Motion to dismiss an adversary complaint under section § 727 for denial of discharge
This blog post will discuss the filing of a motion to dismiss an adversary complaint to deny the Debtor a discharge under 11 U.S.C. § 727 in United States Bankruptcy Court. The motion is made pursuant to Federal Rules of Bankruptcy Procedure § 7012(b)(6), (“FRBP”) which is the section used in Bankruptcy Court instead of the Federal Rules of Civil Procedure § 12(b)(6).
The motion is made on the grounds that the adversary complaint fails to state a claim for relief. Note that the author works on cases in California so the case law cited herein is from the Ninth Circuit Court of Appeals. Readers living in a State located within the jurisdiction of a different Circuit Court of Appeals should do legal research for their particular Circuit Court of Appeals.
The facts discussed in this case are taken from an actual case that the author worked on in which a creditor filed an adversary complaint alleging that the Debtor deliberately failed to list the creditor on hisbankruptcy schedules. The adversary complaint requested a denial of discharge under 11 U.S.C. § 727(a)(4) due to an alleged false oath by the Debtor in that he failed to list the creditor.
The Debtor in the case filed a voluntary Petition for bankruptcy pursuant to Chapter 7 of the U.S. Bankruptcy Code. And the Chapter 7 Trustee filed their Final Report under FRBP 5009 which stated that there was no property available for distribution. Thus, the Chapter 7 Trustee determined that this was a no-asset case.
Unfortunately an unsecured judgment creditor was omitted from the bankruptcy petition. The Debtor denied that the failure to list the creditor was deliberate or done with fraudulent intent
The Debtor filed a motion to dismiss and contended that the Complaint fails to state a claim for relief as it fails to state facts sufficient to show that: (1) the debtor made a false oath in connection with the case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently.
The Debtor also contended that the Complaint failed to state a claim for relief as it also failed to state facts sufficient to show that (1) the debtor made the representations, e.g., a false statement or omission in bankruptcy schedules; (2) at the time he knew they were false; and (3) he made them with the intention and purpose of deceiving the creditors.
Finally, the Debtor also contended that had the creditor waited until after the bankruptcy case was closed they would not be entitled to have the case re-opened because relief would be unnecessary as case law in the Ninth Circuit is clear that reopening to add an omitted creditor is not necessary in a Chapter 7 “no asset/no bar date” case where the court sends a notice directing creditors not to file a proof of claim. Relief is unnecessary because if the omitted debt is dischargeable, it was already discharged.
Because the creditor was objecting to the discharge of the Debtor they bear the burden of proving by a preponderance of the evidence that the discharge should be denied as the Court construe § 727 liberally in favor of debtors and strictly against the party objecting to discharge.
“Those objecting to discharge bear the burden of proving by a preponderance of the evidence that the debtor’s discharge should be denied. In keeping with the fresh start purposes behind the Bankruptcy Code, courts should construe § 727 liberally in favor of debtors and strictly against parties objecting to discharge.” In re Retz (9th Cir. 2010) 606 F. 3d 1189, 1196 (internal citations and quotations omitted.)
In order for the creditor to prevail on their claim they must show four elements which are discussed below.
“To prevail on this claim, a plaintiff must show, by a preponderance of the evidence, that: (1) the debtor made a false oath in connection with the case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently.”. In re Retz, supra at 1197.
The adversary complaint merely made conclusory allegations without any showing of the four elements discussed In re Retz.
And the false oath must relate to a material fact. The adversary complaint failed to detail how the alleged false oath relates to any material fact, other than the fact that the creditor was not listed. The adversary complaint failed to state how that “omission” relates to any material fact.
“Section 727(a)(4)(A) requires that the relevant false oath relate to a material fact. A fact is material if it bears a relationship to the debtor’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor’s property. An omission or misstatement that detrimentally affects administration of the estate is material.” In re Retz, supra at 1198.
The creditor had not alleged how the failure to list them as a creditor has detrimentally affected the administration of the estate.
“On an objection to Chapter 7 discharge on grounds of false oath, to demonstrate fraudulent intent, a plaintiff bears the burden of showing that (1) the debtor made the representations, e.g., a false statement or omission in bankruptcy schedules; (2) at the time he knew they were false; and (3) he made them with the intention and purpose of deceiving the creditors.” In re Retz, supra at 1198-1199.
Because the adversary complaint failed to state any facts which showed that the Debtor made any false oath or omission with the knowledge at the time he made it that it was false, and that he made it with the intention and purpose of deceiving the creditors, the creditor failed to meet their burden of showing that the discharge of the Debtor should be denied.
The interpretation of this case by Debtor was that in a no asset case, omission of a creditor by the debtor will not prejudice the claim since there are no assets to distribute even if the creditor was scheduled in the Petition.
The Ninth Circuit Court of Appeals has in fact stated that if there are no assets to distribute then the omission of a creditor does not result in any prejudice to them.
Reopening to add an omitted creditor is not necessary in a Chapter 7 “no asset/no bar date” case where the court sends a notice directing creditors not to file a proof of claim. Relief is unnecessary because if the omitted debt is dischargeable under § 523(a)(3)(A), it was already discharged under § 727; if nondischargeable under § 523(a)(3)(B), it was not discharged. Amending the schedules does nothing in this situation. In re Beezley (9th Cir. 1993) 994 F.2d 1433, 1434; see also In re Hicks (BC CD CA 1995) 184 BR 954, 961—reopening case to amend schedules to add omitted debts not required to bring debt within scope of discharge.
This case was deemed a no asset case, as evidenced by the Final Report filed by the Chapter 7 Trustee which was in fact admitted in the adversary complaint.
Conclusory allegations or legal conclusions are not sufficient to prevent a motion to dismiss. The adversary complaint made conclusory allegations that Debtor made a false oath but provided no factual allegations of fraudulent intent on the part of Debtor.
Conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss. Stac Electronic Securities Litigation v. Anderson (9th Cir. 1993) 89 F.3d 1399, 1403. (citing text).
And the Ninth Circuit has stated that even though leave to amend is liberally granted, liberality in granting leave to amend is subject to several limitations.
“Liberality in granting leave to amend is subject to several limitations. Leave need not be granted where the amendment of the complaint would cause the opposing party undue prejudice, is sought in bad faith, constitutes an exercise in futility, or creates undue delay.” Ascon Properties v. Mobil Oil Co. (9th Cir. 1989) 866 F.2d 1149, 1160. (emphasis added).
And even “artful pleading” in an insubstantial case will not necessarily prevent a motion to dismiss. Ascon Properties v. Mobil Oil Co., supra at 1155.
And the Ninth Circuit in Ascon Properties v. Mobil Oil Co., supra at 1155, stated that, “We have, however, also recognized that conclusory allegations without more are insufficient to defeat a motion to dismiss for failure to state a claim.”
Legal research was unable to locate any cases that have dealt with the particular situation discussed in this blog post. The motion to dismiss contended that allowing the credit leave to amend would in fact constitute an exercise in futility and therefore requested that the Court grant the motion to dismiss without leave to amend, or in the alternative, that the creditor be required to provide a more definite statement. The Court has not yet ruled on the motion to dismiss.
The author of this article, Stan Burman, is a freelance paralegal who has worked in Bankruptcy litigation since 1995. Mr. Burman may be contacted by e-mail at DivParalgl@yahoo.com for more information.