United Bank, Inc. v. Fedczak

THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
GREGORY J. FEDCZAK,
Debtor.
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UNITED BANK, INC.,
Plaintiff,
v.
GREGORY J. FEDCZAK
Defendant.
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Case No 05-3418
Chapter 7
Adv. Proc. No. 05-195
MEMORANDUM OPINION
United Bank, Inc. (“United Bank”), filed a complaint to deny Gregory J. Fedczak (the “Debtor”)
a Chapter 7 discharge pursuant to 11 U.S.C. § 727(a)(2)(A) on the grounds that the Debtor concealed
property during the year preceding his bankruptcy filing with the intent to hinder, delay, or defraud his
creditors. At the trial in this case, United Bank sought to enlarge the scope of its complaint to include
allegations that the Debtor made false oaths or accounts under § 727(a)(4)(A), and that the Debtor failed
to satisfactorily explain the loss of assets under § 727(a)(5). The Debtor denies any conduct that would
Dated: Wednesday, June 06, 2007 4:29:15 PM
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1 In the post-trial briefing, the Debtor did not object to enlarging the complaint to include
additional counts pursuant to 11 U.S.C. §§ 727(a)(4)(A) and (5).
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cause his discharge to be denied.1
The court held a trial in this case on June 20, 2006, in Wheeling, West Virginia. At the completion
of the hearing, the court ordered supplemental briefing. After that initial briefing was completed, United
Bank moved to supplement the record with newly discovered evidence that the Debtor owned another
business, Mooky Rebal, which the Debtor failed to disclose on his bankruptcy schedules. The court
allowed United Bank to supplement the record, and gave an additional period of time for the Debtor to
present evidence to rebut the new allegations. At the final hearing in this case on February 20, 2007, both
parties stated that the record was now complete and ripe for review. After reviewing the submissions of
the parties, the testimony, and the evidence adduced at trial, the court will grant the relief sought by United
Bank and deny entry of the Debtor’s discharge.
I. BACKGROUND
Before filing bankruptcy, the Debtor served as president of W. Golden Concrete Construction, Inc.
(“WGC”). Before her death on March 20, 1996, all the stock in WGC was held by Martha Frame, the
Debtor’s mother. Through Ms. Frame’s will, the Debtor was to inherit her stock interest in WGC. The
Debtor testified, however, that he was unaware of whether he owned the stock in WGC at the time he filed
bankruptcy. In support of this statement, the Debtor related that he was unfamiliar with the terms of his
mother’s will when he filed bankruptcy, his mother’s estate was likely insolvent, her will was never fully
probated, and he never received any stock certificates for WGC. The Debtor also accuses the attorney
in charge of administering his mother’s estate of being inactive and/or unresponsive.
After his mother’s death, the Debtor continued to serve as WGC’s president. On September 9,
1997, he obtained a $40,000 line of credit from United Bank on behalf of WGC. The Debtor signed the
credit documents as president, signed a personal guarantee, and at United Bank’s direction, executed a
corporate resolution granting him the authority to borrow money on behalf of WGC. As security for the
loan, United Bank took an interest in WGC’s inventory, equipment, accounts, general intangibles, and in
a 1989 Whiteman/Conspray SV-50 Trailer Concrete Pump S#7891803 (the “Concrete Pump”).
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The term of the September 9, 1997 loan was for one year; however, in 1998, 1999, and 2000,
United Bank extended the loan’s maturity date. Pursuant to the 2000 modification, the principal balance
owed was about $24,800 and the loan matured on September 9, 2001. Even though the principal balance
of the loan was not paid off in 2001, the Debtor stated that he ceased making any payments on the loan.
According to the Debtor’s Statement of Financial Affairs, however, WGC continued its business at least
into 2004 inasmuch as the Debtor claims to have received income from WGC during that time.
When United Bank ceased receiving payments from WGC, United Bank contacted the Debtor to
address the loan’s deficiency balance. Anthony Gentile, United Bank’s market manager, testified that the
Debtor was generally non-cooperative in helping to identify and locate the collateral for the loan. In May
2005, United Bank specifically requested that the Debtor provide the location of the Concrete Pump, tools,
and other equipment owned by WGC. The Debtor replied that he no longer worked for WGC, he last saw
the Concrete Pump at a job site, and that he did not know what had happened to the Concrete Pump or
other equipment of WGC since that time.
On August 10, 2005, the Debtor filed his Chapter 7 bankruptcy petition. In response to Question
1 on his Statement of Financial Affairs, he reported receiving income from WGC in 2004. Question 18
on the Statement of Financial Affairs requires that the Debtor to divulge “the names, addresses, tax payer
identification numbers, nature of the business, and beginning and ending dates of all businesses in which the
debtor was an officer, director, partners, or managing executive of a corporation . . . or in which the debtor
owned a 5 percent or more of the voting equity securities within the six years immediately preceding the
commencement of the case.” In response to Question 18, the Debtor listed the name, address, and the
nature of WGC’s business. On Schedule B, which requires that the Debtor list all personal property,
including all stock interests and any contingent or non-contingent interest in the estate of a decedent, the
Debtor did not list any stock ownership of WGC, any claim to the ownership of WGC’s stock, or any
claim of inheritance from his mother’s estate. When he testified at his § 341(a) meeting of creditors, the
Debtor made the following statements:
Trustee: [O]n your Statement of Financial Affairs, the other thing you said was, that
you were a supervisor. Was that for, you doing business as Golden
Concrete?
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Debtor: No. I was appointed President of that company, and I had the authority
to sign my name to it and when I filed bankruptcy, that’s why I brought it
to the attention of the lawyer I have here. I didn’t know if I was liable to
it because I signed my name to it or what. . . . I have no interest in the
company whatsoever. I don’t own no stock in it or nothing.
Trustee: Who made you President?
Debtor: Martha Frame. She was an elderly lady and I sort of ran things for her.
. . . .
Mr. Bailey: With respect to W. Golden Construction, who does own the stock?
Debtor: Martha Frame.
Mr. Bailey: Any are you the President?
Debtor: Yeah, when I worked for them.
Mr. Bailey: You no longer work for them?
Debtor: No.
Mr. Bailey: Are they still in business?
Debtor: I have no idea.
Mr. Bailey: How did you sever your relationship with them?
Debtor: They had no work so I went to work for somebody else.
. . . .
Mr. Bailey: What happened to the assets of W. Golden Construction?
Debtor: I have no idea.
(Pl. Ex. 2).
After the trial in this case, United Bank discovered a complaint filed by Mooky Rebal against
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various defendants in the Circuit Court of Fairfax County, Virginia. In that complaint, Mooky Rebal was
stated to be an unincorporated proprietorship of its owner – the Debtor. At the Debtor’s § 341 meeting
of creditors, however, he stated that Mooky Rebal belonged to his daughter, Adrian Fedczak, and that he
did not have any affiliation with it at the time. In response to United Bank’s supplementation of the record,
the Debtor produced numerous documents listing Mooky Rebal as belonging to Adrian Fedczak, and a
letter from the Fairfax County, Virginia attorney stating that he had made a mistake in listing the Debtor as
the owner of Mooky Rebal.
II. DISCUSSION
United Bank argues that the Debtor should be denied entry of a Chapter 7 discharge under 11
U.S.C. § 727(a)(2)(A) on the basis that the Debtor intentionally concealed assets from his bankruptcy
creditors. In the alternative, United Bank contends that the Debtor’s discharge should be denied under §
727(a)(4)(A) for allegedly making false oaths, and under § 727(a)(5) for allegedly failing to satisfactorily
explain the loss of assets. Because the court concludes that sufficient grounds exist pursuant to §
727(a)(2)(A), and, in the alternative, § 727(a)(4)(A), to deny entry of the Debtor’s discharge, the court
will not address United Bank’s arguments under § 727(a)(5).
A. Concealment: § 727(a)(2)(A)
United Bank asserts that the Debtor’s discharge should be denied because he allegedly concealed
the Concrete Pump from it, and concealed his ownership interest in WGC and Mooky Rebal from all his
creditors. United Bank further contends that the Debtor’s intent to hinder, delay or defraud it can be
garnered from a string of allegedly bad acts dating back to 1997. The court, however, will only focus on
the Debtor’s alleged concealment of his ownership interest in WGC as the basis for granting United Bank’s
motion and for denying entry of the Debtor’s discharge.
Section 727(a)(2) of the Bankruptcy Code directs the court to deny entry of a Chapter 7 discharge
if the court finds that:
(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 . . . concealed, or has permitted to
be . . . concealed –
(A) property of the debtor, within one year before the date of the filing of the
petition; or
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(B) property of the estate, after the date of the filing of the petition;
11 U.S.C. § 727(a)(2).
To prevail on a section 727(a)(2)(A) cause of action based on concealment, the moving party must
generally prove five elements by a preponderance of the evidence: 1) the debtor 2) concealed 3) the
debtor's property, 4) with the intent to hinder, delay, or defraud a creditor 5) within one year of
bankruptcy. In re Kontrick, 295 F.3d 724, 736 (7th Cir. 2002), aff'd, 540 U.S. 443 (2004); see also
Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir. 1993) (stating that the moving party under § 727(a)(2)
bears the burden of proving that the debtor acted with the intent to hinder, delay, or defraud his creditors).
No requirement exists in § 727(a)(2) that a creditor be harmed by a debtor’s concealment of property.
E.g., Keeney v. Smith (In re Keeney), 227 F.3d 679, 685 (6th Cir. 2000) (holding that a creditor’s
inability to reach the property as a matter of law was irrelevant to whether a violation of § 727(a)(2)(A)
had occurred). Likewise, a transfer of property does not have to occur within the one-year period
preceding the bankruptcy filing so long as the debtor is actively concealing that property within the statutory
one-year time period. E.g., id. at 684-84 (discussing and applying the doctrine of continuous
concealment); Thibodeaux v. Oliver (In re Oliver), 819 F.2d 550, 555 (5th Cir. 1987) (“[T]he
concealment of an interest in an asset that continues, with the requisite intent, into the year before
bankruptcy constitutes a form of concealment which occurs within the year before bankruptcy . . . such
concealment is within the reach of section 727(a)(2)(A).”).
Here, the Debtor testified that he was the former president of WGC, and, on his Statement of
Financial Affairs, he stated that he continued to earn income from WGC as late as 2004. The Debtor
further testified that his mother, who died in 1996, was the sole stockholder of WGC.
Notwithstanding his position as president, the Debtor claimed not to know who held the stock in
WGC following his mother’s death in 1996, and he professed to still being ignorant of who held WGC’s
stock when he filled out his bankruptcy petition and schedules in August 2005. In attempting to explain
his ignorance, the Debtor testified that he was unfamiliar with the terms of his mother’s will, and he did not
learn of the will’s contents until the initiation of this adversary proceeding. The Debtor further explained
that he believed that his mother’s estate was likely insolvent and he doubted that her will was ever fully
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probated. At no time, the Debtor stated, did he ever receive any physical stock certificates for WGC. For
these reasons, the Debtor did not consider himself to be the equitable owner of WGC; therefore, he did
not disclose any ownership interest in WGC, any interest in his mother’s estate, or any contingent claim on
Schedule B related to WGC.
The Debtor did, however, list WGC on his Statement of Financial Affairs as both a source of
income under Question 1, and under Question 18, which requires the Debtor to divulge “the names,
addresses, tax payer identification numbers, nature of the business, and beginning and ending dates of all
businesses in which the debtor was an officer, director, partners, or managing executive of a corporation
. . . or in which the debtor owned a 5 percent or more of the voting equity securities . . . .” While the
Debtor did not indicate the nature of his interest on the Statement of Financial Affairs, he did inform the
Chapter 7 trustee at his meeting of creditors that he served as president of that corporation and that he did
not own any stock.
The court finds that the stated reasons for the Debtor’s failure to disclose a stock ownership interest
in WGC are not credible. Significantly, the Debtor’s mother died in 1996, and the Debtor’s employment
with WGC – as its president – continued at least until 2004 when the Debtor left to find other work. WGC
was apparently a closely-held, family corporation, and the Debtor was aware that his mother owned the
stock while she was living. The mere fact that the Debtor claims to have had no idea as to who owned the
WGC stock following his mother’s death, especially considering his lengthy employment as a corporate
officer, is astonishing.
Moreover, the Debtor was less than forthcoming with his testimony at his meeting of creditors.
When asked about who made him president, and who owned the stock for WGC, the Debtor failed to
disclose that Martha Frame was his mother, that she passed away in 1996, and that at the time of her
death, she owned all the stock in WGC. Instead, the Debtor merely stated that Martha Frame owned all
the stock, explaining that she was an “elderly lady” and that he “sort of ran things for her.” Based on these
facts, the court is convinced that the Debtor was attempting to conceal his ownership interest in WGC at
the time he completed his bankruptcy petition and schedules in August 2005, and that his active
concealment continued at his subsequent meeting of creditors. Accordingly, United Bank has met its
burden of showing that the debtor concealed the debtor's property within one-year of bankruptcy, and the
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only remaining element left to be established is that the Debtor undertook this concealment with the intent
to hinder, delay, or defraud a creditor.
An intent to hinder, delay, or defraud a creditor may be established by circumstantial evidence.
E.g., In re Krehl, 86 F.3d 737, 743 (7th Cir. 1996) (“The intent determination often will depend upon a
bankruptcy court's assessment of the debtor's credibility, making deference to the court's finding particularly
appropriate.”). An actual intent to defraud may also be shown when the debtor acts with reckless
indifference to the truth. E.g., Diorio v. Kreisler-Borg Constr. Co., 407 F.2d 1330, 1331 (2d Cir. 1969)
(“Statements called for in the schedules, or made under oath in answer to questions propounded during the
bankrupt's examinationor otherwise, must be regarded as serious business; reckless indifference to the truth
. . . is the equivalent of fraud.”). As stated by one court:
“Bankruptcy is not a game of hide and seek that the debtor plays with the trustee and the
Court. Full disclosure is the quid pro quo for a debtor's discharge.” It is not up to the
trustee and other parties in interest to ferret out the truth about Debtors’ assets and
financial affairs. The critical time for disclosure is at the time of the filing of a petition and
Debtors have the responsibility to do so. Bankruptcy law requires Debtors to be honest
and to take seriously the obligation to disclose all matters.
McDow v. Geddings (In re Geddings), No. 05-80183, 2006 Bankr. LEXIS 161 at *10-11 (Bankr.
D.S.C. Jan. 27, 2006) (granting summary judgment on the trustee’s motion to deny discharge under §
727(a)(2) when the debtors failed to report the sale of stock and failed to disclose their gross income from
the operation of their businesses) (citation omitted).
Under the circumstances of this case, the court believes that the Debtor had the requisite intent to
hinder, delay, or defraud his creditors when he failed to list any stock ownership interest in WGC on
Schedule B, failed to disclose any interest in the estate of his deceased mother, failed to list any claim
regarding WGC’s stock, and when he testified at his meeting of creditors regarding the stock ownership
of WGC. The transcript of Debtor’s testimony at his meeting of creditors was consistent with what the
court observed at trial: the Debtor generally appeared to be evasive in answering questions, and he did not
appear to give forthright testimony. After listening to the Debtor’s testimony on direct and cross
examination, and after observing the Debtor’s demeanor on the witness stand, the court did not find that
the Debtor made a credible witness. In particular, the court found the Debtor’s explanation concerning his
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ostensible ignorance of WGC’s stock ownership to be both implausible and contrived. The Debtor’s
concealment of his stock ownership interest, the objective facts demonstrating that the Debtor knew the
status of the WGC stock before he filled out his bankruptcy schedules and statements, and his lack of
credibility as a witness are sufficient grounds for United Bank to meet its burden of proof and burden of
persuasion on its § 727(a)(2)(A) cause of action.
B. False Oath: § 727(a)(4)(A)
United Bank asserts that the Debtor’s discharge should be denied pursuant to 11 U.S.C. §
727(a)(4)(A) on the basis that the Debtor made false oaths when he: (1) failed to report an ownership
interest in WGC on his petition and schedules, or at his § 341 meeting of creditors; (2) failed to disclose
at his § 341 meeting that the “elderly lady” that owned WGC was his mother who had died nine years
earlier; (3) stated that he had no idea what happened to the assets of WGC when he was the former
president of that corporation; (4) stated that the books and records of WGC were in the possession of an
accountant, and contradictorily, stated that they were lost in a flood; (5) stated in answers to interrogatories
that no transfers were made from WGC to another company once operated by the Debtor – Fedz, Inc.
– when that answer is contrary to the evidence; (6) stated that WGC paid him on commissions when he
was unable to present any W-2 wage statements; and (7) failed to disclose any ownership interest in
Mooky Rebal when Mooky Rebal had filed a relatively contemporaneous complaint stating the Debtor
owned Mooky Rebal. The court, however, will only focus on the Debtor’s failure to disclose his interest
in WGC’s stock as an alternative basis for denying discharge under § 727.
Section 727(a)(4)(A) of the Bankruptcy Code 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 . . . .
§ 727(a)(4)(A).
To succeed on a § 727(a)(4)(A) cause of action, the moving party must prove that: the debtor
made a statement under oath; the statement was false; the debtor knew the statement was false; the debtor
made the statement with fraudulent intent; and that the statement related materially to the bankruptcy case.
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Keeney, 227 F.3d at 685. The party objecting to discharge has the burden of proof by a preponderance
of the evidence. Fed. R. Bankr. P. 4005.
A debtor’s signature avowing to the truth and correctness of the bankruptcy petition, schedules of
assets and liabilities, and statement of financial affairs is undertaken on penalty of perjury. Fed. R. Bankr.
P. 1008 (“All petitions, lists, schedules, statements and amendments thereto shall be verified or contain an
unsworn declaration as provided in 28 U.S.C. § 1746.”). Truth in reporting is consonant with the purposes
of bankruptcy, which is to “give[] the honest but unfortunate debtor . . . a new opportunity in life and a clear
field for future effort, unhampered by the pressure and discouragement of pre-existing debt.” Local Loan
Co. v. Hunt, 292 U.S. 234, 244 (1934); In re Jarrell, 189 B.R. 374, 377 (Bankr. M.D.N.C. 1995)
(stating that bankruptcy does not afford a debtor a right to a “head start”). A debtor should make every
attempt to report accurate information in the debtor’s petition and schedules and “[n]either the trustee nor
the creditors should be required to engage in a laborious tug-of-war to drag the simple truth into the glare
of daylight.” In re Tully, 818 F.2d 106, 110 (1st Cir. 1987).
In proving an 11 U.S.C. § 727(a)(4)(A) cause of action, no requirement exists that there be some
detriment to a creditor resulting from the false oath. Farmers Co-Operative Ass’n v. Strunk, 671 F.2d
391, 396 (10th Cir.1982); United States v. O'Donnell, 539 F.2d 1233, 1237-38 (9th Cir. 1976). The
fact that a debtor may believe that omitted information concerned a worthless business relationship or
holding is a specious defense; “[i]t makes no difference that he does not intend to injure his creditors when
he makes a false statement [because c]reditors are entitled to judge for themselves what will benefit, and
what will prejudice, them.” In re Chalik, 748 F.2d 616, 618 (11th Cir. 1984); In re Ingle, 70 B.R. 979,
983 (Bankr. E.D.N.C. 1987) (“Creditors are entitled to truthful statements in a debtor's statement of
financial affairs so that they may conduct their own investigations of those affairs.”).
For the same reasons articulated by the court, supra, in determining that the Debtor should be
denied a discharge under 11 U.S.C. § 727(a)(2)(A), the court also concludes that grounds exist to deny
the Debtor’s discharge under § 727(a)(4)(A) because the court is convinced that the Debtor knew that he
had an ownership interest in WGC’s stock at the time he filed bankruptcy, and at the time he testified at
his meeting of creditors. The Debtor purposefully chose, however, to represent that he had no interest in
WGC’s stock on Schedule B and at his meeting of creditors. Consequently, the court finds that the Debtor
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knowingly and fraudulently made a false oath or account pursuant to § 727(a)(4)(A).
IV. CONCLUSION
For the above-stated reasons, the court will grant the relief sought by United Bank in its adversary
complaint and deny entry of the Debtor’s discharge. The court will enter a separate order pursuant to Fed.
R. Bankr. P. 9021.
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