Lowe's of Virginia, Inc. v. Thomas

Decision Date23 April 1986
Docket NumberCiv. A. No. 85-0193-A.
Citation60 BR 418
PartiesLOWE'S OF VIRGINIA, INC., Dominion Bank, N.A. James Thomas Hicks, Charles B. Moses, Bailey Lumber Company, Appellants, v. Tommy W. THOMAS and Marie A. Thomas, Appellees.
CourtU.S. District Court — Western District of Virginia

Donald G. Hammer, Marion, Va., Kendall O. Clay, Radford, Va., for appellants.

Richard A. Money, Marion, Va., for appellees.


GLEN M. WILLIAMS, District Judge.

This case comes to the court on appeal from the order of the United States Bankruptcy Court for the Western District of Virginia entered on April 9, 1985, dismissing plaintiffs' complaint in which plaintiffs sought to have dismissed, pursuant to 11 U.S.C. § 727 or alternatively 11 U.S.C. § 523, the debtors' petition for bankruptcy under Chapter 7. In passing on an appeal from bankruptcy court, the district court must make an independent determination on the legal issues, but must accept the findings of fact of the bankruptcy judge unless those findings are clearly erroneous. Gilbert v. Scratch 'n Smell, Inc., 756 F.2d 320 (4th Cir.1985). A review of the record and the relevant law under this standard leads this court to conclude that the bankruptcy court's order dismissing plaintiffs' complaint must be reversed and that the debtors' discharge in bankruptcy must be denied.


Debtor, Tommy Thomas, operated a construction business from 1981 to 1984 during which time he engaged in business dealings with each of the named plaintiff creditors in this case. In August, 1984, Thomas filed for bankruptcy under Chapter 7. Subsequently, plaintiffs filed their complaint in which they consolidated their claims that discharge should be denied to Thomas under § 727, or that, alternatively, their individual claims were nondischargeable under 11 U.S.C. § 523. By order of the bankruptcy court, the plaintiffs' § 727 claim was severed from their § 523 claims and the plaintiffs were put on terms to file separate complaints seeking nondischarge of individual debts under § 523. The plaintiffs chose to rely on their original complaint and not to file separate § 523 based claims. The relief sought in their complaint was founded on allegations that Thomas had obtained funds "based on false assertions," which included advance payments in the amount of thirty thousand dollars from plaintiff Dominion Bank. At the evidentiary hearing on the § 727 claim, the plaintiffs presented evidence of alleged fraudulent conduct by Thomas arising during business transactions between Thomas and themselves as they were conducting business as building material suppliers, purchasers of Thomas' services, and as a lending institution, respectively. Following this hearing, the bankruptcy court issued a memorandum opinion in which it held that the plaintiffs had not presented evidence sufficient to support an allegation of fraud as contemplated by § 727(a)(2)(A), and that Thomas had not failed to satisfactorily explain his loss of assets or deficiency thereof under § 727(a)(5), contrary to plaintiffs' contention. However, the bankruptcy court did not address whether Thomas had engaged in fraudulent conduct as proscribed by § 727(a)(4), which plaintiffs contended was also a basis for denying Thomas a discharge, in addition to § 727(a)(2) and (5).

The issues raised on appeal are as follows: (1) whether, as a jurisdictional matter, the appeal should be dismissed due to plaintiffs' initial failure to file with the bankruptcy court the correct number of copies of the notice of appeal and to include the filing fee; (2) whether the bankruptcy court erred in holding that Thomas is entitled to discharge based on the evidence presented at the § 727 hearing; and (3) whether the bankruptcy court erred in ordering that plaintiffs would have to file separate complaints in order to pursue their individual claims of nondischargeability under § 523 rather than allowing them to pursue both their § 523 and § 727 based claims in a combined adversary proceeding.


The court need not labor long on the jurisdictional issue here presented. The timely filing of a notice of appeal is a prerequisite to this court's jurisdiction to review a final judgment or order of the bankruptcy court. See In Re LBL Sports Center, Inc., 684 F.2d 410 (6th Cir.1982). Under Bankruptcy Rule 8002, the appellant is directed to file a notice of appeal with the clerk of the bankruptcy court within ten days of the date of entry of the judgment, order or decree from which the appeal is taken. Here the appellant/plaintiffs not only filed a notice of appeal with the bankruptcy court clerk within ten days following the bankruptcy court's order dismissing their complaint, they also certified to the clerk, by way of counsel, that copies of the notice of appeal had been mailed to all interested parties. The plaintiffs simply failed to provide the clerk with a sufficient number of copies of the notice of appeal, and this oversight was corrected shortly thereafter. Out of interest in judicial and administrative efficiency, parties should be encouraged to comply strictly with the filing requirements for taking an appeal, but an oversight such as this falls short of a failure to meet the jurisdictional prerequisite of timely filing a notice of appeal.

Likewise, a party taking an appeal should pay the prescribed filing fee upon filing a notice of appeal with the bankruptcy court clerk as Bankruptcy Rule 8001 instructs. Failure, however, to promptly pay the filing fee before the expiration of the ten-day period for filing a notice of appeal will not preclude the district court from exercising jurisdiction to consider the appeal since payment of the fee is not determinative in establishing compliance with the ten-day notice requirement. In Re Winner Corp., 632 F.2d 658 (6th Cir.1980). Thus, plaintiffs' failure to pay the filing fee at the time they filed their notice of appeal will not bar this court from reviewing their appeal.

The court now turns to the issue involving Thomas' eligibility for discharge under 11 U.S.C. § 727. Having reviewed the evidence presented at the § 727 hearing, the court is of the opinion that the bankruptcy court was correct in ruling that plaintiffs failed to present evidence sufficient to support an allegation of fraud as contemplated by § 727(a)(2)(A).1 This court is also of the opinion that plaintiffs failed to prove that Thomas had engaged in fraudulent conduct as proscribed by § 727(a)(4)(A).2

One commentator has explained § 727 as follows:

Section 727 of the Code provides for discharge in cases under Chapter 7 and is the successor to § 14c of the old Bankruptcy Act. There are significant differences. . . .
Under the Act a debtor engaged in business who made or published a materially false statement in writing respecting such debtor\'s financial condition might be denied a discharge under § 14c(3). This section is quite similar to § 17a(2) concerning dischargeability, except that the latter also applied to false financial statements made by consumers. The overlap caused some confusion and, while it might seem inappropriate to permit any dishonest bankrupt to receive a discharge, it is more inappropriate to turn a debtor into a `financial cripple\' due to one mistake; accordingly a false financial statement will not be a basis for objecting to discharge under § 727. . . .
Section 727(a)(2) through (4) relate to wrongdoing by the debtor in or in connection with the bankruptcy case and are derived from § 14c of the Act. They include transfers and concealment of property with intent to hinder, delay or defraud creditors or the trustee, unjustified destruction or falsification of books and records or failure to keep them, and the commission of a bankruptcy crime such as the making of a false oath or bribery. . . .

P. Murphy, Creditors' Rights In Bankruptcy § 17.03 (1980) (footnotes omitted). Murphy goes on to explain that it is Code § 523(a), the successor to § 17(a)(2) of the Act, that now applies to such wrongs as the obtaining of money or the extension of credit by false pretenses or a false representation. Id. at § 17.06.

Courts have made clear this distinction between § 523 and § 727 of the Bankruptcy Code. In In Re Porter, 7 B.R. 354 (Bkrtcy.E.D.Penn.1980), for example, the court granted the defendant/debtor's motion for judgment on the pleadings where the plaintiff/creditor had filed a complaint seeking a denial of debtor's petition for discharge under § 727 based on allegations that the debtor had engaged in fraudulent representations when obtaining a loan from a certain bank. The facts alleged, the court pointed out, were in reality the basis for an action to except a particular debt from discharge under § 523. Id. at 355, 356. Similarly, in Matter of Ellison, 34 B.R. 120, 126 (Bkrtcy.M.D.Ga.1983), the court held that while the debtor's execution of false affidavits to the FHA and other lending institutions might be grounds for declaring an individual debt nondischargeable under § 523(a), it was not grounds for denying the Chapter 7 debtor a discharge in bankruptcy under § 727. See also In Re Jones, 50 B.R. 911, 921 (Bkrtcy.N.D.Tex. 1985) (Individual debt held nondischargeable under § 727(a)(2)(A) where Chapter 7 debtor did not use funds for the purpose for which they were entrusted to him).

Section 727(a)(4)(A) is the provision under Chapter 7 that sets forth the kind of false statement that will constitute a ground for denial of discharge. As alluded to earlier, the statement must be a false oath or account knowingly or fraudulently made in or in connection with the bankruptcy case. A typical case in which discharge is denied under this provision is where the bankrupt has knowingly and fraudulently omitted information from his bankruptcy schedules. See, e.g., In Re Chalik, 748 F.2d 616 (11th Cir.1984); In Re Seablom, 45 B.R. 445 (Bkrtcy.N.D.1984).

Ford v. Poston, 773 F.2d 52 (4th Cir. 1985) is...

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