Hagen v. McFarland (In re McFarland)

• Decision Date: 29 September 2012
• Docket Number: Case Number 11-10218,Adversary Case Number 11-01054
• Parties: In re: THOMAS J. McFARLAND Debtor JOYLYNN HAGEN Plaintiff v. THOMAS J. McFARLAND Defendant
• Court: U.S. Bankruptcy Court — Southern District of Georgia

IN RE: THOMAS J. McFARLAND DebtorJOYLYNN HAGEN Plaintiff

v.THOMAS J. McFARLAND Defendant

Case Number 11-10218

Adversary Case Number 11-01054

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF GEORGIA Augusta Division

Dated: September 29, 2012

Chapter 7

OPINION AND ORDER

Joylynn Hagen ("Hagen" or "Plaintiff"), a creditor in this chapter 7 bankruptcy of Thomas J. McFarland ("Debtor" or "Defendant") filed this adversary proceeding pursuant to 11 U.S.C. §727(d) to revoke the Debtor's bankruptcy discharge. In response, Defendant filed a Motion to Dismiss the Amended Complaint,¹ as well as a Motion to Strike and a Motion for Sanctions.

Debtor filed the motion to dismiss pursuant to FederalRule of Civil Procedure 12{b)(6).² In accordance with Federal Rule of Civil Procedure 12(d), the motion to dismiss is converted to a summary judgment motion and matters outside the pleadings have been tendered by both parties and considered by the Court. See Fed. R. Civ. P. 12(d); Rainwater v. 21st Morta. Corp., 2010 WL 1330624 *7 n. 11 (E.D. Tex. Feb. 25, 2010).³ For the reasons discussed below, after converting the Motion to Dismiss to a summary judgment motion, the motion is Granted in Part and Denied in Part. In addition, the Motion to Strike and the Motion for Sanctions are DENIED.

FACTS

As way of background, this bankruptcy was precipitated by a $1,050,000.00 personal injury verdict against Debtor. Debtor does not have adequate insurance to satisfy the judgment. During the pendency of the personal injury lawsuit, Debtor began consulting with his bankruptcy counsel more than a year before the verdict was returned. Debtor filed this chapter 7 bankruptcy within hours of the verdict.

No objection to discharge was filed prior to the May 9, 2011 ("the Bar Date") and Debtor received his chapter 7 discharge on June 28, 2011. On October 11, 2011, Plaintiff filed this adversary seeking to revoke the discharge alleging the Debtor procured his discharge through fraud. Subsequently, Plaintiff amended her complaint on October 21, 2011. Plaintiff alleges she did not know of Debtor's fraud until after Debtor's discharge, and that if the fraud had been revealed prior to the discharge, it would have prevented Debtor from receiving the discharge. More specifically, the Complaint alleges Debtor committed fraud --

... in that Debtor failed to list all of his assets in his schedules. Debtor: 1) understated his income; 2) failed to list certain income; 3) transferred a half interest in his most valuable assets in advance of filing his Chapter 7 petition; 4) failed to list current values of certain assets; 5) inconsistently represented that his wife owned a half interest in certain property; 6) failed to properly maintain his assets; 7) failed to list on his schedules the assets of his wife; [ ] 8) failed to maintain proper business records... [and 9)] has knowingly and fraudulently made a false oath or account in connection with the underlying Chapter 7 case.

Dckt. No. 8, Complaint, ¶¶ 5 and 26. Conversely, Debtor denies he obtained his discharge through fraud. Any mistakes were oversights and Plaintiff was given notice of most of the matters prior to Debtor's discharge. Furthermore, Debtor contends, even if known, none of the matters would have resulted in a denial of Debtor'sdischarge.

For purposes of this opinion the key dates are:

March 9, 2011 - §341 Meeting date.

May 9, 2011 - Bar date to file objections to discharge. ("Bar Date").

June 6, 2011 - First 2004 examination date. ("First 2004 Examination").

June 28, 2011 - Debtor received his discharge.

August 22, 2011 - Second 2004 examination date ("Second 2004 Examination").

October 11, 2011 - Plaintiff filed her motion to revoke the discharge.

CONCLUSIONS OF LAW

Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c);⁴ see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

[A] party seeking summary judgment always bears the initial responsibility of informing the . . . court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, andadmissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.

Celotex, 477 U.S. at 323 (internal quotations omitted). Once the moving party has properly supported its motion with such evidence, the party opposing the motion "may not rest upon the mere allegations or denials of his pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); First Hat'I Bank of Arizona v. Cities Servs. Co.. 391 U.S. 253, 288-89 (1968); Fed. R. Civ. P. 56(e). "In determining whether the movant has met its burden, the reviewing court must examine the evidence in a light most favorable to the opponent of the motion. All reasonable doubts and inferences should be resolved in favor of the opponent." Amey, Inc. v. Gulf Abstract & Title, Inc., 758 F.2d 1486, 1502 (11th Cir. 1985)(citations omitted).

As the Eleventh Circuit has noted 11 U.S.C. §727(d)(l) requires a court to revoke a debtor's discharge if:

(1) the debtor obtained the discharge through fraud;

(2) the creditor possessed no knowledge of the debtor's fraud prior to the granting of the discharge; and

(3) the fraud, if known, would have resulted in the denial of the discharge under 11 U.S.C. §727(a).

The Cadle Co. v. Matos (In re Matos), 267 F. App'x 884, 887 (11th Cir. 2008). Revoking a debtor's discharge is an extraordinary remedy. Deanqelis v. Shiloh (In re Shiloh). 2011 WL 3204916 *1 (Bankr. M.D. Pa. July 26, 2011). Revocation of a discharge under §727(d)(1) requires "both the existence of fraud in procuring the discharge and proof that the party requesting the revocation of the discharge did not know of such fraud until after the granting of the discharge." Grant v. Putnam (In re Putnam), 85 B.R. 881, 883 (Bankr. M.D. Fla. 1988). The party seeking revocation of a discharge bears the burden of proving all three of the conditions of §727(d) have been met by a preponderance of the evidence. Groaan v. Garner, 498 U.S. 279, 288 (1991). Courts construe the provisions of §727(d) liberally in favor of debtors; "the reasons must be real and substantial, not merely technical and conjectural." In re Matos, 267 F. App'x at 886.

"The phrase 'discharge was obtained through the fraud of the debtor' has been construed to refer to the behavior that would be sufficient for the denial of discharge under §727(a)(2)-(5)." Davis v. Osborne (In re Osborne), 476 B.R. 284, 292 (Bankr. D. Kan. 2012); Walton v. Staub (In re Staub) , 208 B.R. 602 (Bankr. S.D. Ga. 1997)(discharge revoked for failure to disclose checking account business income, and military service income); O'Neal v. DePriest (In re DePriest), 414 B.R. 518 (Bankr. W.D. Mo. 2009) (dischargerevoked for failure to disclose 100% ownership interest in limited liability company and monthly income); Qlsen v. Reese (In re Reese), 203 B.R. 425 (Bankr. N.D. Ill. 1997) (discharge revoked for failure to disclose entitlement to federal and state tax returns). However, "[a]s a general rule, to obtain relief under §727(d)(1), it is insufficient that a debtor's fraud render a particular debt nondischargeable; claimant must allege that the entire discharge would not have been granted but for debtor's fraud. Barnes v. Vision Bank (In re Barnes), 2010 WL 1254876 *7 (Bankr. N.D. Ala. March 24, 2010).

Plaintiff alleges four main grounds to revoke Debtor's discharge pursuant to §727(d)(1). First, Plaintiff contends Debtor failed to list a whole life insurance policy valued at approximately $13,000.00. It is undisputed that Debtor failed to disclose this policy before his discharge was entered and that Plaintiff was unaware of the policy until after Debtor's discharge was entered. In fact, Debtor testified at his first meeting of creditors that he had no whole life insurance policy. Chap. 7 Case No. 11-10218, Dckt. No. 144, Tr. §341 meeting, p. 14, lines 20-22.

Then, on June 6, 2011, Debtor testified he had again examined all his insurance policies and they were all term policies, purchased in the 1980s. Dckt. No. 26, Tr. 2004 Examination, pp. 38 and 67, lines 3-20 and lines 12-21. He testified that the insuranceexpenditure on his Schedule J was for insurance belonging to his wife and not for any insurance that belonged to him. Id. at 64-65. Debtor contends he voluntarily disclosed the policy when he discovered it in his safe deposit box while responding to discovery requests from the Chapter 7 trustee that were unrelated to the policy.⁵

The mere fact that this policy may be exemptible under Georgia's exemption statutes does not affect the §727(d)(1) analysis. See In re Horton, 252 B.R. 245, 248 (Bankr. S.D. Ga. 2000). However, in connection with Debtor's attempt to exempt this policy in his bankruptcy, I have reviewed the various depositions and heard Debtor's testimony and cross-examination concerning his discovery of this policy. It is true that Debtor had consulted with bankruptcy counsel for at least a year before filing bankruptcy and that this policy should have been disclosed. Nevertheless, after considering the matter and observing Debtor's demeanor, I do not find Debtor's conduct falls within the parameters of §727(a)(2), (a)(3) or (a)(4), and therefore, I find Debtor is entitled to summary judgment as to Plaintiff's claims to revoke Debtor's discharge pursuant to §727(d)(1) for his failure to timely disclosethis whole life insurance policy. In re Matos, 267 F. App'x at 888 (quoting and affirming the bankruptcy court's conclusion that the error was through inadvertence or an honest mistake and therefore denying mo...