Opinion
Case No. 99-12161-SSM, Chapter 7, Adversary Proceeding No. 00-1167
March 26, 2001
Dennis Early, Esquire, Alexandria, VA., Counsel for the plaintiff.
Gary B. Shea, Centreville, VA., Defendant pro se.
MEMORANDUM OPINION
Before the court is the United States Trustee's motion, filed on December 29, 2000, for summary judgment revoking the debtor's discharge. A hearing was held on February 6, 2001, at which the United States Trustee was represented by counsel and the debtor chose to represent himself. The court heard the arguments of both parties and took the matter under advisement. Upon review of the record and the applicable law, and for the reasons set forth below, the court denies the motion for summary judgment.
Background
The defendant, Gary B. Shea ("Shea"), filed a voluntary petition, together with his schedules and statement of financial affairs, in this court under chapter 7 of the Bankruptcy Code on April 26, 1999. After a No Distribution Report had been filed by the chapter 7 trustee, Shea received a discharge on July 30, 1999. The plaintiff in this action, the United States Trustee ("UST"), filed a complaint on July 28, 2000, seeking to revoke Shea's discharge under § 727(d), Bankruptcy Code. Specifically, the UST alleges that Shea obtained his discharge (a) by knowingly, and with intent to hinder, delay, or defraud a creditor or the trustee, concealing his interest in an asset in this case; (b) by knowingly and fraudulently making false oaths in connection with this case; and (c) by knowingly, and with intent to hinder, delay, or defraud a creditor or the trustee, transferring, removing, and concealing property of the estate in a related chapter 7 case in which Shea was an insider.
The allegations have their genesis in events that unfolded as early as April of 1997. At that time, Tidal Wave Communications ("TWC"), a Virginia corporation in which Shea served as Chief Financial Officer, Treasurer, Secretary, and twenty percent shareholder, merged with Easy Link Corporation, a Virginia corporation. As a result of the merger, TWC, the surviving corporation, took possession of a certificate of deposit at Crestar Bank ("Crestar") valued at $27,933.00 titled under the name Easy Link Corp. d.b.a. Neptune Interactive. TWC subsequently filed a voluntary petition under chapter 11 of the Bankruptcy Code (Case No. 97-16294-SSM) on August 22, 1997. TWC's case was converted to chapter 7 on October 14, 1997, with Robert G. Mayer being appointed as trustee.
The certificate of deposit, payable on account #007000008368451 at Crestar Bank, had been pledged as collateral to Sun Microsystems of Minneapolis, Minnesota, for "equipment leased" to Easy Link Corp. d.b.a. Neptune Interactive and valued at approximately $90,000.00.
Robert G. Mayer subsequently resigned as the chapter 7 trustee after being appointed a judge of this court. Gordon P. Peyton was appointed successor trustee on October 16, 1999.
On October 1, 1998, while the TWC case was still pending, Shea proceeded to redeem the certificate of deposit at Crestar, effectively netting $28,350.59. Shea claims to have done so under the belief, based upon discussions with Michael Hardey, the owner of Quantum Communications, Inc. ("Quantum"), that the chapter 7 trustee had given Shea permission to redeem the certificate of deposit. Pltf. Ex. 5, at page 23-24. Furthermore, Shea testified that, rather than placing total reliance on Hardey's word, he contacted unnamed Crestar officials, who informed him that "the money was available to be released." Pltf. Ex. 5, at page 38-40. Shea then opened a new money market account at Crestar with the $28,350.59 in proceeds from the certificate of deposit, titling the account under the name Easy Link Corp. d.b.a. Neptune Interactive. Over the course of time Shea deposited two checks into the money market account — one from Quantum Communications, Inc. ("Quantum") in the amount of $638.12, and the other from Carpe Diem Inc., in the amount of $375.00. Shea also drew several checks on the money market account including: (a) two checks made out to Progressive Car Insurance on October 5, 1998, and October 22, 1998, for $168.00 and $162.00 respectively; (b) one check made out to cash for $300.00 on November 22, 1998; and (c) one check made payable to Quantum Communications, Inc. for $25,350.00 on October 14, 1998. Additionally, Shea made one withdrawal from the money market account on October 5, 1998, for $746.00. Shea then closed the money market account on November 30, 1998, and deposited the remaining balance of $3,314.00 into a bank account for himself as "back salary owed" from "Quantum."
Account # 202947327.
Unaware of these events, the original chapter 7 trustee in the TWC case filed an adversary proceeding against Crestar on July 19, 1999 (Adversary Proceeding No. 99-1201), seeking turnover of the certificate of deposit. It was not until April 13, 2000, when Tina M. McMillan, counsel to the successor trustee, received Crestar's exhibits in the adversary proceeding, that the successor trustee became aware of Shea's activities regarding the certificate of deposit. Pltf. Ex. 12. The adversary proceeding against Crestar was eventually settled on May 23, 2000. The issues relating to Mr. Shea's conduct were referred to the UST's office, which after investigating the matter, brought the current adversary proceeding before this court.
Discussion I.
Under Rule 56(c), Federal Rules of Civil Procedure, as incorporated by Federal Rule of Bankruptcy Procedure 7056, summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In ruling on a motion for summary judgment, a court should believe the evidence of the non-movant, and all justifiable inferences must be drawn in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 530 (1986). At the same time, the Supreme Court has instructed that summary judgment "is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2555, 91 L.Ed.2d 265 (1986). Additionally, not every dispute as to the facts will preclude the entry of summary judgment, but only those disputes over facts that might affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. at 2510.
II.
"Section 727 [of the Bankruptcy Code] provides that [a] court must grant a discharge to a Chapter 7 debtor unless one or more of the specific grounds for denial of a discharge . . . is proven to exist." 6 Collier on Bankruptcy ¶ 727.01[1], at 727-6 (Lawrence P. King, ed., 15th ed. rev. 1997). Thus, "[t]he House Report accompanying the Bankruptcy Reform Act [of 1978] described section 727 as [being at] `the heart of the fresh start provisions of . . . bankruptcy law.'" Id. at 727-7 (citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 384 (1977)). As stated in In re Kasden, 209 B.R. 239, 241 (8th Cir. BAP 1997), appeal dismissed, 149 F.3d 1187 (8th Cir. 1998), "[t]he purpose of a discharge in bankruptcy is to relieve an honest debtor from his financial burdens and to facilitate the debtor's unencumbered `fresh start.'" Nevertheless, under limited circumstances a debtor's discharge may be revoked despite the fact that revocation is considered to be an extraordinary remedy. See § 727(d), Bankruptcy Code; In re Kasden, 209 B.R. at 241 (citing Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 924 (9th Cir. BAP 1994)). The grounds for revocation of a debtor's discharge are set forth in § 727(d), Bankruptcy Code, which provides:
(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section 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;
(2) 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; or
(3) the debtor committed an act specified in subsection (a)(6) of this section.
"Revocation under § 727(d) has the same legal effect as denial or waiver of discharge and bars discharge, in a later case, of any debts that were or could have been scheduled in the prior case." In re Mosby, 244 B.R. 79, 88 n. 15 (Bankr.E.D.Va. 2000).
Here, the UST sets forth three grounds, all based on § 727(d)(1), Bankruptcy Code, upon which Shea's discharge should be revoked. First, the UST argues that Shea obtained his discharge by knowingly and fraudulently concealing his interest in Quantum. Second, the UST argues that Shea knowingly and fraudulently failed to report the closing of the Crestar money market account on his statement of financial affairs. Lastly, the UST argues that Shea, as an insider, knowingly and fraudulently transferred and concealed the proceeds from the savings certificate in the TWC case.
Section § 727(d)(1), Bankruptcy Code, is applicable by way of § 727(e)(1), Bankruptcy Code, which states:
(e) The trustee, a creditor, or the United States trustee may request a revocation of a discharge —
* * *
(1) under subsection (d)(1) of this section within one year after such discharge is granted. . . .
In order for a party to prevail on a complaint under § 727(d)(1) for revocation of a discharge, the party must demonstrate both the existence of fraud, and that it lacked knowledge of the fraud until after the granting of the discharge. See 6 Collier on Bankruptcy ¶¶ 727.15[2] and [3] at 727-72. The standard of proof is preponderance of the evidence. Walton v. Staub (In re Staub), 208 B.R. 602, 605 (Bankr.S.D.Ga. 1997) (citing Farouki v. Emirates Bank Int'l Ltd., 14 F.3d 244 (4th Cir. 1994)). As stated in In re Roberson, 187 B.R. 159, 166 (Bankr.E.D.Va. 1995) (Shelley, J.):
This Court has previously ruled that revocation of a discharge based upon fraud requires a demonstration of `fraud in fact' committed by the Debtor. The fraud required to be shown is fraud in fact, involving moral turpitude or intentional wrong, and does not include implied fraud or fraud in law, which may exist without the imputation of bad faith or immorality. Further, in order to justify revocation of [a] discharge in bankruptcy on the ground that it was obtained by fraud `it must appear that [t]he [bankrupt] was guilty of such acts as would sustain a civil action for fraud or deceit, and that the statements were either knowingly false or fraudulent, or made so recklessly as to warrant a finding that he acted fraudulently.'
(citing Race v. Zahralddin (In re Zahralddin), 1 B.R. 621, 623 (Bankr.E.D.Va. 1979)).
Furthermore, the requirement that the party requesting a revocation of the discharge not know of the fraud until after the granting of the discharge has been deemed to be "essential." 6 Collier on Bankruptcy ¶ 727.15[3] at 727-72; Chambers v. Benak (In re Benak), 91 B.R. 1008 (Bankr. S.D. Fla. 1988); Canfield v. Lyons (In re Lyons), 23 B.R. 123 (Bankr.E.D.Va. 1982) (Shelley, J.) (denying revocation where trustee knew as early as meeting of creditors that debtor had spent nonexempt funds prior to the meeting). Accordingly, the court will take up each of the UST's grounds for revocation in turn.
A.
As a threshold matter, the court observes that a critical assumption underlying each of the three counts is that § 727(d)(1) incorporates, as a basis for revoking a debtor's discharge, all of the fraud-type grounds that could have been asserted under § 727(a), Bankruptcy Code, as a basis for objecting to the debtor's discharge. Under a literal reading of the statute, however, it is far from clear that the grounds for revoking a debtor's discharge after it has been granted are co-extensive with the grounds for objecting to it in the first instance. Section 727(d)(1), as noted, allows revocation of a discharge if "the discharge was obtained through the fraud of the debtor" (emphasis added). The plain language of the statute could thus be read to require, not merely that the debtor engaged in fraud during or in connection with his case, but rather that a cause-and-effect relationship exists, such that the debtor would not have received a discharge but for the fraudulent act. Such a nexus would clearly exist, for example, if a debtor filed under a false name or social security number to conceal the fact that he or she had previously filed a bankruptcy within the last six years and was therefore ineligible for a discharge. See e.g., Miller v. Ping (In re Ping), 96 B.R. 96 (Bankr.E.D.Ky. 1988) (discharge revoked for failure to list former name under which previous petition was filed); In re Gonzalez, 248 B.R. 731 (Bankr.S.D.N.Y. 2000) (discharge revoked where debtor filed using false social security number).
It is less clear that fraudulent concealment of assets during a bankruptcy case can be seen as the means by which the debtor obtains a discharge to which he or she is not entitled. Be that as it may, the reported cases uniformly appear to read § 727(d)(1) as allowing revocation of a discharge where a debtor's fraudulent conduct prior to the granting of the discharge would have constituted a basis for denial of discharge had it been known in time. See, e.g., Govaert v. Topper (In re Topper), 85 B.R. 167 (Bankr.S.D.Fla. 1988) (discharge revoked where debtor concealed beneficial ownership in business); Stewart v. Black (In re Black), 19 B.R. 468 (Bankr.M.D.Tenn. 1982) (discharge revoked for concealing ownership of automobile); Walton v. Staub (In re Staub), 208 B.R. at 602 (discharge revoked for failure to disclose checking account, business income, and military reserve income); Borock v. Telesz (In re Ventimiglia), 198 B.R. 205 (Bankr.E.D.Mich. 1996) (discharge revoked for concealment of bank account); Kaler v. Olmstead (In re Olmstead), 220 B.R. 986 (Bankr.D.N.D. 1998) (discharge revoked for understatement of income and concealment of checking account); Walsh v. Hendrickson (In re Hendrickson), 156 B.R. 19 (Bankr.W.D.Pa. 1993) (discharge revoked for concealment of prepetition and postpetition payments to satisfy gambling debts). Given this consistent reading of the statute, the court will assume, for the purpose of the present motion, that fraudulent conduct sufficient to bar a discharge will also support a revocation of discharge.
B.
As noted, the first ground asserted for the revocation of Shea's discharge is that he knowingly and fraudulently concealed his interest in Quantum. Specifically, the UST contends that Shea asserted an ownership interest in Quantum as early as May or June of 1998, that such an assertion did not terminate until July of 2000, and that this ownership interest was not listed on his schedules or otherwise disclosed by him during the pendency of his chapter 7 case.
In this instance, the UST asserts a violation of § 727(a)(2)(A), Bankruptcy Code, which provides:
(a) The court shall grant the debtor a discharge, unless —
* * *
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be, transferred, removed, destroyed, mutilated, or concealed —
* * *
(A) property of the debtor, within one year before the date of the filing of the petition. . . .
It is undisputed that Shea did not list on his schedules or otherwise disclose an interest in Quantum during the period his case was being administered. It is less clear, however, that Shea actually had an ownership interest at the time he filed his chapter 7 petition. Shea's deposition transcript from November 7, 2000, Pltf. Ex. 5, is replete with conflicting testimony concerning whether Shea believed he had an actual ownership interest in Quantum or not. At page 32, line 20 of that transcript, Shea, when asked whether he had an ownership interest in Quantum, clearly stated no. However, on page 46, line 3 of that transcript, Shea stated yes when asked whether a complaint which he had signed against Quantum, alleging that he had an ownership interest in Quantum, was correct. Furthermore, on page 54, line 1 of Shea's deposition transcript, Shea stated yes when asked whether in May or June of 1998 he had an ownership interest in Quantum. However, on page 54, line 22 of that transcript, Shea stated that he did not feel as though he had an ownership interest in Quantum. Accordingly, Shea's deposition testimony demonstrates, at the very least, that issues of material fact remain with respect to whether he knowingly and fraudulently concealed an interest in Quantum in this case. While Shea did write a check on October 14, 1998, for $25,350.00 payable to Quantum, Pltf. Ex. 11, there is nothing in Shea's deposition testimony indicating that this check was written to purchase an ownership interest in Quantum. Indeed, Shea's deposition testimony states that the money was to go either to TWC's customers or to pay off a Bell Atlantic bill. Pltf. Ex. 5, page 42, lines 6-11. Further, while the declaration of Tina M. McMillan, Pltf. Ex. 12, tends to show that the trustee never authorized the transfer or disposition of the certificate of deposit, Shea's deposition testimony states that he believed, based upon discussions with Michael Hardey, the owner of Quantum, that the Chapter 7 trustee had given permission for the transfer of the funds from Shea to Quantum. Pltf. Ex. 5, pages 22-26, and 43. Accordingly, this court can only conclude that a grant of summary judgment is not appropriate at this time with respect to the allegation that Shea knowingly and fraudulently concealed an interest in Quantum in this case.
C.
The second ground set forth for the revocation of Shea's discharge is that Shea knowingly and fraudulently failed to report the closing of the Crestar money market account on his statement of financial affairs. Question 11 on the statement of financial affairs asked, "List all financial accounts and instruments held in the name of the debtor or for the benefit of the debtor which were closed, sold, or otherwise transferred within one year immediately preceding the commencement of this case" (emphasis added). The debtor listed a checking account in "F M Bank Northern Virginia" that was closed in October 1998, but did not mention the closing of the Crestar money market account on November 30, 1998.
Specifically, the UST asserts a violation of § 727(a)(4)(A), Bankruptcy Code, which provides:
(a) The court shall grant the debtor a discharge, unless —
* * *
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account[.]
Since the Crestar money market account was not held "in the name of" the debtor but of "Easy Link Corp. d.b.a. Neptune Interactive," the questions to be resolved are whether the money market account was held "for the benefit of the debtor," and, if so, whether Shea deliberately failed to report the closing of the account on his statement of financial affairs. Oddly, Shea was not asked at his deposition why he did not list the money market account. He was only questioned why he had not listed the certificate of deposit, to which his response was that he "didn't even think of it." Pltf. Ex. 5 at page 57, line 21.
Of course, the UST must also show that he was unaware of the fraud before the debtor was granted a discharge. As to this issue, however, there is no material factual dispute. Even if the chapter 7 trustee's knowledge is imputed to the UST, the chapter 7 trustee did not learn of what had happened until April 2000, some eight months after the debtor's discharge.
There is certainly substantial circumstantial evidence that the money market account, although not held in the debtor's name, was held for his benefit, since he was the sole signatory on the account, at least some small personal expenses seem to have been paid from it, and the bulk of the funds may — an issue which remains disputed — have been used to purchase an interest in Quantum. On the other hand, the debtor denied at his deposition that any significant portion of the funds were used for his benefit. For that reason, the court is unable to conclude, based solely on the summary judgment record, that the debtor thought of the account as one held for his benefit and that he deliberately omitted it from the statement of financial affairs with the intent to deceive.
D.
The UST's final ground as to why Shea's discharge should be revoked is that Shea, as an insider of TWC, knowingly and fraudulently transferred and concealed the proceeds from the certificate of deposit in the TWC case. As noted in In re Landes, 201 B.R. 399, 407 (Bankr.E.D.Pa. 1996), "[t]he substance of a valid §§ 727(a)(7), (a)(2)(B) claim is proven if it is established that an individual debtor in a position of authority attempted to exercise dominion over a corporate debtor's assets after conversion of the corporate case to [c]hapter 7." See also In re Krehl, 86 F.3d 737, 742-44 (7th Cir. 1996); In re Powell, 88 B.R. 114, 116-18 (Bankr.W.D.Tex. 1988); In re Kessler, 51 B.R. 895, 897-99 (Bankr.D.Kan. 1985).
In this instance, the UST asserts a violation of § 727(a)(2)(B), Bankruptcy Code, which provides as follows:
(a) The court shall grant the debtor a discharge, unless —
* * *
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be, transferred, removed, destroyed, mutilated, or concealed —
* * *
(B) property of the estate, after the date of the filing of the petition[.]
Further § 727(a)(7), Bankruptcy Code, is implicated in this context as well because it provides as follows:
(a) The court shall grant the debtor a discharge, unless —
* * *
(7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider[.]
(Emphasis added).
Here, the facts before the court conclusively establish that Shea was an "insider" of TWC. Shea was Chief Financial Officer, Treasurer, Secretary, and twenty percent shareholder of TWC. § 101(31), Bankruptcy Code; Pltf. Ex. 5. Furthermore, Shea's signature can be found on the TWC bankruptcy petition, Pltf. Ex. 2, and Shea's name is listed as the sole person authorized to conduct business at Crestar on behalf of Easy Link Corporation. Pltf. Ex. 8. It is also abundantly clear that Shea was not authorized to take control of the certificate of deposit and to transfer those funds to Quantum, even if they were then used to pay TWC debts. Nevertheless, the issue is not whether what was done was proper, but whether it was fraudulent. As stated previously, a party seeking to revoke a debtor's discharge must establish that the debtor engaged in conduct that was (a) knowingly false or fraudulent; or (b) so reckless as to warrant a finding that the debtor acted fraudulently. See In re Roberson, 187 B.R. at 166. In this instance, nearly a year into the TWC case, and with knowledge of that case's pendency, Shea took steps to redeem the certificate of deposit at Crestar. Pltf. Ex. 5, page 44, line 8. Shea then transferred the $28,350.59 in proceeds into a new money market account, commingling and in short order entirely dissipating those funds. During the two-month period in question, Shea drew checks on, deposited money into, and withdrew money from, the money market account. This included the transfer of $25,350.00 to Quantum, and the transfer of $3,314.00 to himself. Shea's explanation that he thought the chapter 7 trustee had given permission to redeem the certificate of deposit seems farfetched, to say the least. At the same time, the explanation is not so incredible that the court can conclude, based solely on the deposition transcript, that it would not be believed at trial.
As stated previously, TWC controlled Easy Link as a result of its April 1997 merger. Accordingly, Shea's authorization to conduct business at Crestar on behalf of Easy Link implicitly authorized Shea to conduct business at Crestar on behalf of TWC following the 1997 merger.
III.
None of this is to suggest that the United States Trustee has not made out a strong case for revocation of discharge. The debtor's case is weak by comparison. Nevertheless, at the summary judgment stage the court does not weigh credibility. Because the court is unable to conclude that the debtor's state of mind is not genuinely in dispute, and because that state of mind is material to all three counts, a separate order will be entered denying the motion for summary judgment.