Opinion
Case No. 13-34946 Adv. No. 14-3087
10-29-2014
In re: FREDERICK W. FIEBIGER, II SHEILA R. FIEBIGER, Debtors RUTH A. SLONE, Plaintiff v. FREDERICK W. FIEBIGER, II SHEILA R. FIEBIGER, Defendants
Copies to: Erin B. Moore, electronically served (Counsel Plaintiff) Andrew Zeigler, electronically served (Counsel for the Defendants)
Chapter 7
Decision Denying Defendants' Motion to Dismiss
I. Introduction
On June 17, 2014 the Chapter 7 Trustee, Ruth Slone (the "Trustee"), filed a complaint (doc. 1) objecting to the discharge of the debtors, Frederick and Shelia Fiebiger, pursuant to 11 U.S.C. § 727(a)(2)(A) and 727(a)(4)(a). The Debtors filed a motion to dismiss the complaint for failure to state a claim (doc. 13) and also an answer (doc. 15).
II. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and this is a core proceeding pursuant to 28 U.S.C § 157(b)(2)(J).
III. Factual Allegations in the Complaint
The complaint alleges as follows: River Valley Credit Union was granted a judgment against the Debtors for $38,439 in May 2013. A judgment lien was placed on property of the Debtors on July 2, 2013. In June 2013 the Debtors inherited over $110,000. The inheritance was not used to pay any of the River Valley Credit Union judgment. Instead, the Debtors used $50,000 to purchase an annuity, $6,500 for an IRA, and $30,000 to reduce their mortgage loan balance.
The Debtors filed Chapter 7 on December 12, 2013. At the Debtors' meeting of creditors held in February 2014, the Debtors admitted they were aware of the River Valley Credit Union Judgment and purchased the annuity and IRA to prevent creditors from having access to those funds. The transfer of the funds to the annuity and the IRA deposit occurred within one year of the petition date.
IV. Standard for Dismissal Under Federal Rule of Civil Procedure 12(c)
Federal Rule of Civil Procedure 12(c), applicable by Bankruptcy Rule 7012, states that "[a]fter the pleadings are closed— but early enough not to delay trial— a party may move for judgment on the pleadings." The standard for a motion to dismiss under Federal Rule of Civil Procedure 12(c) is the same as a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). JP Morgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581-82 (6th Cir. 2007).
Federal Rule of Civil Procedure 12(b)(6) states that a defendant may move to dismiss a complaint for "failure to state a claim upon which relief can be granted[.]" In considering a motion to dismiss, the court "must construe the complaint in the light most favorable to the plaintiff, accept all the factual allegations as true, and determine whether the plaintiff can prove any set of facts in support of her claim that would entitle her to relief." Wee Care Child Ctr., Inc. v. Lumpkin, 680 F.3d 841, 846 (6th Cir. 2012) (quoting Tucker v. Ohio Dep't of Rehab. and Corr., 157 F.3d 453, 456 (6th Cir. 1998). While a plaintiff need not provide detailed factual allegations to survive a motion to dismiss pursuant to Rule 12(b)(6), "a plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1964-65 (2007) (citations omitted). See also Kolley v. Adult Protective Servs ., 725 F.3d 581, 585 (6th Cir. 2013) (quoting Eidson v. State of Tenn. Dep't of Children's Svcs., 510 F.3d 631, 634 (6th Cir. 2007) ("conclusory allegations or legal conclusions masquerading as factual allegations will not suffice."). The complaint must allege sufficient facts to state a plausible claim. Twombly, 550 U.S. at 570.
V. Legal Analysis
A. The § 727(a)(2)(A) Claim Against Debtor Sheila Fiebiger States a Claim Upon Which Relief Can be Granted
Section 727(a)(2)(A) provides that the court shall grant the debtor a discharge unless "the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody or property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed . . . property of the debtor, within one year before the date of the filing of the petition[.]" Section (a)(2) has two elements: a) conduct taken by the debtor relating to the disposition or concealment of property of the debtor; and b) a subjective intent to hinder delay or defraud a creditor or the bankruptcy trustee through that conduct. Keeney v. Smith (In re Keeney), 227 F.3d 679, 683 (6th Cir. 2000). Actual fraud must be proven and constructive fraud is not sufficient. Ayers v. Babb (In re Babb), 358 B.R. 343, 350 (Bankr. E.D. Tenn. 2006). Intent may be shown by circumstantial evidence. Id.
Shelia Fiebiger argues that the complaint must be dismissed as to her because § 727(a)(2)(A) only applies to "property of the debtor" and the funds were inherited by Frederick Fiebiger and she had no control of the funds. She further alleges her husband paid the subject $30,000 on the mortgage loan and purchased the annuity and the IRA. These assertions, based on an affidavit, reach beyond the pleadings and cannot be considered on a motion to dismiss. Ohio law does provide upon divorce that an inheritance by one spouse during the course of the marriage is generally separate property. Ohio Revised Code § 3105.171(A)(6)(a)(i). Schedule B states that the annuity and the IRA are in Frederick Fiebiger's name only. However, the funds were used to pay the Debtors' mortgage loan on their jointly held residence in fee simple and create an annuity and IRA for the Debtors' apparent mutual benefit in retirement. Further, there is no allegation that the Fiebigers are divorced or that a separate property division was made by a domestic relations court. The court cannot establish at the pleading stage what control or interests, if any, Sheila Fiebiger had in these pre-petition funds and transactions, which appear to be, in part, to her benefit. Further, the court declines to convert this motion to a summary judgment motion without the Trustee being provided the opportunity for full and fair discovery. See Fed. R. Civ. P. 12(d) (applicable by Fed. R. Bankr. P. 7012(b)). Finally, to the extent Frederick Fiebiger is arguing that the count is inadequately plead, the court disagrees. The complaint contains sufficient factual allegations under the Twombly standard to respond to a relatively uncomplicated § 727(a)(2)(A) allegation. See Twombly, 127 S. Ct. at 1964-65. The motion to dismiss the § 727(a)(2)(A) count is denied.
B. The False Oath or Account Count States a Valid Legal Claim
In order to establish a claim under § 727(a)(4)(A), the Trustee must prove by a preponderance of the evidence that "the debtor knowingly and fraudulently, in or in connection with the case . . . made a false oath or account." This entails a showing that "1) the debtor made a statement under oath; 2) the statement was false; 3) the debtor knew the statement was false; 4) the debtor made the statement with fraudulent intent; and 5) the statement related materially to the bankruptcy case." Keeney, 227 F.3d at 685; Warren v. Rowland (In re Rowland), 441 B.R. 281, 286 (2010). Statements in a debtor's schedules, statement of financial affairs, and at the § 341 meeting are made under oath. See Fed. R. Bankr. P. 2003(b)(1) (examination of the debtor at the meeting of creditors is under oath); Official Form 6 (declaration of debtor's schedules under penalty of perjury); Official Form 7 (statement of financial affairs includes declaration by the debtor under penalty of perjury); 28 U.S.C. § 1746 (unsworn declarations under penalty of perjury).
The Trustee alleges that the Debtors made a false oath and account by claiming the annuity and IRA as exempt when the Debtors knew "the accounts were established to hinder, delay or defraud creditors . . . ." (doc. 1, ¶10). The Trustee's essential theory is not that the Debtors failed to disclose assets or pre-petition transfers, but the exemption claim, which is currently being litigated, was a false oath because the Debtors knew such exemptions could not apply and nevertheless listed them on Schedule C.
Complete financial disclosure must be provided by a debtor in order to receive a discharge. See Keeney, 227 F.3d at 685 (noting complete financial disclosure is a pre-requisite to the privilege of a bankruptcy discharge); Hamo v. Wilson (In re Hamo), 233 B.R. 718, 724-25 (B.A.P. 6th Cir. 1999) (similar). Complete financial disclosure is at the heart of § 727(a)(4)(A):
In Hamo, a separate issue was the claiming of an IRA as reasonably necessary for support of the debtor. However, that issue was not part of the basis for denying the Debtor's discharge. 233 B.R. at 722-26.
'Complete financial disclosure' " is a prerequisite to the privilege of discharge. The Court of Appeals for the Seventh Circuit has explained that intent to defraud "involves a material representation that you know to be false, or, what amounts to the same thing, an omission that you know will create an erroneous impression." A reckless disregard as to whether a representation is true will also satisfy the intent requirement. " '[C]ourts may deduce fraudulent intent from all the facts and circumstances of a case.' " However, a debtor is entitled to [a] discharge if false information is the result of mistake or inadvertence. The subject of a false oath is material if it " 'bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.' "Jahn v. Hughes (In re Hughes), 490 B.R. 784, 793 (Bankr. E.D. Tenn. 2013) (quoting Keeney, 227 F.3d at 685-86).
The § 727(a)(4)(A) claim appears based on a thin reed. A review of the complaint establishes that there is no allegation that all the claimed exemptions and relevant assets were not listed in Schedules B and C. There is no allegation that any pre-petition transfer was not accurately listed in the Debtors' statement of financial affairs. The complaint does not allege a false oath at the § 341 meeting. Whether the Debtors' pre-petition actions ultimately require certain claimed exemptions be disallowed or the Debtors' discharges denied under § 727(a)(2)(A) will be determined in due course. But the pre-petition transfers and the Debtors' assets apparently were fully disclosed, both orally and in writing. Further, the complaint does not allege an intent or reckless disregard in making a material misrepresentation or omission about those assets in the schedules (excepting Schedule C), statement of financial affairs, or during the meeting of creditors.
Case law does support that the claiming of an exemption can be relevant for a false oath claim. Unlike the disclosure of an asset or transfer, the exemptions at issue are all subject to legal interpretations. Additionally, such cases normally have other supporting facts, such as the failure to disclose assets fully. See Rockstone Capital, LLC v. Bub (In re Bub), 502 B.R. 345 (Bankr. E.D.N.Y. 2013) (debtor's exemption claim in vehicle subject to a false oath based on valuation, but source was reputable, and discharge ultimately denied on false and fraudulent statements concerning income and expenses); McClenny v. C. H. R Enters., 2000 U.S. App. LEXIS 1889 (4th Cir. Feb. 11, 2000) (affirming decision that debtors committed a false oath by claiming corporate account receivables on their personal bankruptcy schedules and claiming a homestead exemption in those receivables); Schwickerath v. United States Trustee, 2006 Bankr. LEXIS 3104 (Bankr. N.D. Iowa Nov. 1, 2006) (debtor attempted to minimize her non-exempt property and failed to disclose the extent of pre-petition planning and numerous assets). Other cases based on the claiming of an exemption are based on a readily ascertainable fact. Sheehan v. Stout (In re Stout), 348 B.R. 61 (Bankr. N.D. W. Va. 2006) (trustee alleged debtors claimed real estate was jointly owned and sought an exemption for both debtors on Schedule C, but court determined lack of fraudulent intent); Garcia v. Garcia (In re Garcia), 168 B.R. 403 (D. Ariz. 1994) (district court affirming bankruptcy court's decision, after a trial, that the debtor's claiming of homestead exemption as residence was not a false oath despite that the debtor did not continually live in the residence). Nevertheless, neither the case law nor the language of § 727(a)(4)(A) prohibits a false oath allegation based upon an exemption claim listed on Schedule C. Since the court cannot weigh the evidence at the pleading stage, the count under § 727(a)(4)(A) survives dismissal as a matter of law.
A review of the claimed exemptions shows the potential issues that may arise. The annuity is claimed as exempt under Ohio Revised Code §§ 2329.66(A)(6)(b), 3911.10, 3911.12 and 3911.14. Section 2329.66(A)(6)(b) refers to annuities pursuant to § 3911.10. In turn, § 3911.10 states that premiums "paid in fraud of creditors, with interest thereon, shall inure to their benefit from the proceeds of such c0ntracts . . . ." Sections 3911.12 and 3911.14 appear to address insurance policies and contain their own specific language. The IRA is claimed exempt under Ohio Revised Code § 2329.66(A)(10)(c) which addresses, among other things, IRA's and generally exempts them from execution except assets "deposited for the purpose of evading the payment of any debt." In the Debtors' amended Schedule C, the Debtors claim the IRA as exempt under 11 U.S.C. § 522(b)(3)(C). That section simply refers to "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation . . . ." This federal exemption applies to opt-out states. In re Thiem, 443 B.R. 832, 836 (Bankr. D. Ariz. 2011). The court may ultimately have to interpret all these statutes and determine as a matter of law whether they generally apply as claimed and if the Debtors' actions affect their entitlement to these exemptions. --------
VI. Conclusion
The Debtors' motion to dismiss is denied. An order will be contemporaneously entered with this decision.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge Dated: October 29, 2014
Copies to: Erin B. Moore, electronically served
(Counsel Plaintiff) Andrew Zeigler, electronically served
(Counsel for the Defendants)