Bircher III, Trustee v. Dudley

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
NEW BERN DIVISION
IN RE:
WILLIAM M. DUDLEY,
DEBTOR
CHAPTER 7
CASE NUMBER: 11-00013-8-RDD
JOHN C. BIRCHER, III, Trustee
Plaintiff
v.
WILLIAM M. DUDLEY,
Defendant
ADVERSARY PROCEEDING
NUMBER: 11-00150-8-RDD
ORDER DENYING DISCHARGE
Pending before the Court is the Complaint Objecting to Debtor William M. Dudley’s
Discharge, filed by John C. Bircher III, Trustee on May 4, 2011 (the “Complaint”) and the Answer
filed by William M. Dudley on June 15, 2011 (the “Answer”). The Court conducted a trial in New
Bern, North Carolina on February 7, 2012 to consider the Complaint and the Answer.
SO ORDERED.
SIGNED this 06 day of March, 2012.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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STATEMENT OF THE FACTS
On January 3, 2011, William M. Dudley (the “Defendant”) filed a voluntary petition for relief
under Chapter 7 of the Bankruptcy Code (the “Code”). On May 4, 2011, the Chapter 7 trustee in the
Defendant’s case, John C. Bircher, (the “Trustee”) filed the Complaint objecting to the Defendant’s
discharge pursuant to 11 U.S.C. § 727(a)(2) and (4). The Trustee claims the Defendant, with the
intent to hinder, delay, or defraud an officer of the estate charged with custody of property under the
Code, transferred, removed, destroyed, mutilated, or concealed property of the estate after the date
of the filing of the bankruptcy petition. The Trustee also claims the Defendant knowingly and
fraudulently, in connection with a case, made a false oath or account.
The Trustee’s allegations are based on the Defendant’s failure to list a horse trailer and
certain tools in his petition. In the Defendant’s petition, among other personal property listed in
Schedule B, the Defendant included yard tools valued at $50.00, hand tools valued at $300.00, as
well as a utility trailer valued at $800.00 but failed to list a horse trailer and other tools. The Trustee
asserts that at the Section 341 Meeting of Creditors (the “341 Meeting”) on February 2, 2011, the
Defendant completed a form in which he certified that his bankruptcy schedules listed everything
that he owned on the date he filed the bankruptcy petition. This form was signed under penalty of
perjury and adopted as the Defendant’s testimony at the 341 Meeting. Furthermore, at the 341
Meeting, the Trustee asked the Defendant if he realized that he completed the form under oath. The
Defendant responded that he understood.
Later, during the 341 Meeting, the Defendant was questioned by his creditors. Prior to the
filing of the bankruptcy petition, the Defendant had separated from his wife and the two were in the
process of a divorce. The Defendant’s spouse, Sandra C. Dudley, is listed as a creditor holding an
unsecured non-priority claim in an unknown amount in Schedule F of the petition. At the 341
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Meeting, Mrs. Dudley’s attorney examined the Defendant. Based on information provided by Mrs.
Dudley, her attorney asked the Defendant if he owned a horse trailer that was not listed in his
schedules. The Defendant responded that he did in fact own a horse trailer. However, he explained
the trailer had never been titled to him. Through further questioning it was revealed that the
Defendant owned numerous tools that were being kept inside the horse trailer at the Defendant’s
father’s house. The Defendant stated the tools included a grease gun, wrenches, a pressure washer,
a generator, an air compressor, and a tool chest filled with tools. At the 341 Meeting, the Defendant
estimated there was approximately $800.00 worth of tools inside the horse trailer.
At the trial on February 7, 2012, the Trustee presented evidence as to the oath the Defendant
took when he asserted that his bankruptcy schedules completely listed all of his property. The1
Trustee also introduced into evidence a questionnaire he uses at every 341 Meeting to gather
information from debtors. The Defendant completed and signed the questionnaire under penalty of
perjury on February 2, 2011. The questionnaire asks: “Do your bankruptcy schedules list everything2
The B6 Declaration (Official Form 6) signed by the debtor as part of his schedules1
includes the following:
DECLARATION UNDER PENALTY OF PERJURY BY INDIVIDUAL DEBTOR
I declare under penalty of perjury that I have read the foregoing summary of
schedules, consisting of 22 sheets, and that they are true and correct to the best of
my knowledge, information, and belief.
The questionnaire presented by the Trustee states above the signature line:2
By my signature below and by my submission of this questionnaire to the
Trustee, I acknowledge that the answers provided above are my own and
that they are true and correct to the best of my knowledge and that I have
answered these questions under penalty of perjury. I further understand
that theses answers will be adopted as testimony in my 341 meeting to the
same extent as if I had orally testified.
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that you owned on the date that you filed your bankruptcy petition?” The Defendant circled “Yes.”
Later at the 341 Meeting, the Defendant was asked if he had any questions about the questionnaire
and if he realized he signed it under oath. The Defendant responded that he had no questions and
understood the form would be taken as his testimony under oath.
At the trial, Mrs. Dudley testified she reviewed the Defendant’s petition and observed that
numerous items of the Defendant’s property, most noticeably a Fifth Wheel horse trailer, were
missing from Schedule B. Mrs. Dudley testified that the Defendant used the Fifth Wheel horse
trailer frequently to transport animals to 4-H livestock shows. Mrs. Dudley also testified that the
Defendant failed to list the majority of the tools that were kept in a workshop behind their home
when the two were married. Mrs. Dudley testified that she believed the Defendant removed the tools
from the workshop sometime in the fall of 2010.
At the trial, the Trustee testified that he did not learn about the existence of the horse trailer
and tools until the Defendant was questioned about the property at the 341 Meeting. The Trustee
introduced a transcript of the 341 Meeting in which the Defendant admitted to Mrs. Dudley’s counsel
that he did not list the Fifth Wheel horse trailer worth about $2,000.00 in his petition because it was
not titled to him. Transcript of 341 Hearing at 23, In re Dudley, No. 11-00013-8-RDD (Bankr.
E.D.N.C. Feb. 2, 2011). The Trustee testified that at the 341 Meeting, the Defendant stated the horse
trailer was parked in his father’s backyard and contained tools that were previously stored in the
workshop behind his former residence. The Trustee testified that had counsel for Mrs. Dudley not3
questioned the Defendant about this property he would have never learned of it because the Debtor
At the 341 Meeting, the Defendant stated the tools contained in the horse trailer included3
a grease gun, wrenches, a pressure washer, a generator, an air compressor, various tools, and a
tool chest, all totaling approximately $800.00 in value. Transcript of 341 Hearing at 25-7, In re
Dudley, No. 11-00013-8-RDD (Bankr. E.D.N.C. Feb. 2, 2011).
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did not list it in the schedules. The Trustee also testified that after the 341 Meeting, the Defendant
prepared a handwritten list of some three pages of items inside the horse trailer not previously listed
in his schedules and amended his schedules to reflect the personal property. The Trustee testified4
that the Defendant complied with all further requests.
The Trustee stated he hired an auctioneer to take possession of the horse trailer and other
items. The auctioneer located the horse trailer and tools at the home of the Defendant’s father. The
Trustee testified that the Defendant’s personal property was sold at auction to benefit the estate for
a total of $6,917.50. This amount included the sale of a 2001 John Deere tractor that the Debtor
listed in his original schedules for $4,000.00. In total, the horse trailer and the tools inside it were
sold for $2,917.50.
The Defendant testified that he did not list the horse trailer on his petition because did not
understand he was required to list it as his property. The Defendant stated he never received title to
the horse trailer from its previous owner and was not aware that he was required to list it in his
bankruptcy schedules because it was not properly titled to him.
The Defendant testified that sometime after he separated from Mrs. Dudley he returned to
the marital home and discovered that the workshop in the backyard appeared to have been broken
into and a lawnmower was missing. The Defendant explained that because he was afraid someone
might steal the tools and other items in the workshop he loaded them in the horse trailer and took
them to his father’s house approximately two months before the date he filed the petition. The
Defendant testified that he did not think of this property again until he was questioned about it by
Mrs. Dudley’s attorney at the 341 Meeting. The Defendant testified that on the day of the 341
The Defendant amended Schedule B to include a 1991 Chaparral horse trailer and more4
than seventy other items.
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Meeting, he was nervous and under a lot of stress resulting from the pending divorce. At the time
he signed the Trustee’s questionnaire at the 341 Meeting, the Defendant stated he believed the
assertion that he listed all of his property on his schedules was truthful. The Defendant
acknowledged that the Trustee’s questionnaire was signed under oath. After the 341 Meeting, the
Defendant testified he inventoried all of the items in the horse trailer for the Trustee and cooperated
with the Trustee for the remainder of the case. The Defendant stated that he did not intend to hide
any assets and that failure to list the property in his schedules was a mistake.
STATEMENT OF THE CASE
The Trustee objects to the Defendant’s Chapter 7 discharge pursuant to § 727(a)(2) and
(a)(4)(A). In the Complaint, the Trustee alleges the Court should not grant the Defendant a discharge
because the Defendant concealed property with intent to hinder, delay, or defraud an officer of the
estate charged with custody of property under the Code pursuant to § 727(a)(2). At the outset of the
trial, the Trustee acknowledged he would primarily pursue the objection to the discharge under §
727(a)(4)(A), whereby the Trustee alleges the Defendant knowingly and fraudulently made a false
oath or account. Therefore, the Court focuses its analysis accordingly.
The Defendant argues he believed he disclosed all required property at the time that he signed
the petition, Trustee’s questionnaire, and testified at the 341 Meeting and as such did not knowingly
or fraudulently make a false oath or account.
DISCUSSION
The party objecting to the debtor’s discharge bears the burden of proving the discharge
should be denied under § 727(a). Fed. R. Bankr. P. 4005; Farouki v. Emirates Bank Intern., Ltd.,
14 F.3d 244, 249 (4th Cir. 1994). The objecting party must prove this burden by a preponderance
of the evidence. Farouki, 14 F.3d at 249. Once a prima facie case establishing the discharge should
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be denied is made, the burden may then shift to the debtor to offer explanatory evidence, however,
“the plaintiff bears the ultimate burden of proof.” West v. Abdelaziz (In re Abdelaziz), No. 11-6017
at *2, 2012 WL 359756 (Bankr. M.D.N.C. Feb. 2, 2012) (citing Farouki, 14 F.3d at 249)).
Section 727(a)(4)(A) “provides that the court shall grant the debtor a discharge under Chapter
7, unless the debtor knowingly and fraudulently, in or in connection with the case made a false oath
or account.” Angell v. Williams (In re Williams), No. 08-0018 at *8, 2010 WL 364459 (Bankr.
E.D.N.C. Jan. 27, 2010). The purpose of § 727(a)(4)(A) “is to insure that debtors provide reliable
information to those with an interest in the administration of the debtor’s estate.” Kremen v. Slattery
(In re Slattery), 333 B.R. 340, 344 (Bankr. D. Md. 2005); see also In re Pratt, 411 F.3d 561, 566
(5th Cir. 2005) (explaining full disclosure is essential because schedules serve the purpose of
“‘insuring that adequate information is available for the Trustee and the creditors without need for
investigation to determine whether the information provided is true.’”) (citation omitted).
For the court to deny the debtor’s discharge, the objecting party must show: “(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.” Angell, at *8; see also Williamson v. Fireman’s Fund Ins. Co.,
828 F.2d 249, 251 (4th Cir. 1987).
In the present case, by his own admission, the Defendant failed to list the horse trailer as well
as the tools contained within it on his schedules. The omissions of the Chaparral horse trailer and
some seventy other items stored in the horse trailer are not de minimis omissions. The Defendant5
The horse trailer and tools were sold for more than $2,900.00; an amount the Court does5
not consider de minimis. Courts vary in treatment of omissions of de minimis assets. Compare
Dean v. McDow, 299 B.R. 133, 140 (Bankr. E.D. Va. 2003) (finding there is no de minimis
exception to the Bankruptcy Code’s disclosure requirements) with Stathopoulos v. Bostrom (In re
Bostrom), 286 B.R. 352, 360 (Bankr. N.D. Ill. 2002) (finding de minimis assets may on occasion
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also admits he affirmed having listed all the property he owned on the date of the petition in his
schedules under oath at the 341 Meeting. Therefore, the Court finds the Defendant made a statement
under oath that was false. However, the Defendant contends that the failure to disclose the property
was not made with fraudulent intent necessary for denial of discharge under § 727(a)(4)(A).
“[C]ourts may deduce fraudulent intent from all the facts and circumstances of a case,” as it is
unlikely that a debtor will testify that his intent was fraudulent. Williamson, 828 F.2d at 252. Facts
and circumstances may include “a pattern of nondisclosure.” First Fed. Sav. and Loan Ass’n of
Raleigh v. Johnson (In re Johnson), 82 B.R. 801, 805 (Bankr. E.D.N.C. 1988).
After considering the facts and circumstances presented in this case, the Court finds that the
Trustee has met the burden of proving the Defendant made a false oath by a preponderance of the
evidence. The facts clearly establish that the Defendant’s statements under oath concerning the
property he owned were false on two separate occasions. First, on January 18, 2011, the Defendant
declared the information in his schedules to be true and correct under penalty of perjury. Next, on
February 2, 2011, the Defendant answered affirmatively when asked if he had declared all property
owned by him on the Trustee’s questionnaire at the 341 Meeting. These statements were false as it
was later determined that the Defendant owned a horse trailer and numerous tools located inside the
horse trailer.
The Court also finds that based on the circumstances and pattern of behavior, the Defendant’s
statements were made with fraudulent intent. At the time that the statements were made, the Debtor
knew that they were false. The evidence shows that the Debtor had moved the horse trailer and tools
within it from his backyard shed approximately two months prior to filing the bankruptcy petition.
be omitted innocently, but that omitting real property from schedules is too substantial to be
overlooked as inadvertent) (emphasis added).
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The Defendant had multiple opportunities to disclose ownership of the property at issue but did not
do so until questioned about it by his spouse’s attorney. The Court believes the Trustee would not
have learned of the property had it not been for this line of questioning. Furthermore, the Defendant
failed to disclose ownership of the horse trailer and other tools, but did list a utility trailer and
$300.00 worth of hand-tools he owned in his schedules, suggesting the Defendant knew property of
that type should be disclosed in the bankruptcy schedules.
Finally, the statements were related materially to the bankruptcy case because it concerned
property the Defendant owned at the time of the petition, which became property of the estate
pursuant to 11 U.S.C. § 541. The Trustee testified that he received approximately $2,900.00 from
the sale of the property for the benefit of the bankruptcy estate. Therefore, had the property not been
discovered, the false statements would have resulted in a negative material impact in the amount of
funds generated for the benefit of the bankruptcy estate. Accordingly, the Court finds the Trustee
has met the burden of proving the Defendant knowingly and fraudulently made a false oath in
connection with the bankruptcy case by the preponderance of the evidence.
The Defendant argues that the failure to disclose the property was merely a mistake as
evidenced by the fact that he promptly informed the Trustee of all of the property and assisted the
Trustee in his investigation. “While an inadvertent mistake is not cause for the denial of a discharge,
a pattern of omissions and inaccuracies . . . indicates a reckless disregard for the truth.” Angell, at
*9 (explaining prompt efforts to amend misstatements prior to the meeting of creditors weighs
against finding fraudulent intent but failing to offer explanation for a misstatement or amend
schedules shows reckless disregard for the truth). The Defendant’s testimony did not corroborate
his explanation that failing to list the property in his schedules was a mistake, but instead established
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a pattern of behavior from which the Court can infer he intended to conceal the property from the
Trustee.
The Defendant testified that he was not aware that he was required to list the horse trailer
since he did not have title to it. However, this explanation does not account for the tools inside of6
the horse trailer. The Defendant testified he loaded the tools in the horse trailer and removed them
from his former home less than two months prior to the date of the petition. If the Defendant felt
the need to remove tools from his tool shed to protect from theft he surely considered them his
property. Furthermore, if the Defendant had the presence of mind to question the horse trailer’s title
at the time of the petition he could not have simply forgotten about its existence and should have
brought it to the attention of his attorney. Therefore, the Defendant’s failure to list the property in
his schedules, answering affirmatively when asked if he had disclosed all property owned by him,
and failure to offer credible explanation for not disclosing the property proves by a preponderance
of the evidence to the Court the Defendant had fraudulent intent.
After finding that the Defendant failed to present sufficient evidence to explain the facts and
circumstances asserted by the Trustee, the Court also finds that the Defendant’s later compliance
with the Trustee does not redress the knowingly fraudulent statements. The Trustee as well as
creditors must be able to rely on a debtor’s schedules and statements without the necessity of
investigation beyond normal due diligence in each case. While the Defendant’s compliance was
helpful to effectuate the sale of property for the estate, it did not come about until after the non-
disclosures were discovered by the Trustee. As the Fourth Circuit held, “the right of debtors to a
N.C. Gen. Stat. § 20-50 (2005) requires that all vehicles intended to be operated on the6
highway be titled. Because a debtor failed to have the certificate of title changed to his name,
should not be a defense to failing to list one’s possessions in the schedules.
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fresh start depends upon the honest and forthright invocation of the Code’s protections” and full
disclosure is “‘inherent in the bargain for the discharge.’” In re Kestell, 99 F.3d 146, 149 (4th Cir.
1996) (quoting In re Mascolo, 505 F.2d 274, 278 (1st Cir. 1974)).
Therefore, the Court finds the Trustee has met the burden of proving by the preponderance
of the evidence that the Defendant knowingly and fraudulently made a false oath in connection with
his bankruptcy case pursuant to § 727(a)(4)(A). Therefore, the Defendant’s discharge is DENIED.7
Judgment shall be entered in favor of the Plaintiff. The Clerk of Court is directed to enter judgment
denying the Defendant’s discharge.
SO ORDERED.
END OF DOCUMENT
Finding the Trustee met the burden of proving by the preponderance of the evidence that7
the Defendant knowingly and fraudulently made a false oath pursuant to § 727(a)(4)(A), the
Court finds it unnecessary to address denial of discharge pursuant to § 727(a)(2).
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