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Bankruptcy Court Denies Debtor's Discharge Based on False Statements Regarding His Domicile and Failure to Account for Loss of Money

Monday, August 22, 2011

McDow v. Ryan (In re Ryan), No. 09-05029, 2011 BL 200251 (Bankr. E.D. Va. Aug. 2, 2011) The United States Bankruptcy Court for the Eastern District of Virginia granted a motion by the United States Trustee ("U.S. Trustee") for default judgment on its amended complaint seeking to deny a debtor’s discharge under 11 U.S.C. §§ 727(a)(2), (a)(3), (a)(4) and (a)(5). In entering a default, the court ruled that the debtor was in default for failing to file a responsive pleading to the amended complaint and, according to the merits of the claims, held that the U.S. Trustee had sufficiently alleged that the debtor made contradictory statements under oath regarding his true place of domicile and had failed to account more than $400,000 in missing cash.

Debtor’s Contradictory Statements under Oath and Repeated Failure to Appear

In July, 2008, Mykal S. Ryan ("Debtor") filed a petition for chapter 7 bankruptcy protection in Virginia. At the time, Debtor was incarcerated due to his failure to respond to interrogatories in a state court action relating to the satisfaction of three foreign judgments against him. Shortly after the filing of the petition, Debtor’s bankruptcy counsel filed an emergency motion, seeking the protection of the automatic stay and Debtor’s release from jail. Upon being advised of the motion, the state court ordered Debtor’s release. Debtor’s attorney then withdrew as counsel and Debtor proceeded pro se in his bankruptcy case. Notably, while serving as his own counsel, Debtor’s true place of domicile and failure to appear became contentious subjects in the bankruptcy case. While Debtor’s petition indicated that he resided in Virginia and owned real property in Virginia, Debtor subsequently informed the court that he had moved to California. Moreover, Debtor filed a motion in January 2009, stating that he had been a resident of California since 2005, and filed a declaration in May 2010 ("Declaration"), indicating that his true domicile had been California since 2007. The Declaration further claimed that the amount of real property declared on Debtor’s schedules should be reduced from $365,000 to $20,000 and that the amount of personal property should be reduced from $387,145 to $0. Finally, in addition to these contradictory statements under oath, Debtor also repeatedly failed to appear at his scheduled § 341 meeting of creditors. Significantly, only after the court provided Debtor one final opportunity to appear, did Debtor finally appear at a § 341 meeting of creditors held in California in July, 2010.

U.S. Trustee’s Motion Seeking to Deny Debtor’s Discharge

During this period, the U.S. Trustee filed a complaint, which was subsequently amended ("Amended Complaint"), seeking to deny Debtor’s discharge under § 727 of the Bankruptcy Code for (1) refusal to obey the lawful orders of the court under § 727(a)(6); (2) failure to sufficiently explain a loss of assets to meet liabilities under § 727(a)(5); (3) false oath or account under § 727(a)(4)(A); (4) the transfer of property with the intent to hinder, delay or defraud under § 727(a)(2); and (5) failure to keep recorded financial information under § 727(a)(3). Thereafter, the U.S. Trustee filed a motion for entry of default judgment ("Default Motion"), citing Debtor‘s failure to respond to the Amended Complaint. At a hearing on the matter, Debtor failed to appear, despite being afforded notice and the chance to appear by telephone. Ruling on the motion in Debtor’s absence, the court dismissed the § 727(a)(6) count for refusal to obey the lawful orders of the court based Debtor’s eventual appearance at the § 341 meeting of creditors and then reviewed the remaining counts.

Court Rules Debtor Was in Default as to the Amended Complaint

Rendering its decision on the remaining counts addressed in the Default Motion, the court began by concluding that Debtor was in fact in default with respect to the Amended Complaint because he was properly served, yet failed to comply with Federal Rule of Bankruptcy Procedure 7015(a)(3), which requires the filing of a response within 14 days. Observing however, that default was an extraordinary remedy, the court resolved that it was further required to evaluate the validity of the underlying claims in order to enter a default judgment. See, e.g., Lolatchy v. Arthur Murray, Inc., 816 F.2d 951, 953 (4th Cir. 1987).

Court Finds Denial of Discharge Was Warranted under §§ 727(a)(2) and (a)(3)

Examining the substance of the U.S. Trustee’s claims, the court began by deciding that the record supported a claim for the transfer of property with the intent to hinder, delay or defraud under § 727(a)(2) and a claim for the failure to keep recorded financial information under § 727(a)(3). In support of this holding, the court highlighted the U.S. Trustee’s allegation that Debtor had withdrawn hundreds of thousands of dollars from his bank accounts, only to then open accounts in the name of his mother, of which he maintained authority. Similarly, the court cited the allegation that Debtor had directed that his retirement, social security, and disability income be paid directly into these accounts, and had purchased some $350,000 worth of money orders within one year of his bankruptcy filing. Additionally noting Debtor’s failure to provide a proper accounting of $434,926 in missing funds, the court referenced Debtor’s contradictory assertions that the funds were lost while gambling or placed in a backpack which was stolen from his Virginia home, and found that Debtor failed to provide the court with a complete disclosure of the funds and their disposition. Doubet LLC v. Palermo (In re Palermo), 370 B.R. 599, 612-13 (Bankr. S.D.N.Y. 2007). Finally, the court noted the lack of any recorded information from which Debtor’s financial condition could be ascertained. See Keeling v. Ozey (In re Ozey), 172 B.R. 83, 91 (Bankr. N.D. Okla. 1994). Based on this record, the court held that the U.S. Trustee had sufficiently plead grounds to deny Debtor’s discharge under both §§ 727(a)(2) and (a)(3).

Court Also Denies Debtor’s Discharge under §§ 727 (a)(4) and (a)(5)

Turning to the U.S. Trustee’s § 727(a)(4)(A) count based on a false oath or account, the court resolved that the Amended Complaint sufficiently alleged that Debtor had made contradictory statements regarding his true place of domicile. In this regard, the court noted that Debtor first indicated on his petition, under penalty of perjury, that his place of domicile was Virginia, only to later repudiate this statement under oath by stating that he had never lived in Virginia and indicating that "[t]here were other errors on the Schedules and Statement of Financial Affairs that will be corrected at a later date." Likewise, the court referenced Debtor’s attempt, through the Declaration and related motion, to amend his petition to change his place of domicile from Virginia to California and to reduce his personal and real property assets to nearly zero. Based on these allegations, the court concluded that the U.S. Trustee had sufficiently demonstrated that Debtor had willfully ignored the requirement that his statements filed under penalty of perjury be truthful and accurate, such that judgment under § 727(a)(4) was appropriate. Finally, also granting judgment in favor of the U.S. Trustee with respect to his § 727(a)(5) count alleging a failure to satisfactorily explain a loss of assets to meet liabilities, the court again cited the U.S. Trustee’s allegations regarding Debtor’s failure to properly account for the approximately $350,000 in money orders and claimed losses of $434,926. Furthermore, the court pointed to Debtor’s failure to disclose a transfer of real property in the Virgin Islands to his brother. On the record, the court resolved that Debtor’s failure to provide a plausible explanation for how he disposed of his property, including over $400,000 in cash, supported the denial of a discharge under § 727(a)(5).

Court Grants U.S. Trustee’s Default Motion

Ultimately granting the Default Motion, the court held that Debtor was in default with respect to the Amended Complaint by failing to file a responsive pleading and that the U.S. Trustee had sufficiently alleged claims to warrant denial of Debtor’s discharge under § 727(a)(2), (a)(3), (a)(4) and (a)(5). As a result of this decision, any debts resulting from any pending state court litigation, would not be discharged in Debtor's bankruptcy case.
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