Wellmon v. Vigil (In re Vigil)

THE HONORABLE BILL PARKER CHIEF UNITED STATES BANKRUPTCY JUDGE

Chapter 7 FINDINGS OF FACT AND CONCLUSIONS OF LAW

These findings of fact and conclusions of law are not designated for publication and shall not be considered as precedent, except under the respective doctrines of claim preclusion, issue preclusion, the law of the case or as to other applicable evidentiary doctrines.

On this date the Court considered the Motion for Default Judgment filed by the Plaintiff, Brian Wellman, individually, as assignee of Patricia Wellmon, and derivatively on behalf of Furniture Your Way International, LLC, (the "Plaintiff"), through which he seeks to deny the entry of a Chapter 7 discharge in favor of Debtors, Elmigeri O. Vigil and Miriam E. Vigil pursuant to various subsections of 11 U.S.C. § 727(a) or, alternatively, for the determination of the dischargeability of certain debts allegedly owed by Mr. and Mrs. Vigil to Wellmon or Furniture Your Way International, LLC. After the entry of default against both of the Debtor-Defendants for failure to tender a proper answer following proper service, the Court conducted an evidentiary hearing to consider evidence presented by the Plaintiff. At the conclusion of the hearing, the Court directed the submission of additional evidence by the Plaintiff and, upon receipt of such submissions, the Court took the matter under advisement. The following findings of fact and conclusions of law dispose of all issues before the Court.

ADMISSIONS AND/OR FINDINGS OF FACT

1. The Debtor-Defendants, Elmigeri O. Vigil and Miriam E. Vigil (collectively, the "Debtor -Defendants"), each served as an owner, officer and/or director of Furniture Your Way, Inc. ("FYW"). 2. FYW was a furniture manufacturing company. 3. The Debtor-Defendants collectively own 100% of the shares of FYW and have controlled the corporate actions of FYW as its president and vice-president. 4. The Debtor-Defendants individually owned the real estate and improvements located at 415 Regal Row in Dallas, Texas (the "Regal Row Premises"), upon which FYW's manufacturing operations were based (the "Dallas Plant"). 52. The failure of the Debtor-Defendants to provide the FYW financial documents to the Trustee prevented the Trustee from understanding the financial condition of FYW. 53. The testimony of each Debtor-Defendant under oath documents that each Debtor-Defendant assured the Trustee on multiple occasions that the requested FYW financial documents would be provided. 54. The testimony of each Debtor-Defendant under oath fails to present any credible explanation for their failure to tender the FYW financial documents to the Trustee. 55. The circumstances presented in the record establish that the failure of each Debtor-Defendant to tender the FYW financial documents to the Trustee was performed knowingly and with a fraudulent intent. 56. The Plaintiff filed his complaint in this adversary proceeding on November 15, 2016. 57. The complaint and a proper summons was served upon each of the Debtor-Defendants, Elmigeri O. Vigil and Miriam E. Vigil, on November 22, 2016. 58. Upon the failure of each Debtor-Defendant to respond to the Complaint in the manner and within the time period designated by the Federal Rules of Bankruptcy Procedure, the Court entered default against each such Debtor-Defendant by separate orders on January 24, 2017. 59. The Plaintiff filed his Motion for Default Judgment on March 14, 2017. 60. On April 11, 2017, the Court conducted an evidentiary hearing on the Plaintiff's Motion for Default Judgment. 61. At the conclusion of the evidentiary hearing, the Court provided the Plaintiff with an opportunity to supplement his evidentiary submissions. Such submissions were tendered to the Court on May 15, 2017 at which time the Court took the matter under advisement.

Admitted fact from Plaintiff's Original Complaint [dkt # 1] (the "Complaint") at ¶ 11.

Id.; Trial Memorandum Ex. C-1: Transcript of FYW § 341(a) meeting on Sept. 16, 2016 at 2:18-25.

Complaint at ¶ 26. Ex. 17.

Id. at ¶¶ 22 and 24.

Id. at ¶¶ 22 and 24.

Supplemental Affidavit of Brian Wellmon ("Wellmon Affidavit") at ¶ 2.

Ex. B-1.1 and B-1.2 to Trial Memorandum

Complaint at ¶ 23. Plaintiff's Ex. 1. Though the loan proceeds were tendered by both Brian Wellmon and his spouse, Patricia Ann Wellmon, Patricia Wellmon has assigned all of her interests involved in this case to her husband, Brian Wellmon. See Plaintiff's Ex. 10.

Plaintiff's Ex. 2-3; Complaint at ¶ 48.

Id. at ¶¶ 23 and 90.

Id.; Plaintiff's Ex. 5.

Plaintiff's Ex. 8.

Plaintiff's Ex. 9.

Complaint at ¶¶ 3 and 73; Plaintiff's Ex. 6-7.

Id.

Complaint at ¶¶ 23 and 89; Plaintiff's Ex. 18-22.

Complaint at ¶ 23.

Id. at ¶¶ 24 and 95.

Id. at ¶ 26.

Id. at ¶¶ 24 and 95.

Id. at ¶ 27.

Id. at ¶ 30.

Plaintiff's Ex. 8.

Complaint at ¶ 87.

Trial Memorandum Ex. B-2.

Complaint at ¶¶ 27, 28, and 31; Trial Memorandum Ex. B-2.

Complaint at ¶¶ 24 and 28.

Id.

Id. at ¶ 16.

Complaint at ¶ 16.

Id; Trial Memorandum Ex. C-1: Transcript of FYW § 341(a) meeting on Sept. 16, 2016 at 8:10-19.

Id. at 8:23-9:20; Complaint at ¶ 16.

Id; Ex C-1 at 17:8-17.

See supra note 3.

Trial Memorandum Ex. C-2: Transcript of Vigils § 341(a) meeting on Sept. 16, 2016 at 11:18-21.

Trial Memorandum Ex. C-4: Transcript of FYW § 341(a) meeting on Nov. 14, 2016 at 2:7-4:8.

Id. at 4:13-17.

Complaint at ¶ 19(a); Trial Memorandum Ex. A - Affidavit of Christopher Moser, Chapter 7 Trustee (the "Trustee Affidavit") at ¶ 4.

Id. at ¶ 5; Complaint at ¶ 19(b).

Complaint at ¶ 19(c); Trustee Affidavit at ¶ 6.

Trustee Affidavit at ¶ 6.

CONCLUSIONS OF LAW

1. The Court has jurisdiction to consider the adversary complaint in this proceeding pursuant to 28 U.S.C. §§ 1334 and § 157. 2. This Court has authority to enter a final judgment in this adversary proceeding since it statutorily constitutes a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(A), (I), and (J) and meets all constitutional standards for the proper exercise of full judicial power by this Court. 3. The Plaintiff, as a member of International, has standing to bring claims derivatively on behalf of International because of its status as a closely held limited liability company pursuant to § 101.463 of the Texas Business Organizations Code. 4. The Bankruptcy Code requires that a debtor be granted a discharge unless one of the statutory grounds for denial of that discharge is proven. 11 U.S.C. § 727(a). 5. The denial of a debtor's discharge is considered an extreme remedy. Pher Partners v. Womble (In re Womble), 289 B.R. 836, 845 (Bankr. N.D. Tex. 2003) (citing Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir. 1993)). 6. "Courts should deny discharge only for very specific and serious infractions." Martin Marietta Matl's Southwest, Inc. v. Lee (In re Lee), 309 B.R. 468, 476 (Bankr. W.D. Tex. 2004) (citing Ichinose v. Homer Nat'l Bank (In re Ichinose), 946 F.2d 1169, 1172 (5th Cir. 1991)). 7. A denial of discharge is to be imposed only upon those debtors who have not been honest and forthcoming about their affairs and therefore have not fulfilled the duties of full disclosure required of a bankruptcy debtor. Buckeye Retirement Properties v. Tauber (In re Tauber), 349 B.R. 540, 545 (Bankr. N.D. Ind. 2006) ["The denial of a debtor's discharge is akin to financial capital punishment. It is reserved for the most egregious misconduct by a debtor."]. 8. Thus, speculation and surmise about the existence of such misconduct are insufficient. Probative evidence must be presented. 16. However, "[t]he defendant is not held to admit facts that are not well-pleaded or to admit conclusions of law." Wooten v. McDonald Transit Assoc., Inc., 788 F.3d 490, 496 (5th Cir. 2015). 17. In addition, a court "may conduct hearings . . . when, to enter or effectuate judgment, it needs to . . . determine the amount of damages [or] establish the truth of any allegation by evidence." FED. R. CIV. P. 55(b)(2)(B) and (C), as incorporated into bankruptcy adversary proceedings by FED. R. BANKR. P. 7055. 18. Decisions to enter judgment by default are committed to the court's sound discretion.

Complaint at ¶¶ 3 and 73.

Denial of Discharge Under § 727(a)(7): Wrongful Conduct in Related Case

19. Section 727(a)(7) of the Bankruptcy Code denies a discharge to an individual debtor to the extent that he or she, within a year of the filing of a bankruptcy petition, engages in conduct on behalf of an insider which violates any of the first six subsections of § 727(a). 20. In other words, it "extends the basis for denial of discharge to the debtor's misconduct in a substantially contemporaneous related bankruptcy case." DT Credit Corp. v. Brock (In re Brock), 2008 WL 2954621, at *4 (Bankr. E.D. Tex. 2008). 21. As one court recently described,

The purpose and intent of Section 727(a)(7) of the Bankruptcy Code is to prevent debtors who are involved in several bankruptcy proceedings from failing to cooperate in a proceeding in which their own discharge is not at issue such

as a corporate proceeding or a proceeding involving a partner or a relative and then, subsequently or simultaneously, obtaining an individual discharge in another case. Section 727(a)(7) is a statutory provision which ties related cases together so that misconduct in one case by an individual may be chargeable against that individual in other related proceedings.

Rupp v

. Pearson (In re Pearson), 2014 WL 3051211, at *2 (Bankr. D. Utah 2014).

22. To deny a debtor's discharge under § 727(a)(7), a plaintiff must establish that:

(1) the elements of sections 727(a)(2), (3), (4), (5), or (6) are met;
(2) the actions occurred during the current case or within one year before the filing of the petition; and
(3) the actions are in connection with the bankruptcy case of an insider.
Id
. (citing Anda v. Song (In re Song), 449 B.R. 84, 97 (Bankr. N.D. Cal. 2011)).

23. In the context of an individual debtor, the term "insider" is defined in § 101(31)(A)(iv) of the Bankruptcy Code to include a "corporation of which the individual debtor is a director, officer, or person in control." 24. FYW constituted an "insider" as to each of the Debtor-Defendants. 25. In addition to the actions and/or omissions of the Debtor-Defendants in their bankruptcy case, the Complaint seeks to deny a discharge to them based upon alleged violations of various subsections of § 727(a) occurring in the FYW bankruptcy case. 26. The Court will evaluate the evidence in light of the elements required under each of the pled subsections of § 727(a) and whether each Debtor-Defendant's actions/omissions in the FYW case fulfilled those requirements. Section 727(a)(2)(A): Transfer or Concealment of Property. 27. In order to establish grounds for denial of a discharge under § 727(a)(2)(A), a plaintiff must demonstrate by a preponderance of the evidence that there was:

(1) a transfer or concealment of property;
(2) belonging to the debtor;
(3) within one year of the filing of the petition; and
(4) performed with an intent to hinder, delay or defraud a creditor or an officer of the estate.
Judgment Factors
, LLC v. Packer ( In re Packer), 816 F.3d 87, 92-93 (5th Cir. 2016); Pavy v. Chastant (In re Chastant), 873 F.2d 89, 90 (5th Cir. 1989).

28. The second requirement for denying a discharge under § 727(a)(2) is that the property which is transferred, concealed or removed be property of the debtor or property of the estate. 29. "Under the second element of § 727(a), a relevant concealment can occur only if property of the debtor is concealed." Cadle Co. v. Friedheim ( In re Friedheim), 277 Fed. App'x. 485, 489 (5th Cir. 2008). 30. As one court has described this requirement,

According to the plain language of the statute, there must be a disposition of "property of the debtor." Relying on this language, courts have recognized that section 727(a)(2)(A) is concerned with the disposition of property in which the debtor has a "direct proprietary interest." Therefore, section 727(a)(2)(A) does not apply when the disposition involves property belonging to someone, or some entity, other than the debtor, even if the transfer may cause an incidental effect upon the debtor's assets. . . . When a corporation is a bona fide entity distinct from an individual debtor-shareholder, courts

have applied the above-stated principle to hold that transfers of property belonging to the corporation are outside the scope of section 727(a)(2)(A).

Wachovia Bank

, N. A. v. Spitko (In re Spitko), 357 B.R. 272, 299 (Bankr. E.D. Pa. 2006) (citations omitted).

31. "In order to justify the refusal of discharge under a section 727(a)(2) transfer, it must be shown that there was an actual transfer of valuable property belonging to the debtor which reduced the assets available to creditors and which was made with fraudulent intent." Manning v. Watkins (In re Watkins), 474 B.R. 625, 633 (Bankr. N.D. Ind. 2012) (emphasis added). 32. The admitted facts arising from the respective defaults by each Debtor-Defendant demonstrate that each transfer, removal or concealment of property listed in the Complaint as grounds for denial of a discharge under § 727(a)(2)(A) was property that had been transferred from FYW to International and was rightfully owned by International. 33. Each transfer, removal or concealment of property listed in the Complaint as grounds for denial of a discharge under § 727(a)(2)(A) was property that was not owned by the Debtor-Defendants in their individual capacity nor owned by FYW. 34. Each transfer, removal or concealment of property listed in the Complaint as grounds for denial of a discharge under § 727(a)(2)(A) was not transferred within one year of the filing of the bankruptcy petition by either the Debtors or FYW. 35. Thus, because the property was not property of the bankruptcy estate of the Debtors, and was not transferred, removed or concealed within a year of the bankruptcy filing by the Debtors, the admitted facts fail to support the claim for relief sought by the Plaintiff under § 727(a)(2)(A) and such claim is denied. 36. Thus, because the property was not property of the bankruptcy estate of FYW, and was not transferred, removed or concealed within a year of the bankruptcy filing by FYW, the admitted facts fail to support the claim for relief sought by the Plaintiff under § 727(a)(7) and such claim is denied. Section 727(a)(4)(A): False Oaths. 37. In order to establish grounds for denial of a discharge under § 727(a)(4)(A), a plaintiff must demonstrate that:

(1) the debtor made a statement under oath;
(2) the statement was false;
(3) the debtor knew the statement was false;
(4) the debtor made the statement with fraudulent intent; and
(5) the statement materially related to the bankruptcy case.

Packer

, 816 F.3d at 94; Cadle Co. v. Duncan (In re Duncan), 541 F.3d 688, 695 (5th Cir. 2009).

38. "The purpose of § 727(a)(4)(A) is to enforce a debtor's duty of disclosure and to ensure that the Debtor provides reliable information to those who have an interest in the administration of the estate. Thus, complete financial disclosure is a condition precedent to the privilege of discharge." Fiala v. Lindemann (In re Lindemann), 375 B.R. 450, 469 (Bankr. N.D. Ill. 2007) (citations and quotations omitted). 39. "False oaths sufficient to justify the denial of discharge include: (1) a false statement or omission in the debtor's schedules; or (2) a false statement by the debtor at the examination during the course of the proceedings." Beaubouef, 966 F.2d at 178. 40. However, not every misstatement or omission in the schedules constitutes a false oath. As one court has noted,

Section 727(a)(4) does not, however, operate to penalize debtors for honest mistakes or misstatements. To be sure,

courts acknowledge that petitions, schedules, and statements are often filed hastily, memories fail, and innocent mistakes and omissions can occur, and will be understanding of that reality so long as the evidence does not reveal an underlying intent to deceive.

Webb v

. Isaacson (In re Isaacson), 478 B.R. 763, 783-84 (Bankr. E.D. Va. 2012) (citations and internal quotations omitted).

41. Indeed, even multiple errors do not mandate the finding of a false oath without sufficient evidence of a fraudulent intent. First United Bank & Trust Co. v. Buescher (In re Buescher), 491 B.R. 419, 432 (Bankr. E.D. Tex. 2013), aff'd, 783 F.3d 302 (5th Cir. 2015). 42. A false statement or omission is material if it "bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property." Andra Group, L.P. v. Gamble-Ledbetter (In re Gamble-Ledbetter), 419 B.R. 682, 692 (Bankr. E.D. Tex. 2009) (citing Duncan, 562 F.3d at 695). 43. The admitted fact regarding FYW transfers within two years fails to constitute a false oath because the schedules only require disclosure of transfers within one year and there is no evidence of such a transfer. 44. Each purportedly false statement listed in the Complaint as grounds for denial of a discharge under § 727(a)(4)(A) occurring in the Debtor-Defendants' bankruptcy case either has not been proven as false or, even if false, was not material to the Debtor-Defendants' individual bankruptcy case. 45. Each purportedly false statement listed in the Complaint as grounds for denial of a discharge under § 727(a)(4)(A) which addressed FYW physical assets actually pertained to assets that were rightfully owned by International pursuant to assignment. Such statements, even if false, were not material to the FYW bankruptcy estate. 46. Each purportedly false statement listed in the Complaint as grounds for denial of a discharge under § 727(a)(4)(A), other than those dealing with physical assets, were not material to the FYW bankruptcy estate. 47. Each transfer, removal or concealment of property listed in the Complaint as grounds for denial of a discharge under § 727(a)(2)(A) was not transferred within one year of the filing of the bankruptcy petition by either the Debtors or FYW. 48. Because any purportedly false statement of either Debtor was not material to their individual bankruptcy case, the admitted facts fail to support the claim for relief sought by the Plaintiff under § 727(a)(4)(A) and such claim is denied. 49. Because any purportedly false statement of either Debtor was not material to the FYW bankruptcy case, the admitted facts fail to support the claim for relief sought by the Plaintiff under § 727(a)(7) and such claim is denied.

11 U.S.C. § 727(a)(7) states that:

(a) The court shall grant the debtor a discharge, unless —
. . .

(7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider.

11 U.S.C. § 727(a)(2)(A) states that:

The court shall grant the debtor a discharge unless —

the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate . . . has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed —

property of the debtor, within one year before the date of the filing of the petition. . . .

Plaintiff's Ex. 8.

11 U.S.C. § 727(a)(2)(A) states that:

The court shall grant the debtor a discharge unless —

the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account . . . .

Plaintiff's Ex. 8.

Section 727(a)(5): Failure to Explain Loss of Assets

50. In order to establish grounds for denial of a discharge under § 727(a)(5), a party has the initial burden to establish a prima facie case that there has been a loss of substantial assets in the case, Neary v. Guillet (In re Guillet), 398 B.R. 869, 890 (Bankr. E.D. Tex. 2008) (citing Reed, 700 F.2d at 992). 51. A prima facie case is not established merely by an allegation that the debtor has failed to explain losses. Hinsley v Boudloche (In re Hinsley), 149 F.3d 1179, at *18 (5th Cir. 1998). 52. Without the initial introduction of the disappearance of substantial assets or of unusual transactions, no § 727(a)(5) claim is established. Benchmark Bank v. Crumley (In re Crumley), 428 B.R. 349, 371 (Bankr. N.D. Tex. 2010). 53. The admitted facts arising from the respective defaults by each Debtor-Defendant demonstrate that each purported loss of an asset listed in the Complaint as grounds for denial of a discharge under § 727(a)(5) was property that had been transferred from FYW to International and was rightfully owned by International. 54. Each transfer, removal or concealment of property listed in the Complaint as grounds for denial of a discharge under § 727(a)(5) was property that was not owned by the Debtor-Defendants in their individual capacity, nor owned by FYW, and could not have been utilized to meet the liabilities of the Debtor-Defendants or the liabilities of FYW. 55. Because the referenced property was not property of the bankruptcy estate of the Debtors, the admitted facts fail to establish a prima facie case to support the claim for relief sought by the Plaintiff under § 727(a)(5) and such claim is denied. 56. Because the referenced property was not property of the bankruptcy estate of FYW, and the purported property actions did not occur within one year before the filing of the FYW bankruptcy petition, the admitted facts fail to establish a prima facie case to support the claim for relief sought by the Plaintiff under § 727(a)(7) and such claim is denied. Section 727(a)(4)(D): Withholding of Recorded Information. 57. A discharge may be denied under 11 U.S.C. § 727(a)(4)(D) if a debtor:

. . . knowingly and fraudulently, in or in connection with the case, withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor's property or financial affairs.

58. The purpose of § 727(a)(4)(D) is to "ensure that debtors provide all relevant information without the need for lengthy examination and investigations into the affairs of the estate." Tow v. Henley (In re Henley), 480 B.R. 708, 779 (Bankr. S.D. Tex. 2012) (citing Crumley, 428 B.R. at 367-68; and Oldendorf v. Buckman, 173 B.R. 99, 104 (E.D.La.1994)). 59. "Courts have interpreted this provision as imposing an affirmative duty on the [d]ebtor to cooperate with the trustee by providing all requested documents to the trustee for his review and failure to do so constitutes grounds for denial of discharge." Neier v. Friedberg (In re Friedberg), 516 B.R. 205, 212 (Bankr. D. Conn 2014). 60. "[T]he party objecting to discharge under 11 U.S.C. § 727(a)(4)(D) has the initial constructive trusts, and other state law remedies which are more properly applied by state courts, the Court will decline to exercise its discretion to enter a final judgment on an unliquidated claim and the imposition of the ancillary collection remedies sought by the Plaintiff without prejudice to the reinstitution of such requests in a state court of appropriate jurisdiction. 67. Accordingly, the relief requested in the Plaintiff's complaint is granted in part and the discharge of debts for the benefit of the Debtor-Defendants, Elmigeri O. Vigil and Miriam E. Vigil, shall be denied under § 727(a)(7). 68. Taxable court costs in the form of the $350.00 filing fee are awarded to the Plaintiff and taxed against the Debtor-Defendants, Elmigeri O. Vigil and Miriam E. Vigil, pursuant to 28 U.S.C. § 1920. 69. All relief requested in the Plaintiff's Complaint under § 523(a) of the Bankruptcy Code in the above-referenced adversary proceeding shall be dismissed as moot. 70. All other relief requested in the Plaintiff's Complaint in the above-referenced adversary proceeding shall be dismissed without prejudice. 71. To the extent that any of these conclusions of law constitute findings of fact, the Court expressly adopts them as such. 72. An appropriate judgment shall be entered consistent with these findings and conclusions.

11 U.S.C. § 727(a)(2)(A) states that:

The court shall grant the debtor a discharge unless —

the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities.

Plaintiff's Ex. 8. --------

Signed on 10/18/2017

/s/_________

THE HONORABLE BILL PARKER

CHIEF UNITED STATES BANKRUPTCY JUDGE