In re Perrotta

• Decision Date: 03 June 2009
• Docket Number: Adversary No. 08-1117-JMD.,Bankruptcy no. 07-11614-JMD.
• Citation: 406 B.R. 1
• Parties: In re Laura PERROTTA, Debtor. Phoebe Morse, United States Trustee, Plaintiff v. Laura Perrotta, Defendant
• Court: U.S. Bankruptcy Court — District of New Hampshire

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406 B.R. 1

In re Laura PERROTTA, Debtor Phoebe Morse, United States Trustee, Plaintiff v. Laura Perrotta, Defendant

Bankruptcy no. 07-11614-JMD.

Adversary No. 08-1117-JMD.

United States Bankruptcy Court, D. New Hampshire.

June 3, 2009.

COPYRIGHT MATERIAL OMITTED

Ann Marie Dirsa, Esq., Office of the U.S. Trustee, Manchester, NH, for the U.S. Trustee.

Mark P. Cornell, Esq., Cornell and Ovitt Puc, PLLC, Concord, NH, for Debtor/Defendant.

MEMORANDUM OPINION

J. MICHAEL DEASY, Bankruptcy Judge.

I. INTRODUCTION

Before the Court is a motion to dismiss (the "Motion") filed by Laura Perrotta (the "Debtor") in an action under § 727(d)(1) of the Bankruptcy Code¹ brought by the United States Trustee ("UST"). The UST filed this adversary proceeding seeking to revoke the Debtor's discharge under § 727(d)(1) because the Debtor allegedly failed to disclose cash advances on a credit card and her interest in several bank accounts on her bankruptcy schedules. The Debtor filed a motion to dismiss arguing that § 727(d)(1) only allows the UST to request revocation of the discharge if she learns of a debtor's fraud after the discharge is granted, and here, no discharge has entered. In response, the UST filed an objection, arguing that the statute should not provide a safe haven for fraud if the debtor's fraud is discovered before the discharge is entered. The Court held a hearing on the motion in connection with a pretrial conference, at which both sides presented arguments, and the matter was taken under submission.

This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).

II. BACKGROUND

A. The Issue

The Federal Rules of Bankruptcy Procedure² set a short deadline for the filing of complaints by a party in interest objecting to a debtor's discharge in bankruptcy. Bankruptcy Rule 4004(a). The bankruptcy court is directed to "forthwith" grant a discharge to a debtor once the deadline to object to a discharge has expired. Bankruptcy Rule 4004(c)(1). Congress has authorized bankruptcy courts to revoke the discharge of a debtor under limited circumstances when fraud is detected or a debtor fails to perform her statutory obligations, after entry of the discharge. See 11 U.S.C. § 727(d). However, both the Bankruptcy Code and the Bankruptcy Rules are silent on how a debtor's right to a discharge is affected when knowledge of facts which would support an objection to discharge are discovered after the deadline to object to a discharge expires and before the discharge is entered by the court. The issue before the Court is the effect of such a discovery during this "gap period."

B. Procedural and Factual History

For the purposes of ruling on the Motion, the Court draws the following factual background from the complaint. The Debtor filed for chapter 7 relief on July 31, 2007. The meeting of creditors was scheduled for September 4, 2007. The deadline to file a complaint objecting to discharge was accordingly set for November 5, 2007. In schedule B of her bankruptcy petition, the Debtor listed a single checking account with a $1,500 balance and a single savings account with a $300 balance. She later appeared for her required meeting of creditors under 11 U.S.C. § 341 and was questioned under oath by the chapter 7 trustee. The Debtor reaffirmed the accuracy and truth of her schedules and statements. The chapter 7 trustee asked the Debtor whether she took any cash advances on credit cards within the last 12 months and the Debtor answered no. The next day the chapter 7 trustee filed a no distribution report in the Debtor's bankruptcy case indicating no assets were available for distribution to unsecured creditors.

On August 9, 2007, shortly after the filing of the chapter 7 petition, the UST requested documents from the Debtor regarding the income and expenses she claimed on her schedules, including bank statements, canceled checks, and credit card statements for the year before she filed bankruptcy. The request was made as part of the mandatory review of individual chapter 7 bankruptcy cases under § 704(b)(1) to determine if a case is presumed to be an abuse under § 707(b)(1). The Debtor refused to produce the documents because she argued they were not required to be filed with the Court under § 521 and § 704(b)(1) limited the UST's review to documents actually filed.

On September 14, 2007, the UST filed a statement under § 704(b)(1) that she was unable to determine if the Debtor's chapter 7 case was presumed to be an abuse. A few days later, the UST filed a motion under Bankruptcy Rule 2004 to require the Debtor to produce the same documents for the one year period before bankruptcy, regardless of whether the relevant accounts were held individually or jointly with another person. The Court denied the Rule 2004 motion because the congressionally-mandated deadline in § 704(b)(1) does not contemplate or require the UST to review documents other than those filed with the Court or provided to the chapter 7 trustee. In re Perrotta, 378 B.R. 27, 29 (Bankr.D.N.H.2007). The Court held that if the UST were to file a motion to dismiss, she could pursue discovery under Bankruptcy Rule 9014. Id. at 30.

On October 9, 2007, the UST filed a statement under § 704(b)(1)(A) stating her determination that the Debtor's case was presumed to be an abuse under § 707(b)(2). The UST accordingly filed a motion to dismiss the case under § 707(b)(2) or (b)(3) three days later. The UST argued that granting the Debtor a discharge would be presumptively abusive of chapter 7 because the Debtor had sufficient disposable income to repay her creditors. On November 21, 2007, the Court granted the Debtor's motion to dismiss the UST's motion to the extent that it was based upon a presumption of abuse under § 707(b)(2) because the UST had not filed her statement of presumed abuse within the statutory deadline in § 704(b)(1)(A). In re Perrotta, 378 B.R. 434, 438 (Bankr. D.N.H.2007). The UST then pursued her motion to dismiss under the totality of the circumstances standard in § 707(b)(3). As part of the discovery process, the UST subpoenaed the Debtor's bank and credit card account records and found previously undisclosed financial accounts. However, that discovery occurred after November 5, 2007, the deadline to object to the Debtor's discharge under Bankruptcy Rule 4004(a).

The UST identified several bank accounts held jointly by the Debtor, including two Citizens Bank checking accounts, two Citizens Bank savings accounts, and two RTN Federal Credit Union accounts. The records revealed that these bank accounts had a collective balance over $19,000 on the petition date. The UST later deposed the Debtor regarding these accounts. The Debtor testified that she received monthly statements for two of the Citizens Bank accounts, and the other two Citizens Bank accounts were joint accounts held by her and her daughter. The bank account records also included copies of canceled checks drawn on one of the RTN Federal Credit Union accounts and deposited in one of the Citizens Bank accounts, including a check for $7,500 signed and deposited by the Debtor on the petition date. The Debtor admitted at the deposition that the signature on the $7,500 check was hers.

The UST also received account statements regarding two of the Debtor's credit cards, one from Discover Financial Services and one from Advanta Bank Corporation. The records show that a $17,001 cash advance was taken from the Debtor's Discover credit card and deposited in one of her Citizens Bank accounts on October 9, 2006. The Debtor testified at her deposition that her husband used the card and made the transfer without her knowledge. The account statements from the Debtor's Advanta Bank credit card revealed that in October and November 2006, more than $13,000 in cash advances were taken from the Advanta card in a series of transactions. The Debtor testified at her deposition that she gave her husband use of her Advanta card and that he made some of those transfers.

In May 2008, the chapter 7 trustee withdrew his no distribution report, and he later filed a notification of asset recovery and a request to set a proof of claim deadline. The chapter 7 trustee also demanded that the Debtor turnover the undisclosed balances on the accounts and repay the undisclosed cash advances. The Debtor has refused to turn over any money to the trustee and has failed to amend her petition or schedules to reflect the undisclosed accounts.

On August 27, 2008, the UST filed the complaint that started this adversary proceeding. The UST's complaint alleges two counts under § 727(d)(1) based on the facts described above. First, the UST alleges the Debtor knowingly concealed property of the estate with the intent to hinder, delay, or defraud creditors, the chapter 7 trustee, or the UST by failing to disclose the accounts on schedule B and by falsely testifying at the § 341 meeting that her schedules were accurate and complete. Second, the UST alleges the Debtor knowingly concealed the cash advance transactions on the credit cards and falsely testified at the § 341 meeting that she had not taken cash advances within the last 12 months with the intent to hinder, delay, or defraud. The UST also states in both counts that she and the chapter 7 trustee did not know or have reason to know of the Debtor's fraudulent conduct until after the deadline to object to the discharge expired. Simultaneously with the filing of her complaint under § 727(d)(1), the UST withdrew her § 707(b) motion to dismiss the Debtor's case.

C. The Parties' Arguments

The Debtor argues that the complaint fails to state a claim under § 727(d) because it seeks revocation of a...