Goldstein v. Zilberbrand (In re Zilberbrand)

• Decision Date: 18 July 2019
• Docket Number: No. 19 A 129,No. 17 B 4034,17 B 4034,19 A 129
• Citation: 602 B.R. 53
• Parties: IN RE: Jason Lewis ZILBERBRAND, Debtor. Ilene F. Goldstein, not individually, but as chapter 7 trustee for the estate of Jason Lewis Zilberbrand, Plaintiff, v. Jason Lewis Zilberbrand, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

602 B.R. 53

IN RE: Jason Lewis ZILBERBRAND, Debtor.Ilene F. Goldstein, not individually, but as chapter 7 trustee for the estate of Jason Lewis Zilberbrand, Plaintiff,

v.Jason Lewis Zilberbrand, Defendant.

No. 17 B 4034

No. 19 A 129

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed July 18, 2019

Attorneys for plaintiff Ilene F. Goldstein, chapter 7 trustee: Paul M. Bauch, Carolina Y. Sales, Justin R. Storer, Bauch & Michaels, LLC, Chicago, IL

Attorney for defendant Jason Lewis Zilberbrand: Jeffrey C. Dan, Crane, Simon, Clar & Dan, Chicago, IL

MEMORANDUM OPINION

A. Benjamin Goldgar, United States Bankruptcy Judge

Before the court for ruling is the motion of defendant Jason Lewis Zilberbrand under Rule 12(b)(6) of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 12(b)(6) (made applicable by Fed. R. Bankr. P. 7012(b) ) to dismiss the complaint of chapter 7 trustee Ilene Goldstein for failure to state a claim. In her complaint, Goldstein asks to have Zilberbrand's discharge revoked under section 727(d)(1) of the Bankruptcy Code, 11 U.S.C. § 727(d)(1), because he obtained the discharge through fraud.

For the reasons below, Zilberbrand's motion will be denied.

1. Jurisdiction

The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding. 28 U.S.C. § 157(b)(2) ; Steege v. Johnsson (In re Johnsson) , 551 B.R. 384, 389 (Bankr. N.D. Ill. 2016).

2. Facts

On a Rule 12(b)(6) motion, all well-pleaded facts in the complaint are taken as true, and all reasonable inferences are drawn in favor of the non-movant. Trujillo v. Rockledge Furniture LLC , 926 F.3d 395, 397 (7th Cir. 2019). Goldstein's complaint alleges the following facts.

Jason Zilberbrand is a discharged chapter 7 debtor who ran an aircraft brokerage business called Aurum Jets. (Compl. ¶¶ 8, 13, 14, 18). Zilberbrand filed his chapter 7 case in February 2017. (Id. ¶ 8). Six months later, a creditor, David Gassman, moved to dismiss the case under section 707(a) of the Bankruptcy Code, 11 U.S.C. § 707(a). (Id. ¶ 9). The motion was heavily litigated (id. ¶ 10) and eventually led to an evidentiary hearing on March 14 and 15, 2018 (id. ¶ 12).

At the hearing, Zilberbrand appeared and testified about his financial circumstances. (Id. ¶ 13). Among other things, Zilberbrand testified that (a) the previous year he had made only $53,000 in income; (b) Aurum Jets was out of business; (c) he was not operating any kind of business; (d) he was unemployed; and (e) he was trying to get a consulting job of some kind. (Id. ¶¶ 13, 18-19, 25). No one else testified.¹ Based on Zilberbrand's uncontested testimony, the bankruptcy court found that Aurum Jets was out of business, Zilberbrand was unemployed, and Zilberbrand had no current source of income. (Id. ¶ 13). The court therefore denied Gassman's motion. (Id. ). Zilberbrand received his discharge on March 15.

Zilberbrand's testimony at the March 2018 bankruptcy hearing was false (id. ¶¶ 15, 33):

• In June 2017, Aurum Jets or Zilberbrand had received a $97,000 commission on an aircraft sale. (Id. ¶ 25). Zilberbrand tried to hide the income by having it transferred to his wife's bank account and reporting it as her income on their joint tax return. (Id. ¶ 27).

• On March 20, 2018, just days before the March 2018 hearing, Zilberbrand had updated his status on his Facebook page to show he was president of something called "Vref," which he described as an "Aircraft and Helicopter valuation guide." (Id. ¶ 20).

• In June 2018, three months after the March 2018 hearing, either Zilberbrand or Aurum received a $63,294.80 commission from an aircraft sale. (Id. ¶ 22). Zilberbrand again tried to hide the income by having it transferred to his wife's bank account. (Id. ¶ 23).

• Meanwhile, Zilberbrand had moved in his divorce case to have the state court modify his child support obligations. (Id. ¶ 11). At a deposition taken in the divorce case after Zilberbrand received his discharge, he confirmed that since March 2018 he had worked for Aerospace Data Solutions as president of Vref. (Id. ¶ 21).

In January 2019, the state court determined that Zilberbrand had lied to the bankruptcy court at the March 2018 hearing. (Id. ¶¶ 16, 31). Specifically, the state court found Zilberbrand was "hiding assets" from the bankruptcy court because he concealed the two aircraft sales commissions. (Id. ¶¶ 16, 30-32). This court found Zilberbrand had no income, the state court said, only because it was unaware of the hidden commissions. (Id. ¶ 30).

The trustee in Zilberbrand's bankruptcy case, Ilene Goldstein, first learned of the evidence presented to the state court and the state court's findings the next month. (Id. ¶ 17, 39). She filed her complaint to revoke his discharge on March 12, 2019, within one year after the discharge was entered.

Zilberbrand now moves to dismiss Goldstein's complaint for failure to state a claim. Goldstein opposes the motion.

3. Discussion

Zilberbrand's motion will be denied. The complaint states a claim to revoke his discharge – indeed, the question is not a close one. Most of Zilberbrand's arguments for dismissal are not even cognizable under Rule 12(b)(6).

a. Rule 12(b)(6) Standards

To survive a motion to dismiss under Rule 12(b)(6), a plaintiff's complaint must clear "two easy-to-clear hurdles." E.E.O.C. v. Concentra Health Servs., Inc. , 496 F.3d 773, 776 (7th Cir. 2007). First, the complaint must describe the claim in enough detail to give fair notice of the claim and the grounds for it. Cornielsen v. Infinium Capital Mgmt., LLC , 916 F.3d 589, 598 (7th Cir. 2019) ; see also Fed. R. Civ. P. 8(a) (made applicable by Fed. R. Bankr. P. 7008 ). "[A] formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Specifics are unnecessary, Olson v. Champaign Cty. , 784 F.3d 1093, 1098 (7th Cir. 2015), but some facts must support each element, Ashcroft v. Iqbal , 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

Second, the complaint must state a claim "plausible on its face," Twombly , 550 U.S. at 570, 127 S.Ct. 1955 – meaning the plaintiff's right to relief must rise above a "speculative level," id. at 555, 127 S.Ct. 1955 ; see also Cornielsen , 916 F.3d at 598. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ; see also Lewis v. City of Chi. , 914 F.3d 472, 475 (7th Cir. 2019).

b. Section 727(d)(1)

Section 727(d)(1) of the Code declares that the court must revoke a chapter 7 discharge if it "was obtained through the fraud of the debtor, and the [plaintiff] did not know of such fraud until after the granting of such discharge." 11 U.S.C. § 727(d)(1). As the statute's structure suggests, a complaint under section 727(d)(1) must allege two elements: "(1) that the discharge was obtained through fraud; and (2) that the [plaintiff] lacked knowledge of [the] fraud until after the discharge was granted." Cox v. Gordon (In re Gordon) , Nos. 08-71182, 08-7121, 2009 WL 2169872, at *3 (Bankr. C.D. Ill. July 20, 2009) ; see also Zedan v. Habash (In re Habash) , 360 B.R. 775, 778 (N.D. Ill. 2007), aff'd , 529 F.3d 398 (7th Cir. 2008) ; Grochocinski v. Eckert (In re Eckert) , 375 B.R. 474, 478-79 (Bankr. N.D. Ill. 2007), aff'd , No. 07 C 6012, 2008 WL 4547224 (N.D. Ill. Apr. 2, 2008).

The first element requires "fraud in the procurement of discharge," not just fraud toward a creditor. Jones v. First Nat'l Bank of Harrisburg (In re Jones) , 71 B.R. 682, 684 (Bankr. S.D. Ill. 1987). The fraud must also be "fraud in fact," meaning an intentional wrong. Eckert , 375 B.R. at 479. The debtor, in other words, must have had "an intent to deceive." Chicago Patrolmen's Fed. Credit Union v. Maxwell (In re Maxwell) , 597 B.R. 418, 423 (Bankr. N.D. Ill. 2019). Direct evidence of intent is unnecessary; intent can be inferred "from a course of conduct" or "from all of the surrounding circumstances." In re Yonikus , 974 F.2d 901, 905 (7th Cir. 1992).

The second element requires that the plaintiff "not know of the fraud until after the granting of the discharge." 6 Collier on Bankruptcy ¶ 727.17[3] at 727-80 (Richard Levin & Henry J. Sommer eds., 16th ed. 2019). That the plaintiff lacked actual knowledge is insufficient. He must show that he "did not know and could not have known of the fraud ...." Schechter v. McAniff (In re McAniff) , Nos. 02 B 38990, 03 A 4407, 2004 WL 1146699, at *4 (Bankr. N.D. Ill. May 21, 2004) ; see also Smith v. Seferian , No. 11 C 5036, 2011 WL 6753989, at *3 (N.D. Ill. Dec. 21, 2011) (stating that a plaintiff knew of the fraud if he had facts or information that "would ordinarily put a reasonable person on notice").

Some courts, mainly in other circuits, add a third element. They say the debtor's fraud must also have been the kind that would have prevented discharge had there been an objection under section 727(a). See, e.g. , Avery v. Gonzalez (In re Gonzalez) , Nos 2:15-bk-25283-RK, 2:16-ap-01037-RK, 2019 WL 1770013, at *12-13 (Bankr. C.D. Cal. Mar. 27, 2019) ; Miller v. Washabaugh (In re Washabaugh) , 572 B.R. 141, 151 (Bankr. M.D.N.C. 2017) ; Layng v. Cunningham (In re Cunningham) , Nos. 13-20832, 14-2008, 2015 WL 652550, at *3 (Bankr. D. Wyo. Feb. 13, 2015) ; Gebhardt v. Seedor (In re Seedor) , Nos. 3:13-bk-2811-PMG, 3:13-ap-434-PMG, 2014 WL 1600857, at *5 (Bankr. M.D. Fla. Apr. 17, 2014) (requiring as a third element that "the fraud, if known, would have resulted in the denial of discharge under 11 U.S.C. § 727(a)") (internal quotation omitted).

This third element may lend analytical clarity to the general term "fraud," and it may work well in most cases – for example, when a debtor made misrepresentations in his schedules of a kind a creditor or trus...