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Motion to dismiss an adversary complaint under section § 727 for denial of discharge

A motion to dismiss an adversary complaint to deny the Debtor a discharge under 11 U.S.C. § 727 in United States Bankruptcy Court is the topic of this blog post. 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 mostly works on cases from from 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 his bankruptcy schedules and  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 iled 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 failed to ate a claim for relief as it failedo 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 Ninth Circuit Court of Appeals has stated that Courts should  construe § 727 liberally in favor of debtors and strictly against the party objecting to discharge. And that parties objecting to discharge bear the burden of proving by a preponderance of the evidence that the debtor’s discharge should be denied.

In order for the creditor to prevail on their claim they must show four elements as stated by the Ninth Circuit. The four elements are 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 adversary complaint merely made conclusory allegations without any showing of the four elements just mentioned.

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” relatedo any material fact.

The creditor had not alleged how the failure to list them as a creditor has detrimentally affected the administration of the estate.

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 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.

The 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.

The Ninth Circuit Court of Appeals has held that conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss

The Ninth Circuit has also stated that even though leave to amend is liberally granted, liberality in granting leave to amend is subject to several limitations such as where the amendment of the complaint would cause the opposing party undue prejudice, amendment is sought in bad faith, constitutes an exercise in futility, or creates undue delay. In that same case the Court also held that even “artfulpleading” in an insubstantial case will not necessarily prevent a motion to dismiss and that conclusory allegations without more are insufficient to defeat a motion to dismiss for failure to state a claim.

Attorneys or parties in California who wish to view or purchase a sample motion to dismiss an adversary complaint under 11 U.S.C. § 727 in United States Bankruptcy Court can see below.

 

Attorneys or parties that would like more information on a Federal litigation document package containing 42 sample documents including a sample motion to dismiss an adversary complaint under 11 U.S.C. § 727 in United States Bankruptcy Court can use the link shown below.

Federal litigation document package

The author of this blog post, Stan Burman, is a freelance paralegal who has worked in California and Federal litigation since 1995.

If you would like to subscribe to his weekly legal newsletter click on the following link: http://www.legaldocspro.net/newsletter.htm

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