In re Barnes, Case No. 09-00600-BGC7 (Bankr. N.D. Ala. 3/24/2010)

• Decision Date: 24 March 2010
• Docket Number: AP No. 09-00111-BGC.,Case No. 09-00600-BGC7.
• Parties: In re: Jerry Wayne Barnes, Debtor. Jerry Wayne Barnes, Plaintiff, v. Vision Bank, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

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In re: Jerry Wayne Barnes, Debtor Jerry Wayne Barnes, Plaintiff, v. Vision Bank, Defendant.

Case No. 09-00600-BGC7.

AP No. 09-00111-BGC.

United States Bankruptcy Court, N.D. Alabama, Southern Division.

March 24, 2010.

Memorandum Opinion on the Plaintiff's Motion to Dismiss Defendant's Counterclaim

BENJAMIN COHEN, Bankruptcy Judge

The debtor filed the pending complaint on May 11, 2009. Docket No. 1. The defendant filed an answer and counterclaim on June 12, 2009. Docket No. 9. The matter before the Court is the June 22, 2009, Plaintiff's Motion To Dismiss Defendant's Counterclaim. Docket No. 10. A hearing was held on August 5, 2009. Appearing were the debtor-plaintiff, Mr. Jerry Wayne Barnes; his attorney, Mr. Steven D. Altmann; and Mr. Richard M. Gaal, the attorney for Vision Bank, the defendant. The matter was submitted on the pleadings, the record in this case, and the arguments and briefs of counsel.

I. Background

In his complaint, the debtor-plaintiff seeks to avoid a judicial lien pursuant to sections 522(h) and 547(b) of the Bankruptcy Code. 11 U.S.C. §§ 522(h) and 547(b). Docket No. 1. In its counterclaim, Vision Bank, the defendant-creditor who holds the lien, seeks to revoke the debtor's Chapter 7 discharge pursuant to section 727(d) of the Bankruptcy Code. 11 U.S.C. §727. Docket No. 9.¹ The only matter before the Court at this time is the debtor-plaintiff's request to dismiss the counterclaim.

II. The Debtor's Burden

The debtor's motion to dismiss the defendant's "complaint" is based on Rule 12(b)(6) of the Federal Rules of Civil Procedure.² The law in this Circuit is that this Court may not dismiss a complaint under that rule, "`unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.' Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); accord Burch v. Apalachee Community Mental Health Servs., Inc., 840 F.2d 797, 798 (11th Cir.1988) (en banc), cert. granted, 489 U.S. 1064, 109 S.Ct. 1337, 103 L.Ed.2d 807 (1989)." Dunwoody Homeowners Ass'n, Inc. v. DeKalb County, Ga., 887 F.2d 1455, 1458 (11^th Cir. 1989).

In addition, this Court must consider:

When reviewing a motion to dismiss pursuant to Rule 12(b)(6), we take the material allegations of the complaint and its incorporated exhibits as true, Walker Process Equip. v. Food Machinery & Chemical Corp., 382 U.S. 172, 174-75, 86 S.Ct. 347, 348-49, 15 L.Ed.2d 247 (1965), and liberally construe the complaint in favor of the plaintiff. See Fed.R.Civ.P. 8(f); Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). This standard of review mandates that we reverse the dismissal "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley, 355 U.S. at 45-46, 78 S.Ct. at 102.

Burch v. Apalachee Community Mental Health Servs., Inc., 840 F.2d 797, 798 (11th Cir.1988) (en banc), cert. granted, 489 U.S. 1064 (1989), judgment affirmed, 494 U.S. 113 (1990).

III. Vision Bank's Burden

Notwithstanding the burden the debtor must satisfy before the Court may dismiss the pending counterclaim complaint, as the discussion below demonstrates, the burden the bank must satisfy before the Court may revoke this debtor's discharge is even more difficult. This is particularly evident in the instant case because the proof offered by the bank relates to the nondischargeability of a specific debt or the denial of a discharge before it was entered, rather than to revocation of a discharge after it was entered. As such, the Court has compared the proofs necessary to effect those actions to determine whether the former proofs will satisfy the latter. The proofs are certainly not the same, and as this opinion explains, where certain proof may support a complaint to determine the nondischargeability of a debt or to deny entry of a discharge, it may not be sufficient to support a complaint to revoke a discharge.

The per curiam opinion of the Court of Appeals for the Eleventh Circuit in In re Matos, Case No. 07-12628, 2008 WL 596744 (11th Cir. Mar 06, 2008) (unpublished opinion) explains why the burden to revoke discharge is different. It includes:

An individual debtor's pre-bankruptcy debts are generally dischargeable in a Chapter 7 bankruptcy case. 11 U.S.C. § 727(a), (b). "Moreover, courts generally construe the statutory exceptions to discharge in bankruptcy `liberally in favor of the debtor,' and recognize that `[t]he reasons for denying a discharge... must be real and substantial, not merely technical and conjectural.'" In re Miller, 39 F.3d 301, 304 (11th Cir.1994) (quoting In re Tully, 818 F.2d 106, 110 (1st Cir.1987)). This is so because revocation of a discharge in bankruptcy is an extraordinary remedy. See In re Bowman, 173 B.R. 922, 924 (9th Cir. BAP 1994).

Id. at *1 (emphasis in original).³

The opinion includes later:

In considering whether to grant revocation of a discharge, a bankruptcy court should consider these factors: "[1] the detriment to the proceedings and the dignity of the court against the potential harm to the debtor if the discharge is denied ... [;][2] the intent behind the bankrupt's acts—were they wilful or was there a justifiable excuse; [3] was there injury to the creditors; and [4] is there some way the bankrupt could make amends for his conduct." In re Jones, 490 F.2d 452, 456 (5th Cir.1974) (citation omitted).

Id. at *2 (footnote omitted).

IV. Vision Bank's Counterclaim

Vision Bank's counterclaim contains four counts.

A. Count I

Count I relies on both subsections (d)(1) and (d)(2) of section 727.⁴

1. Section 727(d)(1)

Subsection 727(d)(1) provides, "The court shall revoke a discharge... if: (1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge." 11 U.S.C. §727(d)(1) (emphasis added).

Vision Bank's Count I alleges that the debtor fraudulently and intentionally concealed assets from the trustee by not listing them on his bankruptcy petition. It alleges that in financial statements the debtor provided to Vision Bank before filing bankruptcy, the debtor listed assets he did not list later on his bankruptcy petition. Vision Bank concludes that the debtor necessarily concealed those unlisted assets from the trustee.

In contrast to its position, Vision Bank admits that: (1) prior to the bankruptcy, it received financial statements from the debtor that purportedly contained descriptions of the assets allegedly not listed by the debtor in his bankruptcy schedules; and (2) it knew that those assets were not listed by the debtor in his schedules. Therefore, Vision Bank knew, well prior to the date that the debtor received his discharge, of the alleged fraud upon which Count I of its counterclaim is based. In other words, it knew prior to the date that the discharge was granted that those assets had not been divulged to the trustee.

Because Vision Bank had that knowledge, it cannot, according to the allegations contained in its counterclaim, possibly satisfy the "did not know of such fraud until after the granting of such discharge" requirement of section 727(d)(1). 11 U.S.C. §727(d)(1).

2. Section 727(d)(2)

Subsection 727(d)(2) provides that the court shall revoke a discharge if, "the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee." 11 U.S.C. §727(d)(2) (emphasis added).

(a) Subsection 727(d)(2) and Property of the Estate

Subsection 727(d)(2)'s plain language supports a revocation of a debtor's discharge for non-disclosure or non-delivery of property only if that property: (1) is property over which the debtor obtained possession of, or an interest in, after filing a Chapter 7 petition; and (2) is "property of the estate," as that term is defined in section 541(a) of the Bankruptcy Code. 11 U.S.C. § 541(a).

"Property of the estate" under section 541 includes: (1) property that the debtor acquires or becomes entitled to acquire within 180 days after the date of the filing of the bankruptcy petition in the manner and means described in section 541(a)(5); (2) proceeds from property of the estate, as provided for in section 541(a)(6); and (3) any interest in property that the estate acquires after the commencement of the case as provided for in section 541(a)(7).

One commentary explains:

This provision imposes a duty upon the debtor to report to the trustee any acquisitions of property after the filing of the petition. Whether or not such property belongs to the estate under subsections 541(a)(5), (6) and (7) is a matter the debtor may not safely undertake to determine. If the debtor guesses wrong, the door would be open, at least, to get to the next issue of whether there was some fraud or knowing retention involved.

6 Collier on Bankruptcy § 727.15[4] (Alan N. Resnick & Henry J. Sommer, eds., 15^th ed. Rev.)(emphasis added).

Subsection (d)(2) of section 727 was intended to address, and plainly addresses, the non-disclosure or non-delivery of property that a debtor gains possession of, or an interest in, post-petition. The commentary in Annotation, Creditor's Right to Have Bankruptcy Discharge of Individual Debtor Revoked, Vacated, and Set Aside, 138 A.L.R. Fed 253 (1997) explains:

The Bankruptcy Code (11 U.S.C.A. §§ 101 et seq.)(the Code) provides that certain property in which the debtor may acquire an interest, or a right to an interest, subsequent to the bankruptcy petition will become property of the bankruptcy estate. When that occurs, the debtor is required to disclose the existence of the ownership interest, or right to acquire such an interest, the value of the property, and any encumbrance...