtors had been omitted from the initial

filings, resulting in an underreporting of the Debtors’ W-2 income. Jd. at 261-62. Consistent

with the pattern that was emerging, the Debtors’ Third Means test filed in the case witnessed

an increase in the household size from two to four to again satisfy the means test. Jd. at □□□□

85.

The Debtors’ initial filings and subsequent amendments also included changes to their

personal and business income and expenses. The following chart was reproduced (with non-

substantive formatting changes) from the Plaintiff's Motion in Limine (Adv. Doc. 73):

Business Net Income (Line 6) $ 1,580.29 $ 1,580.29 $ 2,007.78 + 27%

Current Monthly Income (Line 12a) $ 6,431.69 $ 6,431.69 $ 7,387.70 + 14%

Annual Income (Line 12b) $ 77,180.28 $ 77,180.28 $88,652.40

Median Family Income (Line 13) $ 95,721.00 $ 60,822.00 $ 87,321.00

Food & Clothing (122A-2, Line 6) N/A $ 1,202.00 $ 1,694.00 + 40%

Health Care (Line 7g) N/A $ 104.00 $ 208.00 + 100%

Utilities (Line 8) N/A $ 567.00 $ 666.00 + 17%

Net Mortgage Expense (Line 9c) N/A $ 0.00 $ 16.88

Taxes (Line 16) N/A $ 922.10 $ 1,265.10 + 37%

Involuntary Deductions (Line 17) N/A $ 114.79 $ 163.38 + 42%

Life Insurance (Line 18) N/A $ 0.00 $ 31.80

Health Insurance (Line 25) N/A $ 421.74 $ 372.32 – 12%

Secured Debt Payments (Line 33d) N/A $ 2,479.91 $ 2,524.41 + 2%

Total Disposable Income (Line 39d) N/A $ 1,935.00 $ (8,525.40) – 540%

1. Inconsistencies in Bankruptcy Filings

There were various inconsistencies and apparent omissions in the Debtors’ bankruptcy

filings and financial records. In their testimony, the Debtors suggested many of the

inconsistencies related to the categorization of the expenses by Eddie Gomer, the Debtors’

accountant, in preparing their taxes. See, e.g., Tr. at 119, 123, 140, 203, 205–06 (Debtors’

testimony discussing Mr. Gomer’s role and categorizations). Mrs. Kerschner testified that Mr.

Gomer created the General Ledger and the TLK profit and loss statements using the Debtors’

bank statements and QuickBooks. Id. at 205–06. However, Mrs. Kerschner indicated that Mr.

Gomer did not have direct access to the TLK Bank Account; he just had access to QuickBooks

data that she entered. See id. at 206 (“Q. Did you provide him monthly [bank] statements, did

he have access to the computer online banking? A. He had it just off of QuickBooks where I

had entered into my Chase account.”)

Regardless of Mr. Gomer’s categorizations, testimony confirmed that the

determination of what items could properly be considered income or expenses should have

been possible by looking at the Debtors’ accounts. See id. at 296–97. Put another way,

recategorizing specific expenses should not have altered fixed expense figures.

a. Household Size

As noted, the Debtors made changes to their household size in all three of their means

tests and schedules associated with each that were filed with the Court. In the First Means

Test, the Debtors claimed they had a household size of five, identifying their son Tanner

Kerschner, their daughter Taylor Kerschner-Moody, and their daughter’s boyfriend Blaine

Hardin as dependents. Id. at 61. At the time, Tanner, Taylor, and Blaine were all legal adults

and none were full-time students. Id. at 62–63. Neither of these three individuals were claimed

as dependents on the Debtors’ 2017 and 2018 tax returns. Id. at 64.

In the Second Means Test, filed almost two years after the petition date, the Debtors

claimed a household size of two—only including themselves—as might have been proper

under the circumstances. Id. at 66. At trial, Mr. Kenworthy testified, however, that this change

was made in anticipation that the inclusion of the three adult dependents could face unwanted

scrutiny in the bankruptcy proceedings:

A. The first means test was amended, I think, when the issue

came up as to their qualifying with two versus five household

members. It was originally based on the figures that I had to work

with, that they would have qualified with two members. So we

amended the schedules just to, basically, take off the dependents

so that that wouldn’t be an issue involved in this court

proceeding.

Q. You were kept abreast by me in regard to the status of the

underlying objection . . .?

A. Yes.

Q. All right. And . . . did you and I have a discussion in regards

to your representation here, that we discussed, if your opinion is

in the first schedule, it shouldn’t ... don’t need dependents, let’s

get rid of that as an issue for the purpose of trial to clean things

up?

A. Yes, that would be correct.

Id. at 282–84.

Finally, in the Third Means Test, the Debtors again changed the household size from

two to four. Id. at 68. Mr. Kenworthy testified that due to other amendments made in the

Third Means Test, namely the inclusion of inadvertently omitted income, the Debtors no

longer satisfied the means test with a household size of two. Id. at 284–85. According to Mr.

Kenworthy, two dependents needed to be added to meet the means test:

Q. All right. So originally you said, no, we don’t need any

[dependents to satisfy the means test], but after the examination,

their income went up and you needed to declare. Now, how

many dependents, household members, have to be declared in

your third test to meet the means test?

A. Two dependents.

Id. at 285. Regarding his reason for omitting Tanner Kerschner as a dependent in the Third

Means Test, Mr. Kenworthy testified:

A. . . . The one dependent I don’t think would qualify based on

the information I had given to me after the original schedules

were filed, that the one son made significant income and I felt

that he could not be considered as a dependent in that situation.

Id.

During trial, the Debtors sought to justify their inclusion of their adult children and

their daughter’s adult boyfriend, Blaine Hardin, as dependents. Mr. Kerschner testified that

Mr. Hardin lived with the Debtors, did not contribute to household expenses, and that the

Debtors supported Blaine financially by buying all his food and clothing. Id. at 142–43, 149.

Mr. Kerschner testified that he knew Mr. Hardin had an income, but he guessed that Mr.

Hardin spent money on heroin. Id. at 150–51, 153. Mr. Hardin testified that, in 2018, he

worked full-time for three different employers. Id. at 228–29. Mr. Hardin’s income tax records

introduced at trial corroborated Mr. Kerschner’s testimony. According to those records

received from employers three W-2s for 2018. See Joint Ex. 33. In 2018, Mr. Hardin earned a

total income of $41,445. Tr. at 231, Joint Ex. 33. Mr. Hardin testified that he spent some of

his income on “partying,” but also used his money to pay expenses for himself and his

girlfriend, Taylor Kerschner-Moody. Id. at 234, 237. Mr. Hardin testified that his income was

used to purchase tools and vehicles, pay his telephone and car insurance bills, pay his taxes,

and pay for means and entertainment for himself and Ms. Kerschner Moody. Id. Mr. Hardin

confirmed that the Debtors did not know how he spent his income, that he did not share that

information with them, and that they did not have access to any of his financial records or

accounts. Id. at 231–32.

In the lead up to the bankruptcy, the record showed that the Debtors’ son, Tanner

Kerschner, had also been employed and frequently lent money to his parents. See, e.g., Id. at

143, 169. The Debtors, however, did not include either Mr. Hardin’s income or Tanner

Kerschner’s income in their income and expenses filings. Id. at 269–70.

b. Income

The Debtors’ Bankruptcy filings were inconsistent with respect to their reported

income and could not be reconciled with the Debtors’ financial records. For example, records

indicate that Rhoads Construction paid TLK $48,145 in 1099 income in 2018. Joint Exhibit

10, p. 2. However, the Debtors only reported $30,914.73 as gross income in their initial

petition. Joint Exhibit 1, p. 44. The Debtors then listed their gross income as $18,001 in their

Amended SOFA, and $37,953.50 in TLK’s profit and loss statement provided to the Debtors’

Chapter 7 trustee. Tr. at 82–87; Joint Exhibit 4, page 2 of 8; Joint Exhibit 15, p. 22. Likewise,

the Debtors’ Amended I & J reflect a gross income of $34,796. Tr. at 87–88; Joint Ex. 2, p. 8.

The Kerschners admitted that they failed to provide complete records of their income

to their attorney for their initial filing, and the income was initially underreported as a result

of these omissions and other computation errors that they failed to catch in their review. See,

e.g. Tr. at 133, 210, 261–62, 284. The Kerschners also failed to disclose certain sources of

income to their attorney. For example, Angela Kerschner testified that the Kerschners

received thousands of dollars in 2018 from Walter Kerschner’s mother, Jane Kerschner. Id.

166–67. According to Mrs. Kerschner that money was intended to cover legal expenses,

which were deducted as a business expense of TLK. Id. Mrs. Kerschner confirmed also that

the funds received from her mother-in-law was never disclosed to the Debtors’ bankruptcy

attorney. Id. Additionally, as discussed above, it is undisputed that the Kerschners omitted

the income of Tanner Kerschner and Blaine Harden from their bankruptcy filings, despite

listing both as dependents in their initial petition. Id. at 269–70, 285.

c. Expenses

Several items identified as TLK’s business expenses were apparently not actually

business expenses. For example, the Debtors included legal fees as TLK business expenses, a

portion of which related to the Debtors’ personal legal representation. See id. at 179–84. The

Debtors’ bankruptcy attorney, Mr. Kenworthy, confirmed that he only represents the Debtors

in a personal capacity. Id. at 297–98. Therefore, his professional legal fees, which were

included in the $5,400 listed as TLK legal expenses, were not actually a TLK business

expense. In addition, Mr. Kerschner admitted that the TLK general ledger’s “outside

services” expense item reflected multiple charges for jiu jitsu classes. Id. at 119. He testified

that the card was inadvertently charged for that personal expense, which was caught and

changed after a few months. Id. There is no suggestion those funds were ever repaid.

There were also questions raised related to other items identified as business expenses,

with the Debtors at times unable to recall whether certain expenses were properly

characterized as business expenses. For example, the Debtors claimed $4,489.76 in “meals

and entertainment” expenses. Id. at 173. However, Mr. Kerschner testified that he had “no

clue” if the company did any sort of business development and could not identify any

entertainment expense the company had, despite operating the business exclusively with his

wife. Id. at 97–98, 123. A portion of the “meals and entertainment” expenses corresponded

to Mr. Kerschner purchasing fast food meals. Id. at 99–105. Mr. Kerschner testified for the

first time at trial that these purchases reflected business expenses for meals that he purchased

for himself and the employees he supervised in the course of his employment with Rhoads

Construction. Id. However, the TLK General Ledger showed that the Debtors continued to

consistently expense meals after mid-September 2018, at a time that Mr. Kerschner no longer

worked for Rhoads Construction and thus would not have been purchasing meals for his

employees. Id. at 174–75, 177–79.

C. Debtors’ Bankruptcy Attorney’s Representation

The Court also heard testimony from the Debtors’ bankruptcy attorney Mr.

Kenworthy. Id. at 248–49. Mr. Kenworthy testified as to his practices in preparing a

bankruptcy filing when working with prospective bankruptcy clients. Id. at 249–50. He

testified that he asks his bankruptcy clients to provide a variety of items and documents,

including paystubs from their last six months of employment. Id. If the prospective clients are

self-employed, Mr. Kenworthy testified that he asks for a “month-by-month breakdown of

income and expense information.” Id.

Throughout their testimony, both Debtors asserted that they relied on Mr. Kenworthy

with respect to completion of their bankruptcy filings. See, e.g., id. at 208 (A. Kerschner

testimony) (“Q. Did you rely totally on Mr. Kenworthy to take the raw information and make

it work? A. Yes.”). In fact, Mr. Kerschner testified that he did not take affirmative steps to

verify the accuracy of the bankruptcy filings:

Q: Okay, but as far as, you know, this actual document that is in

front of us as [the Second Means Test], you didn’t actually take

any steps to verify accuracy did you?

A. I relied upon my bankruptcy attorney to make sure that the

numbers were correct.

Q. Okay, so you provided him the information and then he put

into the form...

A. I, I provided him with the information, I don’t know what he

done with it after that, sir. We gave him everything.

Q: Okay, so you gave him everything and then he filled out [The

Second Means Test] and then you signed it assuming that he did

the right thing, right?

A. Yes.

Id. at 57–58.

Despite their insistence that the Debtors gave Mr. Kenworthy “everything” that they

had with respect to income and expenses, see, e.g., id. at 53, 57, 133, trial testimony revealed

that throughout the process of filing for bankruptcy relief and subsequent amendments, the

Debtors did not provide Mr. Kenworthy with complete and accurate information and

documents relevant to their income and expenses. Mr. Kerschner testified that Mr.

Kenworthy raised concerns early on about their ability to reconstruct their income for

purposes of filing bankruptcy and that he asked them to bring supporting documents for

verification. Id. at 133. However, Mrs. Kerschner admitted that at least one paycheck “was

missed” and so not initially provided to Mr. Kenworthy in preparing their bankruptcy filings.

Id. at 210; see also id. at 133 (Mr. Kerschner testifying that they provided “everything” except

one check that was inadvertently written to him personally). Other information about income

and expenses was apparently not provided to Mr. Kenworthy. See, e.g., id. at 166–67 (Angela

Kerschner testifying that the Debtors received thousands of dollars from her mother-in-law,

Jane Kerschner, that were not disclosed to Mr. Kenworthy); id. at 270 (Mr. Kenworthy

testifying that he was unaware at the time of filing that Tanner Kerschner and Blaine Hardin

had income); id. at 285 (Mr. Kenworthy testifying that he did not include Tanner Kerschner

as a household member on the Third Means Test because he learned after the original

schedules were filed that Tanner made significant income); id. at 276–77 (Mr. Kenworthy

testifying that he did not receive the Debtors’ QuickBooks accounting documentation until

after their initial schedules were filed); id. at 265–66 (Mr. Kenworthy testifying that Angela

Kerschner provided a spreadsheet containing new information about TLK expenses two years

after the initial petition date).

Importantly, Mr. Kenworthy testified that only after reviewing the Plaintiffs’ Expert

Report did he learn of errors in the initial filings5 and did he receive additional expense

information from the Debtors:

Q . . . you learned about both of these paystub issues after you

reviewed Mina Khorrami’s report, correct?

A. Yes.

5 Mr. Kenworthy did acknowledge that one error within the Debtors’ initial filings was apparently the result of

a mathematical miscalculation he or one of his staff members made. See Tr. at 264 (Kenworthy testimony

confirming that one of Angela Kershner’s paystubs was missed due to a “computations error”); see also id. at 209

(Angela Kerschner testimony that Mr. Kenworthy informed her of a mathematical error in adding up paystubs.)

Q. Now, as part of filing the third means test, you also received

some new information from the Kerschners about the TLK

expenses, correct?

A. Yes, I did.

Q. And that new information was that spreadsheet of TLK

expenses that we saw in Exhibit 18, right?

A. Yes.

Q. And that spreadsheet was provided to you on December 31st

of 2020?

A. Yes.

Q. Which was over two years after the bankruptcy case was filed,

right?

A. Yes.

Id. at 265; see also id. at 265–69 (Mr. Kenworthy and Plaintiffs’ counsel discussing the

differences in TLK’s expenses contained in the original petition and schedules filed in the case

compared to the information included in the Third Means Test). Ultimately, Mr. Kenworthy

confirmed that throughout the course of the bankruptcy, he continued to receive new

information from the Debtors:

Q. And you mentioned that there were a number of amendments

that were filed, including the SOFA and adding some things to

the schedules. Those amendments were prompted by new

information that you received, and you felt it was appropriate to

file amendments based on that new information, correct?

A. Correct.

Id. at 298.

Beyond the specific information and documentation that the Debtors did not initially

provide to Mr. Kenworthy, significant information that Mr. Kenworthy used to create the

bankruptcy filings were based on inputs made by the Debtors (namely, Mrs. Kerschner).

Those inputs themselves have been shown to contain a variety of errors or missing

information, amounting to additional information not known to their bankruptcy counsel.

See, e.g., id. at 97–108, 123, 175–78 (TLK’s general ledger lists meals and entertainment

expenses for TLK, but the Debtors’ testified that they had “no clue” whether TLK did any

business development or had any entertainment expenses, and expenses for meals appear to

correspond to personal meals for Mr. Kerschner), 119 (TLK’s general ledger includes

“Outside Services” expense that reflects multiple charges for Mr. Kerscher’s jiu jitsu gym

membership), 179–84, 297–98 (TLK’s Expense Summaries contain expenses for the Debtors’

personal legal fees).

Mr. Kenworthy testified as follows regarding his need to rely on information provided

by the Debtors:

Q. Did you make a herculean effort here over the period of time

to require Angela to do further research in order to clarify to you

and bring to you, the best she could, the exact expense item, the

check or a bill that would allow you to appropriately recategorize

every deduction?

A. Yeah, I did the best I could on it. It’s... I’m sure that it isn’t

any different than a lot of self-employed people that end up in

Bankruptcy Court. Obviously, their documentation and so forth

is sometimes not what we would hope for because they’re not as

thorough as some other bigger businesses are and so, yes, we

tried to be as accurate as we could.

. . .

Q. . . . Do you agree that the TLK bank account accurately

reflected all income and all expenses?

A. That was my understanding. Everything was going to this one

account, part of this was business expenses, part of this was their

personal expenses, which made it next to impossible for me to

try to sort out what was business versus what was their personal

expenses. So, yes, I depended on Angela to get those figures

together to me so that I could make an accurate calculation here.

Q. . . . Do you agree that the TLK bank account accurately

reflected all income and all expenses?

A. That was my understanding. Everything was going to this one

account, part of this was business expenses, part of this was their

personal expenses, which made it next to impossible for me to

try to sort out what was business versus what was their personal

expenses. So, yes, I depended on Angela to get those figures

together to me so that I could make an accurate calculation here.

Id. at 278–79; see also id. at 293–96 (Kenworthy Testimony discussing how Mrs. Kerschner

provided him with the Debtors’ financial information to include in the original petition and

schedules and the addition new figures two years after the initial bankruptcy filing).

D. Expert Testimony

As noted, the Plaintiffs retained then-attorney Ms. Nami Khorrami as a bankruptcy

expert for the purposes of preparing an independent means test. Joint Ex. 21 at 1 (the “Expert

Report”). In conducting her initial review, Ms. Khorrami examined the six‐month statutory

“look-back” period before the filing of the Debtors’ petition, June 1, 2018 through November

30, 2018, and “considered the documents relevant to the 6‐month period in [her] evaluation

of the means test in this case.” Id. The specific documents reviewed are listed in the appendix

of the Expert Report. See id. at 4.

The Plaintiff’s bankruptcy expert reviewed the Debtors’ various means tests and other

filings, and also conducted a number of her own means test calculations using the underlying

documentation the Debtors supplied related to their income and expenses. Tr. at 315, 318–

24. Ms. Khorrami indicated that her independent review led to the conclusion that the

Debtors had understated their income and overstated their expenses on all versions of their

means tests filed in the case. Joint Ex. 21 at 1–2. Notably, Ms. Khorrami’s independent review

of the Debtors’ underlying documentation revealed “several inconsistencies in the amount of

income and expenses reported by the Debtors,” which Ms. Khorrami could not reconcile. Id.

Ms. Khorrami’s review also revealed that paystubs for both Debtors were omitted from the

means test calculations. Id. Mr. Kenworthy testified that he was not aware that these paystubs

had been missed until he reviewed the Plaintiff’s Expert Report. Id. at 261–62.

In her review, Plaintiff’s bankruptcy expert completed four different means test

calculations. In the Expert Report, she described this process, and her assumptions as follows:

In all 4 ways of calculating the [means test (“MT”)], the W‐2 income of

Debtors was calculated the same way. The difference in calculating the MT

lies in the calculation of the business income and expenses of TLK. I relied

on the deposition testimony of Mrs. Kerschner who testified that the 2018

Income Tax return for TLK, Statement of Revenues & Expenses – Income

Tax Basis and General Ledger are accurate. Accordingly, I calculated the

MT in the following 4 ways:

1) MT based on using the business income and expenses of TLK reflected

in TLK 2018 tax return . . .

2) MT based on using the business income of TLK based on the income

reflected in the [TLK Bank Account] for the 6‐month period, and using

expenses of TLK for the 6‐month period reflected in the General Ledger

. . .

3) MT based on using the income and business expenses of TLK reflected

in the Statement of Revenues & Expenses – Income Tax Basis . . . and

4) MT based on the amended Form 122A‐1 filed by the Debtors on

November 4, 2020, using the same income and expenses for TLK but

including the missing paystubs of Debtors from their W‐2 income . . .

In general, in calculating the MT, I allowed for business deductions that

include actual cash expenses and excluded business deductions for tax

purposes, such as depreciation or guaranteed payments to partners. I did not

allow a deduction for meals and entertainment in any of the MT calculations

since all of these deductions represent the daily meals of Mr. Kerschner

personally. I allowed for mileage reimbursement in the MT calculated based

on Statement of Revenues & Expenses ‐ Income tax Basis, but not in the

other two MT calculations. I allowed certain deductions even though these

expenses might not be actual business expenses. I note that the auto and

truck expenses for TLK include vehicle payments that may already be

deducted as secured debts on MT, which represents double dipping. I also

allowed a deduction for all of the legal and professional expenses, but not all

of the legal services benefited the business as they include the legal services

provided by the bankruptcy attorney of the Debtors as well as the legal

services for providing a defense of the litigation against the Debtors

personally. I allowed a deduction for all secured debts, even for the

surrendered collateral, and provided a deduction for the administrative

expenses of a projected Average Monthly Chapter 13 Plan payment, which

is required by the United States Trustee. I also allowed a deduction in each

of the MT calculation for a self‐employment tax deduction of 15.3% based

on net income of business in all of the 3 MT calculation, as claimed by

Debtors’ counsel.

Joint Ex. 21 at 2–3. The Plaintiffs’ bankruptcy expert concluded that in every iteration of the

four means test calculations (including the three filed with the Court and the one she

prepared), the Debtors failed the means test and thus did not meet the eligibility requirements

for relief under Chapter 7. Id.

IV. Legal Analysis

Because denial of a debtor’s discharge is a harsh remedy, exceptions should be “strictly

construed in favor of the debtor.” United States v. Storey, 640 F.3d 739, 743 (6th Cir. 2011).

The party objecting to the debtor’s discharge “bears the burden of proof by a preponderance

of the evidence.” Buckeye Ret. Co. v. Swegan (In re Swegan), 383 B.R. 646, 653 (B.A.P. 6th Cir.

2008); see also Barclays/Am. Bus. Credit, Inc. v. Adams (In re Adams), 31 F.3d 389, 394 (6th Cir.

1994) (establishing burden of proof for § 727 actions). Still, “a discharge is a privilege, and not

a right, and should only benefit an honest debtor.” CM Temp. Servs., Inc. v. Bailey (In re Bailey),

375 B.R. 410, 415 (Bankr. S.D. Ohio 2007) (citing In re Juzwiak, 89 F.3d 424, 427 (7th Cir.

1996)).

A. Section 727(a)(4)(A)’s “False Oath” Discharge Exception

The Plaintiffs assert that the Debtors’ discharge should be denied under § 727(a)(4)(A)

because they made false oaths in their bankruptcy documentation, schedules, and subsequent

amendments.

“Complete financial disclosure is a prerequisite to the privilege of discharge.” Keeney

v. Smith (In re Keeney), 227 F.3d 679, 685 (6th Cir. 2000). Under § 727(a)(4)(A), a debtor’s

discharge must be denied if he “knowingly and fraudulently, in or in connection with the

case—made a false oath or account.” 11 U.S.C. § 727(a)(4)(A); see also In re McDonald, 29

F.4th 817, 821 (6th Cir. 2022) (identifying § 727(a)(4)(A) as an exception “to the general rule

that the bankruptcy court will grant a discharge of the debtor’s debts. Section 727(a)(4)(A)

prevents discharge when the debtor knowingly and fraudulently makes false statements.”).

“The fundamental purpose of § 727(a)(4)(A) is to [e]nsure that the trustee and creditors

have accurate information without having to do costly investigations.” U.S. Tr. v. Zhang (In re

Zhang), 463 B.R. 66, 86 (Bankr. S.D. Ohio 2012) (quoting Jahn v. Flemings (In re Flemings), 433

B.R. 230, 237 (Bankr. E.D. Tenn. 2010)). “The emphasis is upon complete disclosure in the

initial pleadings that will mold the actions of trustees and creditors, based upon reliable

information. Even a single omission may warrant denial of a discharge.” In re Elsass, 597 B.R.

860, 870 (Bankr. S.D. Ohio 2019).

As the Sixth Circuit Bankruptcy Appellate Panel explained:

The very purpose of . . . 11 U.S.C. § 727(a)(4)(A), is to make

certain that those who seek the shelter of the bankruptcy code do

not play fast and loose with their assets or with the reality of their

affairs. The statutes are designed to insure (sic) that complete,

truthful, and reliable information is put forward at the outset of

the proceedings, so that decisions can be made by the parties in

interest based on fact rather than fiction . . . Neither the trustee

nor the creditors should be required to engage in a laborious tug-

of-war to drag the simple truth into the glare of daylight.

. . .

A discharge is a privilege and not a right and therefore the strict

requirement of accuracy is a small quid pro quo. The successful

functioning of the bankruptcy code hinges upon the bankrupt's

veracity and his willingness to make a full disclosure.

In re Hamo, 233 B.R. 718, 725–26 (B.A.P. 6th Cir. 1999) (citations omitted).

A false oath objection to discharge requires the objecting party to prove by a

preponderance of the evidence that: “1) the debtor made a statement under oath; 2) the

statement was false; 3) the debtor knew the statement was false; 4) the debtor made the

statement with fraudulent intent; and 5) the statement related materially to the bankruptcy

case.” Keeney, 227 F.3d at 685; see also In re Hamo, 233 B.R. 718, 725 (B.A.P. 6th Cir. 1999).

“Whether a debtor has made a false oath under section 727(a)(4)(A) is a question of fact.”

Keeney, 227 F.3d at 685.

1. The “Oaths” at Issue

The Plaintiffs argue that the Debtors made multiple false oaths within the following

documents filed by the Debtors in their initial bankruptcy filings and subsequent amendments:

• Schedules I and J filed with the Debtors’ original petition (Bankr. Doc. 1; Joint Ex. 1

at 38–41);

• Amended Schedules I and J, filed March 27, 2019, and containing business Income

and Expense form (the “Amended I & J”) (Bankr. Doc. 26; Joint Ex. 2);

• the Statement of Financial Affairs filed with the original petition (the “Original

SOFA”) (Bankr. Doc. 1; Joint Ex. 1 at 43–50);

• the Amended Statement of Financial Affairs, filed January 7, 2021 (the “Amended

SOFA”) (Bankr. Doc. 35; Joint Ex. 4);

• The First Means Test (Bankr. Doc. 1; Joint Ex. 1 at 52–53);

• The Second Means Test, filed on November 4, 2020 (Bankr. Doc. 34; Joint Ex. 3);

and

• The Third Means Test, filed on January 7, 2021 (Bankr. Doc. 36; Joint Ex. 5).

2. False Statements, Made Under Oath, Materially Related to the Bankruptcy

It is clear that the Debtors made statements under oath that were false and materially

related to their bankruptcy case. There is no dispute that the statements at issue were made

under oath. The rule is well established that “[s]tatements in a debtor’s bankruptcy schedules

are given under penalty of perjury. Statements made during the meeting of creditors are made

under oath. Statements during depositions or a Rule 2004 examination are also under oath.”

In re Perez, No. 18-8036, 2019 WL 7341580, at *8 (B.A.P. 6th Cir. Dec. 30, 2019) (citations

omitted). And “[f]or purposes of § 727(a)(4)(A), statements made by a debtor in . . . the

statement of financial affairs constitute statements made under oath.” In re Riley, No. 16-

14370, 2021 WL 4227701, at *21 (Bankr. S.D. Ohio Aug. 11, 2021) (Buchanan, J.) (citing

Noland v. Johnson (In re Johnson), 387 B.R. 728, 743 (Bankr. S.D. Ohio 2008)). For that reason,

“any false statement, relating to the debtor’s assets and financial circumstances, made by a

debtor in his schedules, at a meeting of creditors, or during a deposition could potentially lead

to denial of a debtor’s discharge under § 727(a)(4)(A) if all of the required elements to establish

that exception are proven.” Perez, 2019 WL 7341580 at *8; see also Gandy v. Schuchardt (In re

Gandy), 645 F. App’x 348, 352 (6th Cir. 2016) (“False statements in the debtor’s schedules are

sufficient to justify the denial of discharge.”).

Here, the documents at issue were signed by the Debtors under penalty of perjury. See

Bankr. Docs. 1, 26, 34, 35, 36; see also Tr. at 44–45, 50–60 (Walter Kerschner confirming

signature on bankruptcy filings under penalty of perjury); and id. at 158–59, 161–63 (Angela

Kerschner confirming signature on bankruptcy filings under penalty of perjury). Therefore,

all the statements at issue here were made under oath and this element is proved by a

preponderance of the evidence.

With respect to the element of falsity, “[e]rrors and omissions from a debtor’s

bankruptcy schedules and statements can constitute false oaths under § 727(a)(4).” In re

Tiscareno, 551 B.R. 1, 15 (Bankr. N.D. Cal. 2016). Here, there is ample evidence, including

the Debtors’ own admissions, that there were errors and omissions in the information

provided in the Debtors’ bankruptcy petition, schedules, and amendments. See, e.g., Tr. at

133, 210 (pay stubs for both debtors erroneously omitted from initial filings), 269–70 (income

of Tanner Kerschner and Blaine Harden omitted from income and expenses filings), 166–67

(money provided by Walter Kerschner’s mother omitted from income and expense filings),

179–84 (legal fees included as a TLK business expenses related to the Debtors’ personal legal

representation). This is sufficient to establish the element of “falsity” under § 727(a)(4)(A).

See, e.g., In re McWhorter, 557 B.R. 543, 557 (Bankr. E.D. Ky. 2016).

Likewise, the Court easily finds that the false oaths at issue are material to the Debtors’

bankruptcy case. “The subject of a false oath is material if it ‘bears a relationship to the

bankrupt’s business transactions or estate, or concerns the discovery of assets, business

dealings, or the existence and disposition of his property.’” Keeney, 227 F.3d at 685–86

(citations and some internal quotation marks omitted); see also In re Perez, No. 18-8036, 2019

WL 7341580, at *8 (B.A.P. 6th Cir. Dec. 30, 2019). A statement made in a schedule or SOFA

is considered “material” if it “concerns the discovery of assets, business dealings or [the]

existence or disposition of property.” Hamo v. Wilson (In re Hamo), 233 B.R. 718, 725 (B.A.P.

6th Cir. 1999) (citations omitted). “Consequently, an intentional failure to disclose an asset

or property transfer, even if the asset is ultimately deemed worthless, can support a denial of

discharge.” In re Bruce, No. 15-13536, 2019 WL 11639533, at *8 (Bankr. S.D. Ohio Sept. 16,

2019). The reason for this is that “the trustee and creditors should be entitled to judge for

themselves what assets hold value and benefit to the estate. Indeed, the completeness and

veracity of the debtor’s statements are essential to the successful administration of the

Bankruptcy Code.” Id.

The test for determining whether a false oath is material does not require that the false

oath “would have changed [something] with respect to the case or produced an asset or other

benefit to the estate.” In re Gandy, 645 F. App’x 348, 354 (6th Cir. 2016). “In determining

whether or not an omission is material, the issue is not merely the value of the omitted assets

or whether the omission was detrimental to creditors.” Id. Instead “a false oath is material if

it bears a relationship to the bankrupt’s business transactions.” Id. (internal citations omitted);

see also In re McWhorter, 557 B.R. 543, 557 (Bankr. E.D. Ky. 2016) (“Materiality is a broad

standard under Sixth Circuit precedent[.]”); In re Dranichak, No. 10-63042, 2012 WL 2343700,

at *8 (Bankr. N.D.N.Y. June 20, 2012), aff’d sub nom. Dranichak v. Rosetti, 493 B.R. 370

(N.D.N.Y. 2013), 448 B.R. 122, 129 (Bankr. E.D.N.Y. 2011) (“Unlike the issue of intent, the

issue of materiality is straightforward. The threshold of materiality is relatively low: “a false

oath is material if it bears a relationship to the bankrupt's business transactions or estate, or

concerns the discovery of assets, business dealings, or the existence and disposition of his

property.” Gandy, 645 F. App’x at 352 (quotations omitted).

The Sixth Circuit in Gandy also rejected the debtor’s argument that the false statements

were not material because they would not affect his Chapter 7 eligibility, noting that the “test

for determining whether a false oath is material is not so narrow.” Id. at 354. Instead, the

court found his false oaths to be “plainly material,” noting their “relationship to the [debtor’s]

business transactions” and their potential impact on “the rights of . . . creditors to file a motion

to dismiss, as well as whether a presumption of abuse arose in the case and whether [the

debtor] was required to complete additional paperwork.” Id.; see also In re Dunne, No. 15-

33831, 2017 WL 1190611, at *4–5 (Bankr. N.D. Ohio Mar. 29, 2017) (rejecting the debtor’s

“no harm, no foul” argument regarding her misrepresentations as to her marital status, finding

the statement to be material even if it would not have changed anything because “it interfered

with the Trustee and UST’s ability to determine the proper handling of the bankruptcy case

based on facts, rather than fiction”).

Here, like in Gandy, the oaths at issue—which are regarding the Debtors’ personal and

business income and expenses, and the Debtors’ household size—are plainly material, as they

clearly “bear a relationship” to the Debtors’ business transactions and have a potential impact

on creditors’ rights. Indeed, the oaths at issue in this case far surpass the wide threshold for

materiality under § 727(a)(4)(A) because although “materiality” does not require that the

assets at issue be of any value, see Bruce, 2019 WL 11639533 at *8, or that those assets would

“chang[e something] with respect to the case,” see Gandy, 645 F. App’x at 354, the oaths at

issue here have the significant impact on whether a presumption of abuse arose and,

consequently, whether or not the Debtors’ are eligible for Chapter 7 relief. Therefore, the

Court finds that the element of materiality is easily met here.

3. Knowledge & Fraudulent Intent

The remaining two elements to prove a false oath objection to discharge require the

Plaintiffs to show that the Debtors made false statements knowingly, and with fraudulent

intent. See, e.g., Keeney, 227 F.3d at 685.

Regarding the element of fraudulent intent, the Sixth Circuit has stated:

[I]ntent to defraud “involves a material representation that you

know to be false, or, what amounts to the same thing, an

omission that you know will create an erroneous impression.” A

reckless disregard as to whether a representation is true will also

satisfy the intent requirement. “‘Courts may deduce fraudulent

intent from all the facts and circumstances of a case.’” However,

a debtor is entitled to discharge if false information is the result

of mistake or inadvertence.

Id. at 685–86 (internal citations omitted); see also McDermott v. French (In re French), 592 B.R.

653, 657 (Bankr. E.D. Mich. 2018). In other words, “[e]ither fraudulent intent or a reckless

disregard for the truth is sufficient to establish the intent requirement.” In re Bruce, No. 15-

13536, 2019 WL 11639533, at *8 (Bankr. S.D. Ohio Sept. 16, 2019) (citing Keeney, 227 F.3d

at 685–86). “Knowledge may be shown by demonstrating that the debtor knew the truth but

nonetheless failed to give the information or gave contradictory information.” Hamo, 233 B.R.

at 725. “A false statement or omission that is made by mistake or inadvertence is not sufficient

grounds upon which to base the denial of a discharge, but a knowingly false statement or

omission made by the Debtor with reckless indifference to the truth will suffice as grounds for

the denial of a Chapter 7 general discharge.” Id.

Further, “[k]nowledge and intent may be deduced from all of the facts and

circumstances of a case, including the course of conduct of a debtor.” In re Bruce, No. 15-

13536, 2019 WL 11639533, at *8 (Bankr. S.D. Ohio Sept. 16, 2019); see also In re West, 328

B.R. 736, 750 (Bankr. S.D. Ohio 2004). “[A] combination of errors and omissions that

individually may not rise to the level necessary to deny discharge, when taken in the

aggregate, may evidence the requisite fraudulent intent or recklessness.” In re Capra, No. 15-

15907, 2016 WL 5106994, at *10 (Bankr. N.D. Ohio Sept. 19, 2016). “A debtor’s intent may

be inferred from circumstantial evidence or from the debtor’s course of conduct.” In re Hamo,

233 B.R. 718, 724 (B.A.P. 6th Cir. 1999) (citations omitted); see also In re Courtney, 351 B.R.

491, 506 (Bankr. E.D. Tenn. 2006) (“Reckless disregard or indifference for the truth also

demonstrates fraudulent intent. Likewise, intent may be inferred from the Debtor’s conduct,

and a continuing pattern of omissions and/or false statements in his bankruptcy schedules

exhibits reckless indifference.”) (internal citations omitted).

In distinguishing between honest mistakes or inadvertence, and the requisite wrongful

intent, courts have found “two considerations [ ] helpful: (1) the extent and the degree of the

misinformation; and (2) whether there existed a motive to provide the misinformation.” In re

Newell, 321 B.R. 885, 890–91 (Bankr. N.D. Ohio 2005) (discussing wrongful intent under §

727(a)(2), but also finding that “the standard necessary to support a finding of knowingly

making a false statement with the intent to defraud [under § 727(a)(4)(A)] is, for all practicable

purposes, identical to the standard required to support a finding of fraudulent intent under §

727(a)(2)”). “Often, resolution of the question of whether a false statement was made with

intent to deceive will turn on the Court’s assessment of the demeanor and credibility of the

debtor.” West, 328 B.R. at 750.

In this case, the cumulative effect of the Debtors’ errors and omissions related to their

income and expenses are sufficient to demonstrate at least a reckless disregard for the truth,

which is sufficient to establish the intent element under § 727(a)(4)(A). Starting with the

petition, and in contravention of their duties under 11 U.S.C. § 521(a), the Debtors repeatedly

filed information with the Court that inaccurately reported their income and expenses.

i. Debtors’ Income & Expenses

Under 11 U.S.C.A. § 101, “current monthly income” is defined as:

(A) . . . the average monthly income from all sources that the debtor

receives (or in a joint case the debtor and the debtor's spouse

receive) without regard to whether such income is taxable income,

derived during the 6-month period ending on—

(i) the last day of the calendar month immediately preceding

the date of the commencement of the case if the debtor

files the schedule of current income required by section

521(a)(1)(B)(ii); or

(ii) the date on which current income is determined by the

court for purposes of this title if the debtor does not file

the schedule of current income required by section

521(a)(1)(B)(ii); and

(B)(i) includes any amount paid by any entity other than the debtor (or

in a joint case the debtor and the debtor's spouse), on a regular basis for

the household expenses of the debtor or the debtor's dependents (and in

a joint case the debtor's spouse if not otherwise a dependent)

11 U.S.C.A. § 101(10A)(A)–(B)(i). Otherwise stated, “[u]nder this section, the Debtors'

current monthly income is the average monthly income they receive from all sources, without

regard to whether such income is taxable, derived during the six full calendar months

preceding the filing of their bankruptcy petitions; their current monthly income includes

amounts paid by any entity other than the Debtors on a regular basis for the household

expenses of the Debtors or the Debtors' dependents, but excludes specified kinds of benefits

and payments.” In re Harkins, 491 B.R. 518, 525 (Bankr. S.D. Ohio 2013).

Under 11 U.S.C. § 1325, debtors may take expenses that are “reasonably necessary”

to be expended:

(A)(i) for the maintenance or support of the debtor or a dependent of the

debtor, or for a domestic support obligation, that first becomes payable

after the date the petition is filed; and

. . .

(B) if the debtor is engaged in business, for the payment of expenditures

necessary for the continuation, preservation, and operation of such

business.

11 U.S.C.A. § 1325. Under the means test, “[a] debtor's ‘reasonably necessary’ expenses . . .

are fixed by the Internal Revenue Service (“IRS”) National Standards and Local Standards.”

In re Skiles, 504 B.R. 871, 875 (Bankr. N.D. Ohio 2014).

The evidence adduced at trial clearly demonstrates that the Debtors went well beyond

making honest mistakes or inadvertence regarding their income and expenses. The numerous

errors, inconsistencies, and misstatements committed by the Debtors in this case include: (1)

omissions from the Debtors’ income and expense filings, including omission of the income

earned by their household members, Tr. at 269–70, omission of money received from Walter

Kerschner’s mother, Id. at 166–67, and omission of pay stubs for both debtors, Id. at 133, 210,

(2) misstatements of TLK’s expenses, including meals & entertainment, Id. at 97–108, 123,

173–78, and inclusion of personal legal fees, Id. at 179–84, (3) and various inconsistencies

within the three means tests filed. The extent and the degree of misinformation contained in

the Debtors’ reported income and expenses show an intent to deceive. Moreover, from their

testimony the Debtors were highly motived to provide misinformation to the Court in order

to qualify under the means test to remain eligible for Chapter 7 relief.

ii. Debtors’ Household Size & Purported Dependents

Further, Debtors’ ever changing household size and omission of household members’

income supports a finding of reckless disregard for the truth, which is sufficient to establish

the intent element under § 727(a)(4)(A).

In a Chapter 7 case, if a debtor’s annualized income is greater than the applicable

median family income, 11 U.S.C. § 707(b)(2) requires the debtor to complete a series of

calculations to determine if the bankruptcy case is presumed to be an abuse of the Bankruptcy

Code. This computation allows the debtor several income reductions and expenses, including

(among other items not relevant to this analysis) expenses for the support of “dependents” as

follows:

The debtor’s monthly expenses shall be the debtor’s applicable

monthly expense amounts specified under the National

Standards and Local Standards, and the debtor’s actual monthly

expenses for the categories specified as Other Necessary

Expenses issued by the Internal Revenue Service for the area in

which the debtor resides, as in effect on the date of the order for

relief, for the debtor, the dependents of the debtor, and the spouse of

the debtor in a joint case, if the spouse is not otherwise a

dependent. Such expenses shall include reasonably necessary

health insurance, disability insurance, and health savings

account expenses for the debtor, the spouse of the debtor, or the

dependents of the debtor.

11 U.S.C. § 707(b)(2)(A)(ii)(I) (emphasis added). The debtor performs the required

computation, otherwise referred to as the “means test,” on Official Form 122A in accordance

with Fed. R. Bank. P. 1007.

Form 122A is comprised of three parts: (1) 122A-1: Statement of Current Monthly

Income; (2) 122A-1 Supp: Statement of Exemption from Presumption of Abuse Under

§ 707(b)(2); (3) 122A-2: Chapter 7 Means Test Calculation. Form 122A-2 directs the debtor

to assess expenses related to support of “dependents” on various lines, though the form does

not define who can be claimed as a “dependent.” Furthermore, line 5 of 122A-2 directs the

debtor, in deciding the “number of people used in determining your deduction from income,”

to:

Fill in the number of people who could be claimed as exemptions

on your federal income tax return, plus the number of additional

dependents whom you support. This number may be different

from the number of people in your household.

However, the Bankruptcy Code does not define the terms “household,” “family,” or

“dependents.” See, e.g., In re Jewell, 365 B.R. 796, 800 (Bankr. S.D. Ohio 2007). Nor, for that

matter, has the United States Supreme Court or the Sixth Circuit Court of Appeals addressed

the meanings of the terms “dependent” or “household size” for purposes of calculating the

“means test” under Chapter 7. The Bankruptcy Appellate Panel for the Sixth Circuit has also

not addressed this issue.

Across the case law, there appears to be a general consensus that three methods exist

by which bankruptcy courts define the scope of “dependents” and/or “household size” for

purposes of the “means test.” These include: (1) the economic unit test; (2) the Internal

Revenue Service (“IRS”) tax return “dependents” test; and (3) the “heads on bed,” pursuant

to either Census Bureau or ordinary meaning, test. Some courts have characterized the

economic unit test as the majority approach. See, e.g., In re Thomas, No. 17-03558-NPO, 2018

Bankr. LEXIS 2380, at *12 (Bankr. S.D. Miss. Mar. 22, 2018) (joining “the majority of courts

in adopting the economic unit approach”). However, the word “majority” oversimplifies the

status of the caselaw: across all of these methods of defining “dependents,” including the

economic unit test, there are several variations within each based on case-by-case analysis.

In this case, the Court need not determine whether Blaine Hardin, Tanner Kerschner,

or Taylor Kerschner-Moody qualify under the legal definition of “dependents” for purposes

of analysis of the false oaths exception to a Chapter 7 discharge. First, the Debtors’ false oaths

related to their income and expenses suffice to support a finding under 727(a)(4)(A) without

regard to the issue of household size. Second, after considering the totality of circumstances,

the fact that the Debtors changed the numbers of claimed dependents (using adult individuals,

one of whom had no relation to them) in the three different means tests filed in this case

clearly supports an inference of knowing fraudulent intent on their part. See West, 328 B.R. at

750 (“[A] combination of errors and omissions that individually may not rise to the level

necessary to deny discharge, when taken in the aggregate, may evidence the requisite

fraudulent intent or recklessness.”); Bruce, No. 15-13536, 2019 WL 11639533, at *8

(“Knowledge and intent may be deduced from all of the facts and circumstances of a case,

including the course of conduct of a debtor.”).

iii. Further Indicia

Mr. Kerschner provided additional indicia of a reckless disregard or indifference for

the truth when he admitted that he likely did not review certain documents filed in the

bankruptcy, despite signing them under penalty of perjury. See Tr. at 56–60. See In re

McWhorter, 557 B.R. 543, 557 (Bankr. E.D. Ky. 2016) (“An item that affected the impression

of the Debtor’s credibility was his failure to give a direct answer when his attorney asked him

if he thought the petition was accurate when filed.”)

All of these facts and circumstances are compounded by a potential motive to provide

misinformation: the desire to remain Chapter 7 eligible and avoid having to file under Chapter

13 or another chapter, which would require surviving the presumption of abuse. See In re

Newell, 321 B.R. 885, 890–91 (Bankr. N.D. Ohio 2005) (stating that one way “to distinguish

between honest mistakes or inadvertence, and the requisite wrongful intent,” is to consider

“whether there existed a motive to provide the misinformation.”)

iv. Effect of Amendments on Intent Analysis

While the Debtors may argue that their multiple amendments in this case negate any

inference of fraudulent intent, this argument is unavailing. It is true that courts have found

that efforts to cure omissions or misstatements in bankruptcy filings can indicate a lack of

fraudulent intent. See, e.g., Eifler v. Wilson & Muir Bank & Tr. Co., No. 3:13-CV-00785-JHM,

2014 WL 314473, at *11–12 (W.D. Ky. Jan. 28, 2014), aff’d, 588 F. App’x 473 (6th Cir. 2014).

However, fraudulent intent may still be found in the original petition, and it may still be

inferred if the amendments were compelled by a fear of discovery of the errors. As one New

Jersey district court observed:

While subsequent amendments to one’s petition may rectify an

honest mistake, such amendments will not expunge any fraud in

the falsity of a statement set forth in the original petition. Spitko,

357 B.R. at 313; Moore v. Strickland (In re Strickland), 350 B.R. 158,

164 (Bankr.D.Del.2006) (finding that the amendment of the

debtor’s schedules to reflect her interest in a business did not

negate the conclusion that the omission was intended to mislead

or defraud her creditors). Indeed, fraudulent intent has been

inferred despite a debtor’s subsequent disclosure of omitted

assets where such disclosure was “compelled” by the court or by

fears that the omitted assets would soon be discovered. See

Strominger v. Giquinto (In re Giquinto), 388 B.R. 152, 181

(Bankr.E.D.Pa.2008) (finding an absence of fraudulent intent

where the debtor’s submission of an amended petition was

voluntary and not the result of fears that the omitted assets would

be discovered); Spitko, 357 B.R. at 313 (explaining that a debtor's

omission of an asset that is already known to the trustee or a

creditor will not be excused even when the debtor belatedly

discloses that asset); Dolata, 306 B.R. at 153–54 (finding

fraudulent intent and denying discharge despite amendment

because the subsequent disclosure was compelled by the court).

In addition, where a debtor’s underreporting or omission of

assets is at issue, “no carelessness [can] excuse the Debtor’s

failure to amend his schedules promptly when he had the leisure

to do so.” Zimmerman, 320 B.R. at 810.

In Re Corona, No. 08-15924 (DHS), 2010 WL 1382122, at *10 (D.N.J. Apr. 5, 2010); see also

McWhorter, 557 B.R. at 557 (finding the debtor’s argument that an amendment to his SOFA

to correct previous errors and omissions did not demonstrate a lack of fraudulent intent where

the debtor’s amendment and admissions “all occurred after the Trustee became aware of the

[previously undisclosed] transfers through his own independent investigations,” which

supported an “easy” determination that the debtor had “knowingly and intentionally made

false statements and omissions” under the false oaths exception to discharge).

Similarly, here, while the Debtors did make amendments to their schedules, means

tests, and SOFA, these amendments do not negate an inference of reckless indifference (at

best) which is sufficient to justify denial of discharge under the false oaths exception. First,

these amendments were made well after the original petition was filed, with some

amendments not being made until after this adversary proceeding was filed. And what’s more:

the amendments themselves still include errors and ultimately contained information that was

unable to be reconciled by a bankruptcy expert. See Joint. Ex. 21.

In total, this case bears marked similarities to Gandy v. Schuchardt (In re Gandy), 645 F.

App’x 348, 352 (6th Cir. 2016). In Gandy, the Sixth Circuit affirmed the bankruptcy court’s

denial of the debtor’s discharge under § 727(a)(4)(A). Over the course of two years, the debtor

in the Gandy case had filed and relied on schedules that reported inaccurate income,

inconsistently reported his marital status, and listed educational expenses for a minor child

when the debtor had no minor children. His repeated failure to correct any mistakes despite

objections from a creditor “gave the bankruptcy court reason to find that [the debtor] had

acted with the requisite fraudulent intent.” Id. at 353. And especially given the pattern and

delay in correction, the court did not find convincing the debtor’s arguments that the

inaccuracies were due to mistake or inadvertence.

In conclusion, the Court finds that the cumulative effect of the Debtors’ serial errors

and omissions under the circumstances of this case give rise to the inference of a fraudulent

intent or, at least, a pattern of reckless disregard for the truth. Therefore, this element is proved

by a preponderance of the evidence under § 727(a)(4)(A).

B. Advice of Counsel Defense

As a last resort, the Debtors assert that they are entitled to an advice-of-counsel

defense, contending that any falsity or errors in their bankruptcy filings were made in reliance

on the advice of their bankruptcy attorney, Gary Kenworthy.

In certain circumstances, reliance on the advice of counsel “can show that the debtor

lacked the requisite intent required to deny his discharge.” Eifler v. Wilson & Muir Bank & Tr.

Co., 588 F. App’x 473, 478 (6th Cir. 2014) (quoting Buckeye Retirement Co., LLC v. Swegan (In

re Swegan), 383 B.R. 646, 656 (B.A.P. 6th Cir. 2008)). Such reliance, however, must be

reasonable and in good faith. In re Swegan, 383 B.R. 646, 656 (B.A.P. 6th Cir. 2008). More

specifically—to prevail on the advice of counsel defense, the Debtors must demonstrate “(1)

full disclosure of all pertinent facts to counsel, and (2) good faith reliance on counsel’s advice.”

Eifler, 588 F. App’x at 478–79.

“A debtor cannot, merely by playing ostrich and burying his head deeply enough in

the sand, disclaim all responsibility for statements which he has made under oath.” Church

Joint Venture, L.P. v. Blasingame (In re Blasingame), 559 B.R. 692, 699 (B.A.P. 6th Cir. 2016)

(ultimately quoting Boroff v. Tully (In re Tully), 818 F.2d 106, 111 (1st Cir. 1987)). This is

because the duty to fully disclose information in bankruptcy filings falls on debtors, not their

attorneys. See Eifler v. Wilson & Muir Bank & Tr. Co., No. 3:13-CV-00785-JHM, 2014 WL

314473, at *11 (W.D. Ky. Jan. 28, 2014), aff’d, 588 F. App’x 473 (6th Cir. 2014) (finding that

the debtor could not “simply hope to dump ‘all of the pertinent financial documents’” on his

attorney and then argue a reliance-on-counsel defense, particularly where the attorney used a

method of having clients review their forms multiple times and instructed clients to make

corrections, and where the debtor could not identify any testimony where his attorney advised

him to make the omissions that were made). Indeed, “[a] debtor has an affirmative duty to

disclose all of its assets to the bankruptcy court.” Browning v. Levy, 283 F.3d 761, 775 (6th Cir.

2002).

In this case, Debtors’ assertion of the advice of counsel defense fails because they failed

to fully disclose all pertinent facts to their attorney. As much was admitted by both the Debtors

in their testimony and confirmed by Mr. Kenworthy in his. Overwhelming evidence presented

at trial clearly shows that Debtors had not fully disclosed to Mr. Kenworthy all their income

and expenses in preparation for filing for bankruptcy relief:

• The Debtors did not disclose certain sources of income to Mr. Kenworthy, such as

their receipt of thousands of dollars from Mr. Kerschner’s mother, Jane Kerchner. Tr.

at 166–67.

• Mr. Kenworthy was completely unaware of and apparently had not been told about

the extent of income of the Debtors’ purported household members. Id. at 169–70.

• Mrs. Kerschner admitted that at least one paycheck “was missed” and so not initially

provided to Mr. Kenworthy in preparing their bankruptcy filings. Id. at 210.

• Mr. Kenworthy testified that he had not been shown the Debtors’ QuickBooks

accounting documentation until after their initial schedules were filed. Id. at 276–77.

• Mr. Kenworthy testified that he only received other additional income and expense

information after review of the Plaintiffs’ Expert Report. Id. at 265–69.

Mr. Kenworthy relied upon the income and expense figures provided by the Debtors,

including changes that the Debtors made to those figures over the period from the original

petition through the trial for this adversary proceeding. See id. at 251–52, 293–97. For

example, Mr. Kenworthy used TLK’s Expense Summaries created by Mrs. Kerschner for the

means test calculations, and he confirmed that he had not seen some of the information

included in the Second Expense Summary until he received it in December of 2020—two

years after the petition date. See id. at 265.

It does seem that the Debtors’ relied heavily on Mr. Kenworthy’s experience and

advice, and there was at least one computation error admitted by Mr. Kenworthy himself. See

id. at 264, 275 (Mr. Kenworthy explaining a computation error in calculating paystubs); see

also id. at 209 (Mrs. Kerschner’s testimony confirming computation error). Even so, for

Debtors to prove the advice-of-counsel defense, it is also incumbent upon them to

demonstrate that they provided “full disclosure of all pertinent facts” to their attorney.

Because the Debtors’ failed to demonstrate full disclosure to their attorney here, their advice-

of-counsel defense fails.

V. Conclusion

For the reasons stated above, the Court finds that the Debtors’ discharge must be

DENIED under § 727(a)(4)(A) of the Bankruptcy Code and that judgment should be granted

in favor of the Plaintiffs and against the Debtors. The Court will enter a separate judgment

entry in accordance with this opinion.

IT IS SO ORDERED.

Dated: May 22, 2024 (Aripag lf Shpbessam

Je ¢ Hopkins

United States District Judge

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