Financial Adviser Denied Bankruptcy Discharge in Rare Sanction

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By Diane Davis

A veteran financial adviser can’t discharge his debts in bankruptcy because he falsely understated the value of his interest in a real estate investment company, the U.S. Court of Appeals for the Fourth Circuit held in a rare sanction Feb. 28 ( Van Robinson v. Worley , 2017 BL 61215, 4th Cir., No. 15-2346, 2/28/17 ).

Debtor Jason Worley, who worked at Edward Jones for 10 years, intentionally shortchanged his creditors in his Chapter 7 bankruptcy by making a material misstatement about the value of his assets, Judge J. Harvie Wilkinson III wrote.

It’s a “cautionary tale” that debtors shouldn’t treat their valuations of assets lightly because it can prevent their bankruptcy discharge—the wiping out of debt—under Bankruptcy Code Section 727(a)(4)(A).

Under that law , a court should deny discharge if “the debtor knowingly and fraudulently, in or in connection with the case, made a false oath or account,” the court said.

Denial is a “severe sanction that should be reserved for instances in which a debtor contravenes the basic compact underlying the Code’s promise of a ‘fresh start,’” the court said.

This is such a “rare case” where the denial of a discharge is the correct result, the court said.

Worley invested $65,000 for a 49 percent interest in Gemini Land Trust, LLC with his childhood friend Joshua Crapps.

After Worley’s investments flopped and he filed for bankruptcy, he estimated his interest in Gemini had a market value of $2,500. Worley said he obtained the advice of counsel and used the capitalization method for this estimate.

Worley’s real estate valuation was “outside the realm of common sense” because his share was worth at least five times the value he reported based on testimony by Crapps, the court said.

As a financial professional, Worley knew better than to value his interest using capitalization rates, which applied an income-driven formula to an investment that generated only incidental revenue, the court said.

His claimed reliance on the advice of counsel didn’t excuse his failure to list an accurate valuation, the court said.

Any fraudulent misstatement “in or in connection with the case” is sufficient grounds to deny discharge under the law, the court said.

Worley’s misstatements were material because they were relevant to his business transactions, estate and assets, the court said.

Judges Paul V. Niemeyer and Barbara Milano Keenan joined the opinion.

Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., represented Jason Worley; Spilman Thomas & Battle, PLLC, represented plaintiffs Wann and Mary Robinson.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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