McDow v. Wamsley

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

In re:
CHARLES E. WAMSLEY Case No. 02-22959
Chapter 7
Debtor.
W. CLARKSON MCDOW, JR.
U.S. TRUSTEE, REGION 4
Plaintiff
Vv. A.P., 04-00044

CHARLES E, WAMSLEY, JR.

Defendant.

MEMORANDUM OPINION

This Court is reviewing, pursuant to the request of the Plaintiff, the U.S. trustee, and the
Debtor/Defendant, Charles E. Wamsley (the “Debtor”), the complete record, including the
transcript of a trial conducted by Judge Edward Friend on February 22, 2006, whereafter having
heard all the evidence, Judge Friend thought it appropriate to deny discharge to the Debtor. This
ruling was appealed to the District Court for failure of the presiding Judge to issue findings of
fact and conclusions of law, and was reversed and remanded for new proceedings. Having
consented to the suggestion of counsel for both parties with respect to the most economical way
to proceed, this Court has reviewed the transcript of the February 22, 2006 trial, the exhibits

admitted into evidence at that trial, and then heard oral argument on September 27, 2007.

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I. BACKGROUND
The Debtor filed a Chapter 11 petition on September 11, 2002, the petition being one
under Chapter 11 of the Code wherein no trustee to protect creditor interests was assigned. The
§341 meeting of creditors was conducted, as prescribed, by an officer or employee of the U.S.
trustee. That officer examined the Debtor, who performed home building and quality
woodcraftsman work, under oath on October 22, 2002. The following questions and answers
were provided.

Q. Your attorney filed on your behalf schedules and statements of
financial affairs, along with various other statements and so forth.
You signed those statements, or it appears that you signed those.
Did you have an opportunity to review those statements?

Yes.

Q. Is everything on those statements and schedules correct?

A. Yes.

Q. Are there any omissions from those statements or schedules?
A. No.

Q. Are all of your assets listed on the schedules?

A

Q

A

E

>

. Yes.
. Are all of your liabilities listed on the schedules?
. Yes.
(Pl. Tr. Ex. 2; 7-8).
Q. Okay. In the year prior to the filing of the bankruptcy petition,
did you sell, transfer, give away, or in any other way, change the
ownership of any asset that you owed such that it is now owned by
someone else?
A. No, sir.
Q. All of the assets that you owned in September 2001 you still
own?
A. Yes.
(Pl. Tr, Ex. 2; 37).

Q. Okay. In the year prior to the filing of the petition, I think you
have previously testified you did not dispose of any asset in any
way, other than the repossessions. Is that still correct, after we
have talked about all of your assets?

A. Yes, sir.

Q. You haven’t transferred anything to any of your companies?

A. No, sir.

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Q. You haven’t transferred anything to any of your relatives?
A. No, sir.

(PI. Tr. Ex. 2; 66).

During the course of the § 341 meeting of creditors, counsel representing
individual creditors also questioned the Debtor.

Q. Okay. So with the exception, as counsel pointed out several
times for you, with the exception of the repossessions and with the
exception of that one property that you just acknowledged your
misstatement on, as of September 2001, you owned all the same
property that you own here now, in September 2002, when you
filed the case?

A. Yes.

Q. Let’s go back then one more year. Let’s go back between
September 2000 and September 2001. Did you transfer any
property during that one year period of time, sir?

A. I sold an apartment complex in Morgantown.

(P1. Tr. Ex. 2; 75).

Unfortunately, the well articulated questions of the U.S. trustee’s officer and other counsel were
not answered truthfully and the questions and answers were of material matters.

This case was converted to one under Chapter 7 of the Code on March 31, 2003. An
amended schedule of assets and liabilities (Plaintiff’s Trial Exhibit 3) was filed by the Debtor,
which listed additional assets not previously scheduled by the Debtor upon filing the Chapter 11
proceeding. On examination by Mitchell Klein (the “Chapter 7 Trustee”), additional questions
were raised with respect to the real and personal property of the Debtor because the Chapter 7
Trustee had become aware of two real property transfers that had been made by the Debtor
which were not scheduled or acknowledged at the §341 creditors meeting conducted by the U.S.
trustee. Questions and answers elicited with respect to matters the Court finds material at the
second meeting of creditors are below.

Q. Let’s see. I am going to show you your Bankruptcy Petition,

Page 2. And this is the most recently filed, the amended one. And
ask you if that is your signature, sir?

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A. Yes.
Q. All right. Did you have a chance to read this and review it
before you filed it, before you signed it?
A. Yes. Yes.
Q. Does it truthfully and accurately reflect all of your assets and
where they are located?
A. Yes.
(Pl. Tr. Ex. 4; 7).

Q. Have you sold, transferred, given away anything of value in the
last twelve months?
A. No.

(Pl. Tr. Ex. 4; 8).

Q. Now, I am looking on your Schedule A, Real Property. That

factory building, landwise, that’s one point nine two (1.92) acres?

A. Yes.

Q. And then there’s also another parcel of land attached to it of

point one eight (.18) acres of land?

A. No.

Q. There’s no other - - you don’t know of any other land that was

conveyed to you by your wife in 2000?

A. No (unintelligible) in 2000. It’s the same piece of property.

Q. It’s the same piece of property?

A. Yes.

Q. Let’s see. I have a parcel that was conveyed by you on January

1° — excuse me ~ January 22™, 2002, from Charles to Susan G.

Wamsley, a one-eighth (1/8") acre tract. Did you convey that to

her?

A. Oh, a one-eighth (1/8"). Yes.

Q. Okay. And that happened within a year of the filing of the

bankruptcy?

A. I believe it’s sometime in 2001, I can’t be exact. I don’t know

the dates.

Q. And then you own a piece of property in your own name. It’s

one point nine-o-two (1.902) acres?

A. Other than the factory building, that’s the only thing that’s in

my name.

Q. Allright. Then you have a piece of property that you conveyed

on January 22", 02, from yourself to Michael P, Wamsley?

A. Yes. That was in my father’s name, something like that.

Q. What property is that?

A. Evidently, my father and mother — they got medical bills and

everything. They put it in my name. And I didn’t realize it. I just

had it put back in my brother’s name. They are both in disability.
(Pi. Tr. Ex. 4: 9-11).

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After having examined the Debtor at this meeting, the Chapter 7 trustee exercised the
prudence, as should be done in all such cases, and visited the premises of the Debtor where
business had been conducted. As a result of that visit, the Chapter 7 trustee discovered many of
additional items that were recovered by an auctioneer for sale. Subsequently, the auctioneer
conducted an auction and sold some 468 pieces of equipment and supplies recovered from the
Debtor’s premises. The auction revenue totaled some $168,000. Later, additional items were
discovered by the Chapter 7 trustee that had also not been identified or disclosed by the Debtor,
some in storage in a truck or trailer, others at a remote location. These items were also sold,
bringing a much less substantial recovery, but did permit additional distribution in the case.

After completing the examination of the Debtor and having determined that two pieces of
real property of some value had been conveyed by the Debtor within a year prior of the filing of
the Chapter 11 petition, the Chapter 7 trustee commenced to recover the following sums from the
Debtor’s spouse and the Debtor’s brother, to whom the undisclosed conveyances of the two
parcels of real estate. From the spouse the Chapter 7 trustee recovered $2,669.85 and from the
brother $22,162.50.

Il. DISCUSSION

Bankruptcy Code, Title 11 U.S.C. §727(a), provides that the Court shall grant the Debtor
a discharge unless:

(2) the debtor, with intend 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; or

(B) property of the estate, after the date of the filing of the
petition;

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(4) the debtor knowingly and fraudulently, in or in connection
with the case—
(A) made a false oath or account;
(B) presented or used a false claim;

Subpart (d) of §727 provides that:

On request of the trustee, a creditor, or the United States trustee,
and after notice and 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 knowing and
fraudulently failed to report the acquisition of or
entitlement to such, or to delivery or surrender such
property to the trustee; ....

The Debtor filed his Chapter 11 bankruptcy on September 11, 2002, which was
ultimately converted to a Chapter 7 bankruptcy on March 31, 2003. In light of discrepancies in
the Debtor’s schedules, amended schedules, statement of financial affairs, and testimony, the
U.S. trustee’s office initiated this adversary proceeding on March 16, 2004, seeking to revoke the
Chapter 7 discharge that had been granted to the Debtor on September 4, 2003, pursuant to §
727(d)(1).

Revocation of a discharge under § 727(d){1) requires that the U.S. trustee prove by a
preponderance of the evidence that (1) the discharge was obtained through fraud, and (2) the
U.S. trustee was not aware of the alleged fraud prior to discharge.' Farouki v. Emirates Bank

Int'l Ltd., 14 F.3d 244, 249 (4" Cir. 1994) (“the standard of proof in a discharge action is the

' Section 727(d)(1) requires a movant to establish that the debtor has obtained his discharge by fraud and the movant
was not aware of such fraud until after the discharge was granted. On April 18, 2005, the presiding Judge, after
reviewing briefs on the issue, entered an order determining that the U.S. Trustee was informed of the alleged fraud
before the entry of the discharge but after the time for filing a complaint objecting to discharge, and thus, fell within
a judicially-created exception. The April 18, 2005 order has not been disturbed, and, therefore, the court will not
address this element on remand.

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preponderance of evidence”), Dean v. McDow (In re Dean), 299 B.R. 133, 139 (E.D. Va. 2003).
To satisfy the first requirement, the U.S. trustee must show that (1) the debtor “knowingly and
fraudulently made a false oath in or in connection with the bankruptcy proceeding, and (2) the
cath concerned a material fact.” /d. In order to satisfy the requirement that the Debtor have
fraudulently made a false oath, the U.S. trustee may either establish fraudulent intent by (1)
circumstantial evidence, or (2) inference drawn from a course of conduct or establish a “reckless
indifference to the truth” constituting a “functional equivalent of fraud.” /d. at 140 (quoting
National Post Office Mail Handlers, etc. v. Johnson, 139 B.R. 163, 166 (E.D. Va. 1992)).

The U.S. trustee has outlined a pattern of fraudulent conduct by the Debtor that began
with the initial schedules he filed and continued through the entirety of the bankruptcy
proceedings. The U.S. trustee contends that the Debtor filed his initial schedules and statement
of financial affairs with numerous material omissions, including vehicles, tools, machinery, real
property, tax refunds, and fraudulent transfers of real property. He later amended his schedules
to disclose a portion of the omitted assets, but not all of them. Finally, according to the U.S.
trustee, the Debtor removed assets from the auction site in order to prevent the auctioneer from
selling them.

On his original Schedule A, the Debtor listed two parcels of real estate with a total value
of $382,369.55, which included Heron Cove Property (Lot 27) with a value of $82,369.55.
When the Debtor filed his amended Schedule A, the Heron Cove Property (Lot 27) was listed
with a value of $455,000. Also a Factory Building with a value of $430,000 was added to
Schedule A. Originally, the Debtor’s Schedule B listed personal property with a total value of
$181,702.97; however, his amended Schedule B listed personal property with a total value of

$208,705.50. The Debtor’s original Schedule B included 6 vehicles with a total value of

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$80,630.47. Once amended, Schedule B disclosed 14 vehicles with a total value of $92,285.
According to the original Schedule B, the Debtor owned 8 pieces of machinery and equipment,
which the Debtor listed as leased property with a value of $100,000. The amended Schedule B,
however, revealed 28 pieces of machinery, equipment, and tools, which were not leased and had
a total value of $115,748.

When the Debtor signed his initial schedules, he swore under penalty of perjury that they
were a complete and accurate representation of his assets, liabilities, and financial transactions.
The Debtor reaffirmed this oath during his initial § 341 hearing when he testified that he had
reviewed the schedules and statement of financial affairs and determined that they were a
complete and accurate representation of his financial circumstances. As evidenced by the
amended schedules, the original schedules contained numerous inaccuracies and omissions.

While the Debtor’s amended schedules disclosed some additional assets, they still did not
disclose the transfers of real property to his wife and brother or the anticipated $65,400 tax
refund. Again the Debtor signed and later affirmed that he had read and reviewed the amended
schedules and that the information contained in them was complete and accurate. Furthermore,
when specifically asked whether he had transferred any assets within the year preceding his
bankruptcy filing, the Debtor did not disclose the real property transfers.

During the second § 341 meeting, the Debtor was again asked if he had sold, transferred,
or given away anything of value in the year preceding his bankruptcy. Once again, he indicated
that he had not. The Debtor only acknowledged the transfers of the real property when he was
confronted by the Chapter 7 trustee with the deeds evidencing the transfers.

Among the assets omitted from both the original and amended Schedule B was an

anticipated tax refund in the amount of $64,500. The Debtor, however, explained during the

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initial § 341 meeting that he did not anticipate receiving a refund because he owed a substantial
amount to the Internal Revenue Service and he assumed any refund would be offset against his
debt. The Debtor, however, did receive two checks totaling $64,500, which were payable jointly
to him and his wife. The Debtor did not inform the Chapter 7 trustee that he received the funds,
but rather endorsed the checks and gave them to his wife.

Finally, the U.S. trustee contends that the Debtor removed assets from the auction site
and stored some of them in a vehicle, which was parked at a friend’s home and the rest in two
storage rental units. The U.S. trustee asserts that the Debtor did this with the intent of preventing
the auctioneer from selling these assets. The Chapter 7 trustee, however, received information
about the stored assets, and a second auction was held, at which, the auctioneer sold the
remaining assets.

During the Debtor’s testimony at the February 22, 2006 trial, he addressed each of the
U.S. trustee’s assertions. As to the omissions on his schedules and statement of financial affairs,
the Debtor testified that his counsel had advised him that he was under severe time constraints
and needed “to get a down-and-dirty schedule filed,” which could later be amended. Trial

Transcript at 195, McDow v. Wamsley (In re Wamsley), No. 04-44 (Bankr. N.D.W. Va. argued

September 27, 2007) (No. 55). As to the tools specifically, the Debtor testified that they were
not specifically included on the “advice of John {on] how to fill out the voluntary petition. He
didn’t tell me to break out each individual tool item that we had.” /d. at 206. As to the real
property transferred to his wife, the Debtor testified that he believed that he had transferred the
real property to his wife more than a year before his bankruptcy filing, and, therefore, it was
unnecessary to list it on the statement of financial affairs. The Debtor, however, also testified

that he told his counsel about the property and was told that “it was so small and so immaterial to

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[not] even worry about it.” /d. at 197. When questioned about why he had not listed the shop
property on his original Schedule A, the Debtor stated, “I can’t answer that question for you. I
Just - - I turned that over to John.” Jd. at 199.

As to the real property the Debtor transferred to his brother, he argues that he was not
aware that he owned the property and did not sign the deed transferring it. When asked if he
recalled signing the deed that transferred the real property to his brother, the Debtor testified
under oath, “I never signed a deed that I can remember, no.” Jd. at 200. The Debtor then
explained that he had no knowledge of owning the real property until the Chapter 7 trustee
showed him the deed at the second § 341 meeting. Jd. The Debtor then testified about the
receipt of the tax refund, which he did not anticipate receiving. When questioned as to why he
did not forfeit the checks to the Chapter 7 trustee, he stated, “That was after we was discharged
from the bankruptcy, and I thought it was a nice gift.” Id.

Finally, in addressing the U.S. trustee’s assertion that the Debtor hid assets by removing
them from the auction site, the Debtor testified that he had all of the items present for the
auctioneer to examine and then explained to the auctioneer which items he had exempted. Jd. at

212. When asked about the information the Chapter 7 trustee received regarding the tools being

stored at a different location, the Debtor responded, “Someone informed Mr. Klein that I was

harboring tools at a different location, which I did have two rental storage units a couple hundred

yards from my house.” Jd. at 213. When asked if the tools stored in the rental units were present

at the first auction, the Debtor testified, “At the time of the first auction there might have been a
few, but not — basically, what I was doing the first auction, I was putting furniture in one side of

it that I was building for people.” Jd. at 213. The Debtor then went on to explain that, despite

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his testimony during the § 341 meeting that the companies did not have any assets, the
companies owned the items that were kept in the storage rental units. /d. at 215.

In evaluating the evidence presented by the U.S. trustee and the Debtor’s testimony, the
court finds that the Debtor knowingly and fraudulently made false oaths throughout his
bankruptcy proceedings. The Debtor contends that he did not have a fraudulent intent in
omitting assets from his bankruptcy schedules and statement of financial affairs because he was
relying on the advice of his counsel. While the court recognizes that in some circumstances a
debtor’s reliance on attorney advice may negate the fraudulent intent required, the court finds
that the Debtor did not, in good faith, rely on his attorney’s advice concerning the omissions on
his schedules and statement of financial affairs. See In re Geller, 314 B.R. 800, 807 (Bankr.
D.N.D. 2004) (“Reliance on attorney advice absolves a debtor of the fraudulent intent required
by the false oath discharge exception if such reliance was reasonable and the attomey was fully
informed when he gave such advice, especially in a case where neither the debtor nor her
attorney manifested any ill intent.”). But see In re Montgomery, 86 B.R. 948, 958 (Bankr. N.D.
Ind. 1988) “Generally, a debtor who acts in reliance on the advice of his attorney lacks the

required intent to deny discharge of his debts; however, such reliance must be reasonable. ... If

however, the bankrupt did not actually and in good faith rely on his attorney’s advice, he cannot
take advantage thereof.”) (internal citations omitted). We find that the Debtor, Charles E.
Wamsley, Jr., engaged in a pattern of fraudulent conduct that went well beyond an innocent
omission on the advice of counsel.

The Debtor filed his original schedules and statement of financial affairs with numerous
omissions and inaccuracies. He then testified at his first § 341 meeting that the information

contained in those documents was completely true and accurate. After being confronted by

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creditors and the U.S. trustee, he filed amended schedules, which disclosed additional assets.
The Debtor, however, still did not disclose the transfers of real property. He then testified at his
second § 341 meeting that the information in those documents was completely true and accurate.
When confronted with the deeds evidencing the transfers of real property, the Debtor admitted to
transferring the property. At his trial, however, the Debtor gave contradicting testimony that he
did not transfer the property to his brother. In fact, according to his testimony, he had no
knowledge that he owned the property and never signed the deed. The court is convinced that
his testimony at the second § 341 meeting was truthful after he was confronted with the deeds.
While the court does find the Debtor’s testimony that he did not anticipate receiving a tax refund
when he filed his schedules and amended schedules credible, the court is not convinced that the
Debtor thought he was entitled to retain the $65,400 tax refund. Finally, the court does not find
the Debtor’s testimony that he had presented all of his assets to the auctioneer and then told the
auctioneer those assets which were exempt and not to be auctioned was credible. The Debtor’s
own testimony was contradictory, in that he later explained his withholding of certain items by
stating that one of his corporations owned them. Examining this pattern of conduct, the court

finds that the Debtor knowingly and fraudulently made false oaths in his bankruptcy
proceedings. Sackett v. Shahid (In re Shahid}, 334 B.R. 698, 710 (Bankr. N.D. Fla. 2005)
(“When there is a pattern of omissions, it is logical to conclude the debtor did in fact make a
false oath in connection with the case.”).

Finally, the court finds that the false oaths given by the Debtor concerned material facts.
The omission of the Debtor’s transfers of real property to his wife and brother were of material
consequence, as they ultimately resulted in a combined $24,832.35 recovery for the estate.

Hatton v. Spencer (In re Hatton), 204 B.R. 477, 485 (E.D. Va. 1997) (“[A] debtor, whether his

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estate is large or small, must accurately and diligently divulge the state of his financial affairs. . .
. Small estates do not fall under a ‘no-harm, no foul’ exception to this rule”).

Likewise, the omission of the Debtor’s assets from his schedules were material to the
administration of the bankruptcy, as it is imperative that creditors and the Chapter 7 trustee have
a complete and accurate picture of the Debtor’s financial circumstances. Id. (“[T]here is no de
minimus exception to the Bankruptcy Code’s disclosure requirements”).

The U.S. trustee is required to demonstrate by a preponderance of the evidence that the
Debtor obtained his discharge through fraud by proving that he knowingly and fraudulently
made a false oath, concerning a material fact, in his bankruptcy proceeding. The US. trustee has
satisfied his burden, and, therefore, the court finds that the Debtor obtained his discharge through
fraud. Judge Friend previously found that the U.S. trustee was not aware of the alleged fraud
prior to discharge, and that finding was not contested, so further, the Debtor’s discharge shall be
revoked.

Ill. CONCLUSION

The U.S. trustee has successfully satisfied his burden in establishing the requisite

elements under 11 U.S.C. § 727(d)(1), and, therefore, the Debtor’s discharge shall be revoked.

The court will enter a separate order pursuant to Fed. R. Bankr. P. 9021.

P2

Ronald G. Pearson,
United States Bankruptcy Judge

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