Davis v. Baker

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Robert E. Nugent

United States Bankruptcy S

DESIGNATED FOR ONLINE PUBLICATION

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

IN RE:

MONICA L. BAKER Case No. 19-12015

Chapter 7

Debtor.

L. JOY DAVIS

Plaintiff,

vs.

Adv. No. 20-5006

MONICA L. BAKER,

Defendant.

ORDER DENYING DEFENDANT’S MOTION TO DISMISS

When a defendant moves to dismiss a § 727(a) complaint objecting to discharge

for failure to state a claim upon which relief can be granted, the Court takes the

complaint’s allegations as true and draws all factual inferences against the party

seeking dismissal.1 A debtor’s failure to schedule an asset can support several general

objections to discharge including concealment before or after the case was filed, §

727(a)(2)(A) or (B), making a false oath, § 727(a)(4)(A), and withholding information

from an estate office, § 727(a)(4)(D). In this case, L. Joy Davis alleges that Monica

Baker failed to list the “client list” or “client base” of the accounting business Baker

acquired from her. Baker denies that such a list or “base” physically exists, but for

this motion, we assume the facts pleaded in the complaint are true and that Baker

omitted the list on her property schedules. Thus, Davis has stated several plausible

claims for relief under § 727 and Baker’s motion to dismiss should be denied.2

The Amended Complaint3

Joy Davis contends that in November of 2014, she agreed to sell her

accounting business to her employee Monica Baker for about $255,000. In the

purchase agreement, about $10,000 of the purchase price was allocated to the

business’s tangible assets and $245,000 to Davis’s so-called “client base.” When

Baker defaulted on her installment payments in 2017, Davis sued her for breach of

contract in state court and, after discovery, the parties agreed to a consent

1 Fed. R. Civ. P. 12(b)(6). Fed. R. Bankr. P. 7012(b) makes Rule 12(b)(6) applicable in

adversary proceedings.

2 The plaintiff L. Joy Davis appears by her attorney Josh V.C. Nicolay. The defendant

Monica Baker appears by her attorney Cody R. Smith.

3 Adv. Doc. 13.

judgment against Baker for $174,000 with the understanding that the “client base”

was worth $224,000. Baker filed her chapter 7 petition in 2019 to prevent Davis

from executing her judgment against the business. In the schedules, Baker listed

the accounts receivable, computers, printers, and other office equipment as having a

value of $15,830, but didn’t list either a client “list” or “base.” Davis filed this

adversary proceeding, claiming that Baker concealed the client information with the

intent to hinder, delay, or defraud her creditors within a year of filing and

afterward. She also claimed that Baker knowingly and fraudulently withheld this

client information from the trustee by failing to provide the trustee information

about it and by failing to schedule it. Finally, Davis alleges that by signing the

schedules that omit referring to the client information and undervaluing the

business under penalty of perjury, Baker made a false oath. Any of these four

allegations, if proven, would be sufficient grounds to deny Baker a discharge.

Analysis

Rule 12(b)(6) Standards

Rule 12(b)(6) allows for the dismissal of a complaint that fails to state a claim

upon which relief can be granted. To survive a motion to dismiss, the complaint

must state a plausible basis for relief that is something more than “the mere

possibility of misconduct.”4 The Court's function “is not to weigh potential evidence

that the parties might present at trial, but to assess whether the plaintiff's

complaint alone is legally sufficient to state a claim for which relief may be

4 Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

granted.”5 Thus, in reviewing a Rule 12(b)(6) motion, the Court “must accept all the

well-pleaded allegations of the complaint as true and must construe them in the

light most favorable to the plaintiff.”6

Generally, materials beyond the complaint itself aren’t considered in ruling

on a Rule 12(b)(6) motion, but sometimes when they are presented, the Court may

consider them without treating the motion as one for summary judgment.7 The

Court may, for example, take judicial notice of bankruptcy court filings including

the debtor’s schedules.8 In addition, documents that are referenced in the complaint

and attached to the motion to dismiss are fair game in determining whether the

complaint states a claim.9 In deciding this motion, I look at the amended complaint

and take judicial notice of the debtor’s bankruptcy schedules. Davis’s complaint

refers to the parties’ Business Sale Agreement which describes, values, and

5 Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009) (internal quotations omitted).

6 Pace v. Swerdlow, 519 F.3d 1067, 1073 (10th Cir.2008) (internal quotations omitted). See

also Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) (The Court takes the facts

alleged in the complaint as true and determines whether the claim is “plausible on its face”

based upon those facts).

7 See Fed. R. Civ. P. 12(d). The Court has broad discretion to refuse to consider the extra-

pleading materials and resolve the motion solely on basis of the complaint. See Navajo

Nation v. Urban Outfitters, Inc., 935 F.Supp. 2d 1147, 1156-58 (D. N.M. 2013).

8 See e.g., Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1278 n.1 (10th Cir. 2004);

Rose v. Utah State Bar, No. 11-4095, 471 F. App’x. 818, 820 (10th Cir. Mar. 23, 2012);

Merswin v. Williams Companies, Inc., No. 09-5096, 364 F. App’x 438, 441 (10th Cir. Feb. 3,

2010); J.P. Morgan Trust Co. Nat. Ass’n v. Mid-Am. Pipeline Co., 413 F. Supp. 2d 1244,

1257-58, 1260-61 (D. Kan. 2006).

9 Adv. Doc. 16-1. See Utah Gospel Mission v. Salt Lake City Corp., 425 F.3d 1249, 1253-54

(10th Cir. 2005) (recognizing that a document central to the plaintiff’s claim and referred to

in the complaint can be considered in resolving a motion to dismiss); Venture Assoc. Corp. v.

Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993) (Documents attached to a motion

to dismiss are considered part of the pleadings if they are referred to in the plaintiff’s

complaint and are central to her claim.).

transfers Davis’s accounting services business to the debtor and allocates values to

specific intangible assets including the “client base.”

General Objections to Discharge

Baker moves to dismiss this amended complaint because, she says, there was

no “customer list” per se to disclose on her schedules. The amended complaint refers

to the “client list” and the “client base” interchangeably, and alleges that any

business maintains a database of client information that is an asset with intrinsic

value that should be disclosed by a debtor in bankruptcy. Certainly a service-

oriented business may have among its assets a written or recorded list of clients and

their associated data and, indeed, question 43 of Schedule A/B requests information

about “customer lists.”10 But whether this business had one isn’t the Court’s focus

in determining if Davis has stated a claim. Rather, we take Davis’s factual

allegation as true and consider whether Baker’s omitting such a list or base from

her schedules supports denying her discharge under any of the four grounds pled.

Whether the list existed and whether Baker left it off the schedules with bad intent

are matters for Davis to prove at trial. All that matters today is whether what Davis

has pleaded supplies a plausible basis for relief under the specific subsections of §

727(a) she alleges.

10 Bankruptcy Official Form 106A/B is Schedule A/B for an individual debtor and requires a

debtor to list her real and personal property. Part 5 of Schedule A/B requires disclosure of

any “business-related property” the debtor owns or has an interest in. In response to

question 43, Baker denied having “customer lists, mailing lists, or other compilations.” See

Doc. 1, p. 16. Question 44 further requests if debtor has “any business-related property”

not previously listed on Schedule A/B, to which Baker responded “no.” Id. In response to

question 26, Baker disclosed the accounting business website.

Concealment—§ 727(a)(2)

A debtor who conceals assets within one year before the case is filed or

property of the estate afterwards with intent to hinder, delay or defraud creditors

may be denied a discharge.11 The elements of subsections (a)(2)(A) and (a)(2)(B) are

the same, except the conduct must occur post-petition in an (a)(2)(B) case and must

involve property of the estate.12 The case law holds that concealment may be a

continuing event, such that the date of original concealment is not determinative if

the concealment continued into the year preceding filing and beyond.13 To prevail,

Davis will have to show at trial that there is or was such an asset, that Baker did

not disclose it on the schedules when she filed (or amend the schedules post-

petition) nor to the trustee and creditors afterward, and that she did so with

malintent.14 Willful schedule omissions can be deemed concealment.15 Collier’s

11 Panda Herbal Int’l, Inc. v. Luby (In re Luby), 438 B.R. 817, 827 (Bankr. E.D. Pa. 2010)

(concealment of property includes preventing the discovery of or withholding knowledge of

the property (citation omitted)).

12 See Strauss v. Brown (In re Brown), 531 B.R. 236, 258 (Bankr. W.D. Mo. 2015).

13 Weiland v. Gordon (In re Gordon), 526 B.R. 376, 389, 393-94 (10th Cir. BAP 2015)

(recognizing the doctrine of continuing concealment and finding debtor’s omission from his

schedules of his marital home and vehicles in which he held a beneficial interest and

treated as his own though titled in his wife’s name subjected him to the reach of §

727(a)(2)).

14 See Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1294 (10th Cir. 1997) (failure to

list antique automobile did not warrant denial of discharge where debtor raised the

omission at § 341 meeting of creditors).

15 Gordon, supra (denying debtor’s discharge for concealment under § 727(a)(2) and false

oath under (a)(4) for failure to schedule debtor’s interest in home and vehicles); In re

Petersen, 564 B.R. 636, 645 (Bankr. D. Minn. 2017) (typical concealment of assets under §

727(a)(2) exists where the debtor’s interest in property is not apparent, but debtor retains

an interest from which she benefits); In re Warren, 512 F.3d 1241, 1250 (10th Cir. 2008)

(debtors-accountants denied discharge under § 727(a)(2) for failure to schedule prepaid

insurance (and other prepayments of living expenses) as assets); In re Gardner, 384 B.R.

654 (Bankr. S.D.N.Y. 2008) (failure to schedule all of debtor’s timeshare interests

bankruptcy treatise says that concealment under this section is “not confined to

physical secretion,” but can also include withholding knowledge of an asset by

failing to divulge its existence.16 Thus failing to disclose an asset in a disclosure

statement or at an examination in aid of execution can constitute concealment.17

Many bankruptcy courts have held that failing to schedule an asset, if the requisite

intent to “hinder, delay or defraud” is shown, can be a basis for denying discharge

as concealment under these two subsections.18 Davis’s amended complaint states a

plausible claim for relief under § 727(a)(2).

Withholding Information—§ 727(a)(4)(D)

Withholding recorded information from an estate officer that relates either to

debtor’s property or financial affairs is another ground for denying a debtor’s

discharge.19 This exception doesn’t apply, however, if the documents or data in

warranted denial of discharge under § 727(a)(2) and (a)(4)); In re Beatty, 583 B.R. 128

(Bankr. N.D. Ohio 2018) (failure to list garaged sports car in schedules or statement of

financial affairs warranted denial of discharge for fraudulent concealment).

16 Richard Levin and Henry J. Sommer, editors-in-chief, 6 COLLIER ON BANKRUPTCY, ¶

727.02[6][b] (16th ed. 2018) (“COLLIER”).

17 See Peterson v. Scott (In re Scott), 172 F.3d 959, 967-68 (7th Cir. 1999) (finding §

727(a)(2) concealment by omission of assets from chapter 11 disclosure statements, even if

creditors didn’t detrimentally rely on the disclosure statement); Jacobs v. Marcus-

Rehtmeyer (In re Marcus-Rehtmeyer), 784 F.3d 430, 442-43 (7th Cir. 2015) (debtor’s

concealment of employment income at post-judgment examination to discover assets

leading up to bankruptcy supported nondischargeability under § 727(a)(2)).

18 See Harmon v. McGee (In re McGee), 157 B.R. 966, 975-76 (Bankr. E.D. Va. 1993)

(denying discharge under § 727(a)(2)(A) and (B) for concealing and failing to schedule trade

secret consisting of list of parts suppliers for manufacture of classic car; finding the vendors

list to be similar to a customer list and a valuable information-type property right.); In re

Luby, 438 B.R. at 828-30 (failure to schedule customer lists (“a base of customers”) and

internet domain names as basis for denial of discharge under § 727(a)(2)(B)).

19 11 U.S.C. § 727(a)(4)(D); In re Beach, 281 B.R. 917, 921 (10th Cir. BAP 2002) (failing to

turnover tax returns to chapter 7 trustee can result in the denial of discharge under §

727(a)(4)(D)). See In re Potts, 501 B.R. 711, 723 (Bankr. D. Colo. 2013) (Section 727(a)(4)(D)

question don’t exist.20 Again, for the purpose of this motion to dismiss, we assume

the list exists. Whether the trustee has actually demanded production of the client

base information is not an essential element to prevailing on this claim.21 What

matters is whether Baker had documents or other recorded data that she failed to

divulge when she failed to schedule the customer list and whether her omission was

knowing and fraudulent. As the amended complaint alleges that there is a client list

or base that Baker failed to schedule, and remembering that schedules are signed

by the debtor under penalty of perjury, the complaint states a claim under §

727(a)(4)(D).

False Oath—§ 727(a)(4)(A)

Making a false oath or account knowingly and with fraudulent intent in

connection with debtor’s bankruptcy case is another ground for denial of

discharge.22 The false oath or account must pertain to a fact that is material to the

debtor’s business transactions or estate, or concerns a disclosure of assets or the

existence and disposition of property.23 Omitting an asset from the schedules is a

claim by creditor may lack evidentiary support if the trustee doesn’t join in the creditor’s

claim and is satisfied with the information received from the debtor).

20 See In re Asif, 455 B.R. 768, 793 (Bankr. D. Kan. 2011) (trustee who failed to establish

that the recorded information existed as of the petition date could not prevail on §

727(a)(4)(D) claim).

21 Under § 521(a)(4) debtors have an affirmative duty to surrender to the trustee all

property of the estate and any recorded information relating to property of the estate. A

denial of discharge under § 727(a)(4)(D) is the means by which that duty is enforced.

22 11 U.S.C. § 727(a)(4)(A).

23 COLLIER, ¶ 727.04[1][b]. See also In re Brown, 108 F.3d 1290, 1294 (10th Cir. 1997)

(stating that the false oath must relate to a material fact); In re Asif, 455 B.R. at 794

(describing when a false oath is material).

sufficient reason to deny one’s discharge if the omission is knowing and

fraudulent.24 Fraudulent intent is rarely proven by direct evidence.25 At the motion

to dismiss stage, sufficient factual circumstances must be alleged from which

fraudulent intent may be inferred.

Davis has adequately pled the “who, what, when, where and how” of Baker’s

omission of the client list or base from her bankruptcy schedules and its substantial

value based upon both the Business Sale Agreement and the consent judgment

between the parties.26 Fraudulent intent can be inferred from these factual

circumstances.27 In this proceeding, the false oath is Baker’s declaring under

penalty of perjury that the schedules were true when, in fact, she knew they

weren’t. But omitting assets is different from stating values of assets. Part of

Davis’s complaint is that Baker has undervalued the accounting practice by

omitting the value of the client base. At trial, Davis will need to prove that Baker

willfully omitted the client list from her schedules with the intent to defraud, that

the omission was material, and that she knowingly and fraudulently ascribed no

value to the client base, thereby underestimating the value of the practice. Courts

generally understand that values ascribed to assets by debtors may be estimates,

24 In re Asif, 455 B.R. at 794; In re Steffensen, 511 B.R. 149, 160 (Bankr. D. Utah 2014)

(factual allegations regarding non-disclosure of income sufficient to withstand motion to

dismiss false oath claim).

25 See In re Warren, 512 F.3d 1241, 1249 (10th Cir. 2008) (noting that for

nondischargeability purposes and specifically a § 727(a)(2) claim, fraudulent intent may be

established by circumstantial evidence).

26 Steffensen, 511 B.R. at 160-61.

27 Plaintiff has pled the factual details with particularity. See Amended Complaint ¶s 9-12,

17-24, 43-45.

leading to some grace being permitted in those estimates’ accuracy. But for

purposes of a Rule 12(b)(6) motion, Davis’s allegations are sufficient to plead a

plausible false oath claim.

Conclusion

Under the permissive standards that govern a Rule 12(b)(6) motion, Davis’s

amended complaint states facially plausible § 727(a) claims for denial of debtor’s

discharge. Baker’s motion to dismiss this proceeding for failure to state a claim is

denied. Pursuant to Fed. R. Bankr. P. 7012(a) Baker shall have 14 days from the

entry of this order to file her answer to the amended complaint.

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