Before filing a voluntary Chapter 7 bankruptcy, Ms. Washabaugh was employed by Wake Forest Baptist Health/N.C. Baptist Hospital, where she made personal purchases using her employer’s credit card without reimbursement, also using that credit card and gift cards to make purchases from her own Thirty-One handbag business for gifts for volunteers and other employees. Ms. Washabaugh was terminated for these purchases, with the hospital filing an employee dishonesty claim with National Union Fire Insurance for $1,009,347.00. When Ms. Washabaugh filed her bankruptcy, she did list the hospital as a creditor, but only for minor medical bills, disclosing neither the potential claim related to the purchases nor her pending criminal prosecution. Ms. Washabaugh pled guilty to obtaining property by false pretenses immediately after receiving her discharge. Shortly less than a year later, Ms. Washabaugh’s bankruptcy was re-opened on the motion of National Union and the Bankruptcy Administrator sought the revocation of her discharge pursuant to 11 U.S.C. § 727(d), alleging a concealment of assets (based on an assumption that with more than $1 million purchases, Ms. Washabaugh would have had far more assets than disclosed) and that the omission of the employee dishonesty claim and criminal prosecution were material omissions. Ms. Washabaugh moved for Summary Judgment.
Pursuant to 11 U.S.C. § 727(d)(1), a debtor’s discharge may be revoked upon the moving party establishing that the “discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge.” The two elements necessary are:
(1) denial of discharge would have been appropriate pursuant to a § 727(a) claim; and
(2) the debtor committed fraud in fact that prevented the movant from knowing until after the discharge had been entered.
The Bankruptcy Administrator advanced claims that discharge would have been denied under § 727(a)(4), for “knowingly and fraudulently, in connection with the case, … made a false oath or account”, under § 727(a)(5), for failing “to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor’s liabilities”, and under § 727(a)(2), for concealing or disposing of assets within one year of filing the bankruptcywith an intent to hinder delay or defraud creditors or the estate.
As to the first, a denial of discharge under§ 727(a)(4) requires proof that “the debtor made a statement under oath which she knew to be false, that the statement was material, and she made the statement willfully, with the intent to defraud.” See In re French, 499 F.3d 345, 354 (4th Cir. 2007). The Bankruptcy Administrator argued that the failure by Ms. Washabaugh to disclose the criminal charges, the fraudulent gifts and transfers made during her employment and the personal property obtained were material and intended to defraud. As to the criminal charges, while the bankruptcy petition does not specifically require disclosure of such, the Bankruptcy Administrator argued that it was the most significant fact regarding Ms. Washabaugh’s bankruptcy. The court held that this was a genuine dispute to be determined at trial, not summary judgment. Similarly, because there was disagreement whether Ms. Washabaugh owned any of the property acquired from the hospital, there was a material dispute regarding the failure to disclose that property. The failure to fully disclose the claims of the hospital and National Union were also likely material, but would require factual findings at trial. The court did, however, find that Ms. Washabaugh disclosed all of her income for the pertinent years prior to filing bankruptcy and that the failure to itemize the different sources was not fraudulent. Accordingly, there was sufficient evidence for the Bankruptcy Administrator to proceed with the § 727(a)(4) claim.
As to the § 727(a)(5) claim, the court held that a reasonable person could find that Ms. Washabaugh
had failed to explain the loss of assets and summary judgment was therefore not appropriate.
The assertion by the Bankruptcy Administrator that Ms. Washabaugh had improperly disposed of assets in violation of § 727(a)(2), while “factually intertwined” with the other claims, was insufficient as there were “are no clear allegations these were transfers of property of the debtor, which is a critical element of a claim under § 727(a)(2).”
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