Opinion
Case No. 93-14028-DOT, Adversary Proceeding No. 93-1411
April 4, 1997
Lawrence E. Rifkin, McGuire Woods Battle Boothe, L.L.P., McLean, VA, of counsel for Patricia McNallen Hagan
James B. McNallen, Hartford, CT, for Debtor, pro se
MEMORANDUM OPINION AND ORDER
This matter is before the court on the plaintiff's motion to voluntarily dismiss Counts II and III of her complaint. The defendant, paradoxically, objects and apparently insists that the matter go to trial in order that he can be vindicated. Because the court finds that dismissal of Counts II and III is proper, the motion to dismiss will be granted.
I.
This controversy has a tortuous history. Following an adverse verdict against him after a jury trial in Texas, the debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on September 29, 1993. The debtor's sister, proceeding both as attorney-in-fact for her mother, Sally Lou McNallen, and as Managing Trustee of the G.B. and Sally McNallen Trusts, filed a timely adversary proceeding seeking in Count I a determination that the verdict in the Texas action was nondischargeable under § 523(a)(6), Bankruptcy Code, and in Counts II and III a general denial of discharge under §§ 727(a)(2) and (a)(4)(A), Bankruptcy Code. The asserted basis for the denial of discharge was that the debtor had listed on his schedules an interest in McNallen Enterprises as being worth only $1.00 when he himself believed it to be worth $29,857; that he had not listed at all a contingent interest in the G.B. and Sally McNallen Trusts; and that he had testified at the meeting of creditors that his schedules were true and complete. The complaint alleged that such conduct constituted concealment of assets from the trustee and the making of a false oath or account in connection with the case.
Judgment on the verdict had not been formally entered at the time the debtor's chapter 7 petition was filed, but the automatic stay was subsequently modified to permit the entry of judgment and the prosecution of any appeals.
Although the Patricia McNallen Hagan brought this action in two distinctly different representative capacities, for convenience she will be referred to in the singular simply as "the plaintiff."
After issue was joined, the plaintiff moved for summary judgment on Count I on the basis of collateral estoppel. On May 18, 1994, Bankruptcy Judge Douglas O. Tice, Jr., to whom this case was then assigned, entered summary judgment in favor of the plaintiff on Count I of the complaint determining that $105,583.00 (the compensatory and punitive damages awarded by the Texas jury) was nondischargeable under § 523(a)(6), Bankruptcy Code. That ruling was affirmed on appeal by the United States District Court on September 23, 1994, by an unpublished bench ruling and by the United States Court of Appeals for the Fourth Circuit by published opinion on August 10, 1995. Hagan v. McNallen (In re McNallen), 62 F.3d 619 (4th Cir. 1995).
In the interim, the chapter 7 trustee, Robert G. Mayer, entered into an agreement to sell to the plaintiff, in her individual and representative capacities, all of the bankruptcy estate's interest in McNallen Enterprises and in the G. B. and Sally McNallen Trusts for $12,664.95 and the withdrawal and "offset" of $172,946.51 in claims filed by the plaintiff. On May 17, 1995, Judge Tice signed an order approving the sale over the debtor's objection. In a follow-up memorandum opinion, Judge Tice explained:
Essentially, the agreement proposes to transfer the estate's interest in the family trust and the family partnership in exchange for $12,664.95 cash and the resolution of $272,946.51 [ sic] worth of claims against the estate. Therefore, the agreement will result in a total economic benefit to the estate of $285,611.46 [ sic] and will permit eligible unsecured creditors to recover a substantial percentage of the dollar value of their claims. Debtor's own evidence demonstrates that the value of the interest was less than $150,000.00.
In re James B. McNallen, No. 93-14028-AT, Memorandum Opinion at 15 (Bankr. E.D. Va. Jun. 27, 1995).
Although the text of the memorandum opinion overstates the amount of the claims resolved by the agreement — and therefore the resulting cash benefit to the bankruptcy estate — by $100,000.00, a footnote gives the correct figures. Reading the opinion as a whole I am convinced that the figures in the text are mere typographical errors and that Judge Tice, in ruling on the motion, correctly understood the amount of the claims.
The trustee then consummated the sale and filed a final report and account before distribution. The debtor filed an objection. After a hearing on January 27, 1997, this court entered an order on February 4, 1997, overruling the objection. Subsequently, this court signed on February 20, 1997, an order approving the trustee's final report, including payment of $7,658.85 in administrative expenses and payment of $5,730.09 to unsecured creditors on account of $63,103.02 in allowed filed claims.
A notice of appeal from that order was filed on March 14, 1997, but would appear to be untimely. See, F.R.Bankr.P. 8002(a) ("The notice of appeal shall be filed with clerk within 10 days of the date of the entry of the judgment, order, or decree appealed from.").
II.
Under Federal Rule of Civil Procedure 41, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7041, a plaintiff may voluntarily dismiss an action "at any time before service by the adverse party of an answer or of a motion for summary judgment." Otherwise, unless the dismissal is with the consent of all parties who have appeared in the action, "an action shall not be dismissed at the plaintiff's insistence save upon order of the court and upon such terms and conditions as the court deems proper." Fed.R.Civ.P. 41(a)(2). Federal Rule of Bankruptcy Procedure 7041 further provides,
[A] complaint objecting to the debtor's discharge shall not be dismissed at the plaintiff' instance without notice to the trustee, the United States trustee, and such other persons as the court may direct, and only on order of the court containing terms and conditions which the court deems proper.
The 1983 Advisory Committee note to Rule 7041 explains:
Dismissal of a complaint objecting to a discharge raises special concerns because the plaintiff may have been induced to dismiss by an advantage given or promised by the debtor or someone acting in the debtor's interest.
(emphasis added). The 1991 Advisory Committee note to Rule 7041 further explains:
The United States Trustee has standing to object to the debtor's discharge pursuant to section 727(c) [of title 11, U.S. Code] and may have refrained from commencing an adversary proceeding objecting to discharge within the time limits provided in Rule 4004 only because another party commenced such a proceeding. The United States trustee may oppose dismissal of the original proceeding.
Under Rule 7041, voluntary dismissal of a plaintiff's action after issue is joined is not a matter of right but is within the court's discretion, and ample regard must be had for the interests of the defendant. 10 Lawrence P. King, Collier on Bankruptcy ¶ 7041.02, p. 7041-6 (15th ed. rev. 1996). In this case there is not the slightest suggestion that plaintiff has been "induced to dismiss by an advantage given or promised by the debtor or someone acting in the debtor's interest." The debtor's response to the motion makes clear that he has not given or promised the plaintiff anything in exchange for the dismissal. In short, this is not a case in which a debtor whose right to a discharge has been challenged has, in effect, bought his discharge by agreeing to a monetary settlement with the objecting creditor. Since her own claims have now been determined to be nondischargeable or have been "offset" in connection with the sale of the debtor's interests in the family partnership and family trusts, the plaintiff would gain little or nothing pursuing Counts II and III of the complaint. That she would not want to incur additional attorneys fees and litigation costs solely to deny the debtor a discharge of his debts to other creditors is understandable.
In his response, the debtor quotes from the 1983 Advisory Committee note, which observes,
Some courts by local rule or order have required the debtor and his or her attorney or the plaintiff to file an affidavit that nothing has been promised to the plaintiff in consideration of the withdrawal of the objection. By specifically authorizing the court to impose conditions in the order of dismissal this rule permits the continuation of this salutary practice.
This district has no local rule or standing order requiring such an affidavit, although it is clearly within the discretion of the judge hearing a motion to dismiss a complaint objecting to discharge to require testimony or an affidavit in appropriate circumstances. I do not find that an affidavit is necessary in this case.
Both the chapter 7 trustee and the United States Trustee have been given notice of the motion to dismiss Counts II and III, and neither one has objected or evinced any interest in taking over the litigation. It is not difficult to see why they have not, since debtors are often successful in arguing that particular errors and omissions from their bankruptcy schedules, rather than evidencing an intent to hide assets from the trustee or to deceive creditors, were simply the result of inadvertence, misunderstanding, or carelessness. See, Second Nat'l Bank v. Parker (In re Parker), 85 B.R. 384 (Bankr. E.D. Va. 1988) (failure to include wastebaskets, curtains, games, and popcorn popper on schedule of assets did not warrant denial of discharge); Citizens Bank Trust Co. v. Knott (In re Knott), 32 B.R. 252 (Bankr. E.D. Va. 1983) (hastily filed bankruptcy schedules omitting certain property did not rise to level necessary for denial of discharge); Bishop Wall Systems, Inc. v. Stowe, 1994 WL 841218 (Bankr. E.D. Va. 1994) (although schedules prepared with "disgraceful inattentiveness," omissions, taken as a whole, did not evidence intent to conceal assets). But compare, Hatton v. Spencer (In re Hatton), 204 B.R. 477 (E.D. Va. 1997) (misstatements and omissions in bankruptcy schedules were fraudulent); Harman v. McGee (In re McGee), 157 B.R. 966 (Bankr. E.D. Va. 1993) (failure to list stock in corporation as asset on bankruptcy schedules warranted denial of discharge). In his answer the debtor flatly denied any intent to hide assets and asserted that he fully disclosed his interest in the family partnership and the family trusts at the meeting of creditors and that he subsequently filed amended schedules. For the purpose of ruling on a motion to dismiss, it is not necessary for the court to make a determination that the plaintiff would or would not be likely to prevail at a trial: it is sufficient that the issue be reasonably in dispute and the outcome uncertain.
In his opposition, the debtor requests that if the plaintiff's motion is granted and Counts II and III are dismissed, such dismissal be with prejudice. Since, under Federal Rule of Bankruptcy Procedure 4004(a), a complaint objecting to a debtor's discharge must be filed not later than 60 days after the first date set for the meeting of creditors, and since that time has long since expired, it is clear that no such complaint can now be filed and that any dismissal would, as a practical matter, be with prejudice. Nevertheless, to avoid any possible ambiguity, the court will expressly direct that the dismissal of the complaint be with prejudice.
Because of the pendency of the complaint objecting to the debtor's discharge, a discharge has not yet been granted in this case. Under § 727(d) and (e), Bankruptcy Code, once the discharge is granted, a creditor, the trustee, or the United States Trustee may bring an action within one year thereafter to revoke the discharge on the ground that the discharge was procured through fraud, but only if "the requesting party did not know of such fraud until after the granting of such discharge."
The debtor also voices concern that dismissal of the action will prevent him from using this adversary proceeding as a springboard to litigate with his siblings, including the plaintiff, concerning his mother's estate and the plaintiffs administration of the family trusts. None of those issues, however, are even remotely relevant to the causes of action asserted by the complaint.
It is represented that the debtor's mother died in December 1995.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion to dismiss Counts II and III is granted, and Counts II and III are dismissed with prejudice.
2. There being nothing further to be done, the clerk shall close this adversary proceeding and shall grant the debtor a discharge.
3. The clerk shall mail a copy of this order to counsel for the plaintiff, to the debtor-defendant, to the chapter 7 trustee, and to the United States Trustee.