In re Mayo

• Decision Date: 07 December 1988
• Docket Number: Adv. No. 87-0065.,Bankruptcy No. 86-00146
• Citation: 94 BR 315
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re Rodney S. MAYO, Debtor. CHITTENDEN TRUST COMPANY, Plaintiff, v. Rodney S. MAYO, Debtor, and Timothy J. Wells, Trustee, Defendants.

94 B.R. 315 (1988)

In re Rodney S. MAYO, Debtor.

CHITTENDEN TRUST COMPANY, Plaintiff, v. Rodney S. MAYO, Debtor, and Timothy J. Wells, Trustee, Defendants.

Bankruptcy No. 86-00146, Adv. No. 87-0065.

United States Bankruptcy Court, D. Vermont.

December 7, 1988.

G. Crawford, O'Neill and Crawford, Burlington, Vt., for Rodney S. Mayo, debtor.

R. Davis and J. Palmisano, Barre, Vt., for Chittenden Trust Co.

Timothy J. Wells, White River Junction, Vt., pro se.

MEMORANDUM DECISION¹ DETERMINING STANDARD OF PROOF UNDER 11 USC § 727(a)

FRANCIS G. CONRAD, Bankruptcy Judge.

After Debtor's September 1, 1987 conversion from Chapter 11 to Chapter 7, 11 U.S.C. §§ 101, et seq., Chittenden initiated an adversary proceeding on December 18, 1987 opposing Debtor's discharge under 11 U.S.C. § 727.² The filed complaint is within sixty days of the October 30, 1987 date set for the § 341(a) first meeting of creditors and thus, within the requirement of Rules of Practice and Procedure in Bankruptcy Rule 4004(a).³ Additionally, Chittenden sought an exception to Debtor's discharge for its debts under 11 U.S.C. § 523.⁴ Chittenden's § 523 and § 727 complaint is timely within the requirements of Rules of Practice and Procedure in Bankruptcy Rules 4007(a) and 4007(b).⁵ Its timeliness disposes of Debtor's first affirmative defense that Chittenden's complaint cannot be maintained before us because we lack jurisdiction over the subject matter since the complaint was not filed timely pursuant to Rule 4007(c). We note further that Bankruptcy Rule 4007(c) fixes the time for filing a § 523 complaint and not a § 727 complaint. Although generally well plead, the complaint did not specify the specific subsection of § 523(a). We read this portion of the complaint to be under §§ 523(a)(2) and (4). If counsel for the plaintiff disagrees with our interpretation, they may advise us before trial.

As an affirmative defense to Chittenden's complaint, Debtor raised Rules of Practice and Procedure in Bankruptcy Rule 4007(c). The sixty (60) day statute of limitations under 4007(c) pertains only to § 523(a)(2), (4), and (6) complaints. In this proceeding only § 523(a)(4) is alleged. Since we have found the complaint to have been filed within sixty (60) days of the § 341(a) hearing, we find the Rule 4007(c) affirmative defense is without merit and is dismissed.

Specifically, Chittenden's § 727 and § 523 complaint alleges, and Debtor denies, seven counts within its complaint which are summarized as follows:

1. "Pre-Petition Debt And Security," Prior to Debtor\'s Chapter 11 petition, Chittenden made secured loans in excess of $4.8 million which are outstanding although duly demanded to be repaid;

2. "Post-Petition Debt And Security," Chittenden was induced by Debtor\'s representations to extend $250,000.00 of post-petition financing to Burlington Lincoln Mercury, Inc. (BLM), a company in which the Debtor was a principal. This financing was embodied in a "so Ordered" stipulation dated October 31, 1987;

3. "FMCC\'s $7 Million of Receipts," Between August of 1986 and May of 1987, Debtor authorized Ford Motor Credit Company (FMCC) to receive and FMCC did receive proceeds of collateral in the sum of $6,856,157.57. Some of the collateral received by FMCC may belong to Chittenden;

4. "Improper Accounting," Debtor failed to account properly for money received by FMCC in operating reports required to be filed with the Court. Some of the sums received by FMCC may have included the proceeds of Chittenden\'s pledged collateral;

5. "Conversion," The above transactions between the Debtor and FMCC were a fraud or defalcation by the Debtor while acting in a fiduciary capacity and embezzlement or larceny of Chittenden\'s collateral;

6. "Franchises," Debtor entered into negotiations with Ford Motor Company (FMC) and FMCC to obtain Ford franchises personally to the "detriment of the Debtor, BLM" as well as Chittenden, and Debtor knowingly and fraudulently offered or attempted to obtain money, property or advantage or a promise of money, property or advantage for acting or fore-bearing to act with respect to the Ford franchise or dealership; and,

7. "Hinder, Delay or Defraud," Debtor, with intent to hinder, delay, or defraud Chittenden, has transferred, destroyed, concealed or permitted property of the estate to be so transferred. Debtor has either destroyed, concealed or failed to keep or preserve recorded information, books, documents, records and papers from which Debtor\'s financial condition or business transactions might have been ascertained, and failed to explain the loss of the Ford franchises or other deficiency of assets to meet Debtor\'s liabilities, and, refused to obey lawful direction of the Court to file monthly operating statements.

Chittenden's complaint concludes with a prayer for a § 523 exception to discharge for the balances of all of its loans, advances and other financial accommodations extended to the Debtor as well as a § 727 order denying Debtor's discharge in bankruptcy.

Aside from the lack of subject matter jurisdiction affirmative defense under Rules of Practice and Procedure in Bankruptcy Rule 4007(c) which we previously disposed of, Debtor raised the following affirmative defenses: The complaint fails to state a claim upon which relief can be granted; insufficiency of process; insufficiency of service of process; illegality; fraud; estoppel; assumption of risk; contributory negligence; laches; and, waiver. The validity and applicability of these defenses remain to be proven at trial.

ISSUE PRESENTED

After an adequate discovery period had passed, we held a final pre-trial hearing on August 8, 1988 and entered a final pre-trial Order on August 10, 1988. At the final pre-trial conference both parties raised the issue about the measure of proof in the § 727 complaint. No party questioned the measure of proof we expounded on the § 523(a) issue, namely the measure would be by clear and convincing evidence. At their request for a resolution within this jurisdiction on the appropriate measure of proof Chittenden must meet to sustain its § 727 objections to Debtor's discharge, i.e., whether the appropriate standard is by mere preponderance or by clear and convincing evidence, we reserved the matter sub judice in our final pre-trial Order for a later decision.

Although the parties did not brief the issue on the appropriate measure of proof required under § 523, they cited § 523 cases for support of their respective positions on the appropriate evidentiary burden under § 727. Like § 727, the nondischargeability provisions of § 523 do not provide expressly for the measure of the burden of proof.

In construing § 523 objections, Courts, however, have consistently placed this responsibility on the creditor's shoulders, Household Finance Corp. v. Danns (In re Danns), 558 F.2d 114, 116 (2d Cir.1977), and, at least in the context of fraud as alleged by Chittenden through its count 5, this District requires it be met by clear and convincing proof. First Vermont Bank & Trust Company v. Tashman (In re Tashman), 21 B.R. 738, 741 (Bkrtcy.D.Vt.1982) (§ 523(a)(2)(B) ("the fraud contemplated within the dischargeability exception must be proven by clear and convincing evidence . . .") (citations omitted); Fredette v. Golowaty (In re Golowaty), 13 B.R. 781, 784 (Bkrtcy.D.Vt.1981) (creditor assumes heavy burden to come within exception of § 523(a)(2)(A)). Compare, Driggs v. Black (In re Black), 787 F.2d 503, 505-06 (10th Cir.1986) (Construing §§ 523(a)(2)(A) and (a)(2)(B), the Driggs Court held exceptions to discharge are construed narrowly, and the burden of proof is on the party opposing discharge by clear and convincing evidence), Accord, Lussier v. Barrup (In re Barrup), 37 B.R. 697 (Bkrtcy.D.Vt.1983); Schweig v. Hunter (In re Hunter), 780 F.2d 1577, 1579 (11th Cir.1986) (§ 523(a)(2)(B)); In the Matter of Bogstad, 779 F.2d 370, 372 (7th Cir.1985); First National Bank of Red Bud v. Kimzey (In re Kimzey), 761 F.2d 421, 423-24 (7th Cir. 1985) (§ 523(a)(2)(A)); Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1165 (6th Cir.1985); Calumet National Bank v. Gallagher (In re Gallagher), 72 B.R. 830, 834 (Bkrtcy.N.D.Ind. 1987) (§ 523(a)(2)(B)). But see, Combs v. Richardson, 838 F.2d 112, 116 (4th Cir. 1988) (§ 523(a)(6)) (Acknowledging that Courts are divided on the appropriate standard of proof, the Richardson panel squares the fresh start of the Bankruptcy Code by holding the preponderance standard is the appropriate standard in a § 523(a)(6) proceeding. "that the policies of the Bankruptcy Code are best effectuated by requiring that creditors prove by a preponderance of the evidence the willfulness and maliciousness of the debtor's acts under § 523(a)(6) and by waiting for Congress, not the courts, to signal a departure from this standard."); Bottari v. Baiata (In re Baiata), 12 B.R. 813, 817 (Bkrtcy.E. D.N.Y.1981) (reached same conclusion under § 523(a)(2)(B)).

Courts can use the § 523 cases to analyze the § 727 burden of proof requirement but it should be clearly understood, however, that § 523 causes of action are dissimilar statutory creatures from § 727 causes of action. On hierarchical scale, a § 727 complaint compares in prerogative to the strength of Zeus. While all gods in Greek mythology had their separate dwellings, and each their respective strengths and weaknesses, when summoned, each repaired to the palace of Zeus, the father of gods and men. Section 523 complaints may bar one or more debts from discharge, but when § 727 is summoned it has the portent to bar all debts from discharge. The § 727 burden of proof issue must be analyzed with this paramount concept in mind.

DISCUSSION

The Code is silent about the appropriate measure of proof a plaintiff must demonstrate on its § 727 objection to a debtor's otherwise presumed discharge. In the regrettable, and perhaps unexcusable, continued absence of express statutory direction, we turn to ...