Antonucci v. Carbone

UNITED STATES BANKRUPTCY COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

IN RE SALVATORE CARBONE, : Chapter 7

:

Debtor. : Bky. No. 18-13403ELF

:

:

JOHN ANTONUCCI, :

:

Plaintiff, :

:

v. :

:

SALVATORE CARBONE, : Adv. No. 19-221

:

Defendant. :

:

M E M O R A N D U M

I. INTRODUCTION

In this adversary proceeding, John Antonucci (“the Plaintiff”) seeks torevoke the

dischargegranted to Salvatore Carbone (“the Debtor”). The Plaintiff alleges that that the Debtor

failedto report the existence of certain assets in his bankruptcy schedules and failed to deliver

thoseassets to the chapter 7 trustee. (Compl. ¶¶ 56-57) (Doc. # 1). Based on these allegations,

the Plaintiff asserts that revocation of the Debtor’s discharge is warranted pursuant to11 U.S.C.

§727(d)(2).1

1 I discuss 11 U.S.C. §727(d)(2) in Part V., infra.

The Plaintiff also references 11 U.S.C. §727(d)(1) in the opening paragraphs of his Complaint.

However, his prayer for relief referencesonly 11 U.S.C. §727(d)(2). Moreover, the Plaintiff specifies in

his Answer to the Debtor’s Motion to Dismiss that he does not seek a revocation of discharge under 11

U.S.C. §727(d)(1). (Plaintiff’s Response at 7) (Doc. # 7).

The Debtor filed a Motion to Dismiss pursuant toFed. R. Civ. P. 12(b)(6) (“the Motion”).

For the reasons explained below, theMotionwill be granted,but I will grant the Plaintiff

leave to amend the Complaint.

II. PROCEDURAL HISTORY

The Debtor filed achapter 7 bankruptcy petition on May 22, 2018. He received a

discharge on November 8, 2018.

On November 8, 2019, exactly one year after the entry of the discharge order,the

Plaintiffcommenced this adversary proceeding. OnDecember 12, 2019, the Debtor filedthe

Motion,along withasupporting memorandum. (Doc. #’s 3, 4).2

The Debtor argues that the Complaint fails to state a claim under §727(d)(2)becauseit

does not allegethat he acquiredor became entitled toanyproperty of the estatepost-petition

that he was required to disclose or deliver to the chapter 7 trustee. Accordingly, the Debtor

asserts that dismissal of the Complaint is warranted pursuant toFed. R. Civ. P. 12(b)(6).

The Plaintiff responded to the Motion to Dismiss onJanuary 9, 2020, arguing generally

that the conduct alleged in the Complaint falls within the scope of §727(d)(2). (Doc. #7).

III. MOTION TO DISMISS STANDARD

The Debtor moves to dismiss the Complaint for failure to state a claim. Fed. R. Civ. P.

12(b)(6) applies in adversary proceedings under Fed.R.Bankr.P.7012. I have previously

discussed the legal standard for a motion to dismiss:

2 The Debtor filed a supplemental supporting memorandum on December 17, 2019. (Doc. # 5).

A motion to dismiss under Fed. R. Civ. P. 12(b)(6) tests the legal sufficiency of the

factual allegations of a complaint, seeKost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993),

and determines whether the plaintiff is entitled to offer evidence to support the claims, Bell

Atlantic Corp. v. Twombly, 550 U.S. 544, 563 n.8, 127 S.Ct. 1955, 167 L.Ed.2d 929

(2007). A defendant is entitled todismissal of a complaint only if the plaintiff has not pled

enough facts to state a claim to relief that is plausible on its face. Twombly, 550 U.S. at

547, 127 S.Ct. 1955. A claim is facially plausible where the facts set forth in the complaint

allow the court to draw the reasonable inference that the defendant is liable for the

misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868

(2009).

In evaluating the plausibility of the plaintiff's claim, the court conducts a context-

specific evaluation of the complaint, drawing from its judicial experience and common

sense. See, e.g., Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009); In re

Universal Marketing, Inc., 460 B.R. 828, 834 (Bankr. E.D. Pa. 2011) (citing authorities).

In doing so, the court is required to accept as true all allegations in the complaint and all

reasonable inferences that can be drawn therefrom, viewing them in the light most

favorable to the plaintiff. See, e.g.,Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct.

2229, 81 L.Ed.2d 59 (1984); Taliaferro v. Darby Township Zoning Board, 458 F.3d 181,

188 (3d Cir. 2006). But, the court is not bound to accept as true a legal conclusion couched

as a factual allegation. Twombly, 550 U.S. at 555, 127 S.Ct. 1955; Iqbal, 556 U.S. at 678,

129 S.Ct. 1937.

The Third Circuit Court of Appeals has condensed these principles into a three (3) part

test:

First, the court must take note of the elements a plaintiff must plead to state a

claim. Second, the court should identify allegations that, because they are no

more than conclusions, are not entitled to the assumption of truth. Finally,

where there are well-pled factual allegations, a court should assume their

veracity and then determine whether they plausibly give rise to an entitlement

for relief.

Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir. 2010) (quotations and citations

omitted).

In assessing a Rule 12(b)(6) motion, the court may “consider the allegations in the

complaint, exhibits attached to the complaint and matters of public record ... [as well as]

‘undisputedly authentic’ documents where the plaintiff's claims are based on the

documents and the defendanthas attached a copy of the document to the motion to dismiss.

Unite Nat'l Ret. Fund v. Royal Sportswear, Inc., 2007 WL 2713051, at *4 (M.D. Pa. Sept.

14, 2007)(citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192,

1196 (3d Cir. 1993)); see also In re Angulo, 2010 WL 1727999, at *12 n.1 (Bankr. E.D.

Pa. Apr. 23, 2010).

In re Boltz-Rubinstein, 574 B.R. 542, 547-48 (Bankr. E.D. Pa. 2017).

IV. FACTS

The Plaintiff alleges that the Debtor fraudulently failed to disclose the true nature and

valueof his personal assets and financial condition when he filed his schedules and statement of

financial affairs. Examples of this deficiency include: failing todisclosethe value of his interest

in Carbone Realty, Inc. (Compl. ¶22); falsely claiming that Carbone Brothers LLP was no longer

in existence (¶¶24-25); failing to discloseincome from twohouses that Carbone Brothers

completedsometime after 2014(¶¶31-33, 37); and failing to disclose income from a snow

plowing business that the Carbone Brothers operated (¶¶47-48).

The Plaintiffalso alleges that the Debtor operates and controls an entity known as

“Builder Pros Contracting,”from which heearns $76,000.00 annually,(¶51), and that Builder

Pros Contracting is a mere continuation of Carbone Brothers LLP that was established to avoid

liabilities attributable to that entity. (¶52).

The Complaint’s prayer for relief summarizes the above allegations by statingthat the

Debtorfraudulentlyfailed to deliveror report his entitlement tovarious pre-petition assets to the

chapter 7 trustee. (¶¶56-57). But for this fraud, the Plaintiffasserts,the Debtor would not have

received his discharge. (¶¶61-63).

V. DISCUSSION

In the Motion to Dismiss and supporting memoranda, the Debtor generally disputes the

Complaint’s factual assertions and argues that, as a matter of law, the facts, even if true, fail to

state a claim under 11 U.S.C. §727(d)(2).

Based ontheplainlanguage of §727(d)(2), case law interpreting this subsection, and

pertinent statutory history, I agree with the Debtor that §727(d)(2) only applies toproperty of the

estatethat a debtor acquires or becomes entitled to acquirepost-petition. Becausethe Complaint

fails to allege any relevant post-petition misdeeds,the pleadingfails as a matter of law and will,

consequently,be dismissed.

A. 11 U.S.C. §727(d)(2)

Section 727(d)of the Bankruptcy Code permits creditors and trustees to seek the

revocation of a debtor’s discharge. Section 727(d)(2) provides:

(d)On request of the trustee, a creditor, or the United States trustee, and after notice and a

hearing, the court shall revoke a discharge granted under subsection (a) of this section if—

[. . .]

(2) the debtor acquired property that is property of the estate, or became entitled

to acquire property that would be property of the estate, and knowingly and

fraudulently failed to report the acquisition of or entitlement to such property, or to

deliver or surrender such property to the trustee;

11 U.S.C. §727(d)(2) (emphasis added).

1. Plain Language

Read together with additional bankruptcy provisions,§727(d)(2) plainlyrefers to

property of the estate that the debtordid not have an interest in at the time the petition was filed.

A debtor’s “estate” is created at the time the petition is filed. 11 U.S.C. §541(a). Debtors

filingunderchapter 7 must discloseall theirassets and surrender to the trustee all property of the

estate. See11 U.S.C.§521(a)(1)(B)(i), (a)(4). In broad terms, the estate consists of the

debtor’s present interests in property at the time of filing (§541(a)(1)-(2)); interests in property

that are subsequently recovered, preserved, or transferred to the estate (§541(a)(3)-(4)); and

certain interests in property that areotherwiseacquired by the debtor or the estate after the filing

of the petition (§541(a)(5)-(7)).

Reading §727(b)(2) together with §541(a) strongly suggests that §727(d)(2) only applies

to property of the estate that the debtor develops an interest inpost-petition. Theoperative

language in §727(d)(2)—“acquired” or “became entitled to acquire”—seems to referonlyto

property of the estateunder §541(a)(5)-(7); that is, property that accrues totheestate at apoint in

time after a debtor files a bankruptcypetition. Accord6Collier on Bankruptcy, ¶ 727.17[4]

(Alan N. Resnick & Henry J. Sommer eds. 16th ed.)(“Collier”) (noting that §727(d)(2) imposes a

duty on debtors to report any post-petition acquisitions of property to the trustee that may belong

to the estate under §541(a)(5)-(7)).

If §727(d)(2) applied to prepetition assets under §541(a)(1)-(2),one would expect

§727(d)(2) to refer tosuch interests in the present tense (propertythe debtor“has”) or to cross-

reference §541(a)(1)-(2). It would make little sensefor a Code provisionto refer to prepetition

assets that already are part of the estate upon the commencement of the caseas being “acquired”

by the debtor or to speak of the debtor as “becoming entitled to acquire” such property.

2. Case Law

Not surprisingly,courts directly addressingthis issue have almost uniformlyconcluded

that §727(d)(2) only applies to property of the estateacquiredpost-petition. Seee.g., In re

DaMaia,217 F.3d 838, 2000 WL 977395,at *2 (4th Cir.July 17, 2000)(unpublisheddecision)

(“A careful reading of [§727(d)(2)]reveals that it applies only to property acquired by a debtor

after his petition has been filed.”); In re Anthony, 515 B.R. 831, 840(Bkrtcy. D. Utah 2014)

(citing DaMaia, 217 F.3d 838), aff’d 542 B.R. 580(D. Utah2015); In re Shepard, 2011 WL

1045081, at *11(Bankr. D. Md. Mar. 16, 2011)(“Obviously, property acquired prepetition

would not be property of the estate when acquired and therefore is not included within the reach

of [§727(d)(2)].”); In re Puente, 49 B.R. 966, 968-69 (Bankr. W.D.N.Y. 1985).

My research revealedonlyonecasein whicha court applied §727(d)(2) (perhaps

inadvertently) to property acquired by the debtor prepetition. SeeMatter of Yonikus, 974 F.2d

901, 905-06 (7th Cir. 1992)(affirming the revocation of the debtor’s discharge under §727(d)(2)

where he knowingly and fraudulently failed to report the existence of a prepetition personal

injury claim). However, it appears that theparties did not raise—andthereforethe Yonikus

court did not address—the precise questionof whether §727(d)(2) should apply to propertyof

the estateacquired prepetition.

Thus, I find that case law supports the conclusion that §727(d)(2) applies only to estate

propertythat a debtor acquires after the petition has been filed.

3. Consistency with Prior Law -the former Bankruptcy Act

An examination of the historical antecedents of §727(d)(2) in the Bankruptcy Act (‘the

Act”) reinforces this constructionof the current Code provision.See generally Pennsylvania

Dep't of Pub. Welfare v. Davenport, 110 S. Ct. 2126, 2133 (1990)(“We will not read the

Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress

intended such a departure”).

Section 15 of the Act provided that a debtor’s discharge could be revokedif it was

“obtained through the fraud of the [debtor].” Pub. L. No. 55-541, §15, 30 Stat. 544(1898);

Collier, ¶727.LH[5];. The Act contained no additional ground forrevocation of a debtor’s

discharge.

In 1970, Congress amended §15of the Act and added two (2) additional grounds for

revocation ofdischarge,including subsection (2), which stated:

(2) that the [debtor], before or after discharge, received or became entitled to receive

property of any kind which is or which became a part of the bankrupt estate and that he

knowingly and fraudulently failed to report or to deliver such property to the trustee. . . .

Pub.L. 91-467,§4,84 Stat. 991(1970)(emphasis added).3

Thelegislative recordcontains little commentaryabout this specific amendment, but the

testimony of one of the amendment’s proponents is illuminating. At a hearing before the House

Judiciary CommitteeonOctober 1, 1969, Vern Countryman — a professor of law at Harvard

Law School and the Vice Chairman of the National Bankruptcy Conference — explained the

purpose of the proposed addition of subsection (2)to Section 15.

This amendment would fill a gap in the Act. Under §14c(4) a discharge may be denied to

a [debtor] who has, within one year preceding bankruptcy, concealed property from his

creditors. But §14c—stating the grounds for denial of discharge—takes no account of

1938 amendments to §70a(5) under which the bankruptcy trustee becomes entitled to

(1) future interests in property which were nonassignable by the [debtor] prior to

bankruptcy by which became assignable within six months thereafter, (2) all property

which vests in the [debtor] within six months after bankruptcy by bequest, devise or

inheritance, and (3) all property in which the [debtor] has an interest by the entirety

and which within six months of bankruptcy becomes transferable solely by the

[debtor]. Since the events which entitle the trustee to this property may occur before or

after the discharge is granted, the simplest way to fill this gap seems to be to provide for

revocation of the discharge where the [debtor]conceals such property.

To Amend the Bankruptcy Act: Hearing on H.R. 6665 and H.R. 12250 Before the H. Comm. on

the Judiciary,92nd Cong. 71(1969) (Statement of Vern Countryman) (emphasis added).

3 The first ground for revocation of a debtor’s discharge essentially mirrored the original Section

15 ground,i.e.,that the dischargewasobtained through the fraud of the debtor. The third ground was a

precursor to the current §727(d)(3), respecting a debtor’s failure to obey anylawful order ofthe court or

failure to answer any material question approved bythe court. AccordCollier, ¶727.LH[5].

The comments of Professor Countryman demonstrate that subsection (2) was only

intended to apply to property that a debtor received post-petitionbut that isconsidered property

of the estate.

The current version of the Bankruptcy Code differs only stylisticallyfrom the 1970

amendments to subsection (2) in Section 15. Instead ofsubsection (2)’s use of the verbs

“received” and“became entitle to receive,”the drafters of§727(d)(2) opted for “acquired” and

“became entitled to acquire.” The remaining differences are immaterial, and do not alter

Congress’s intended scope of subsection (2)’s application. In other words, §727(d)(2)of the

Codeexpresses the original intent of the drafters of subsection (2)to Section 15of the Act,

which was to apply only to property that a debtor acquired post-petition.

This historylends support to theconclusion that §727(d)(2) only permits revocation of a

debtor’s discharge in connection to the debtor’s acquisition of(orreceipt of entitlement to)post-

petition propertythat would be property of the estate. In other words, §727(d)(2) does not

provide grounds for revocation of a debtor’s discharge where the only allegations of failure to

report assets relate to property of the estate that the debtor had an interest inas of the

commencement of the case.4

4 The limited scope of §727(d)(2) poses no risk that other fraudulent non-disclosures in the

bankruptcy schedules will escape discharge revocation. Section 727(d)(1), although drafted in general

terms, addresses the fraudulent nondisclosure of assets that were property of the estate on as of the

commencement of the case. “The intentional omission of assets from the debtor's schedules has been

found to qualify as grounds for revocation of a discharge under § 727(d)(1).” In re Meabon, 508 B.R.

626, 632 (Bankr. W.D.N.C. 2014),aff’d514 B.R. 446 (W.D.N.C. 2014)(citing In re Stedham,327 B.R.

889, 897 (Bankr. W.D. Tenn. 2005)).

B. Whether Plaintiff’s Complaint States a Claim upon which Relief Can Be Granted

Having resolved the threshold legal issue of the applicability of §727(d)(2) to assets that a

debtor possesses pre-petition, I now turn to the issue of whether Plaintiff’s Complaint should be

dismissed pursuant toFed. R. Civ. P. 12(b)(6). Because the Complaint purports to state a

§727(d)(2) cause of action based exclusively on the acquisition of pre-petitionassets, it fails to

state a viable cause of action.

As discussed,the Complaint alleges a number of fraudulent actions by the Debtor in

connection with his chapter 7 bankruptcy case. The Plaintiffasserts that the Debtor’s schedules

and statement of financial affairs failed to disclose the true nature and value of his personal

assets, including income from both Carbone Brothers LLP and Builder Pros Contracting (which

the Plaintiff alleges is the re-creation of Carbone Brothers). TheComplaint summarizes these

actions by stating that the Debtor fraudulently failed to deliver or report his entitlement to

various “pre-petition assets”to the chapter 7 trustee. (¶¶56-57).

The Complaint’s singularfocus on the Debtor’s handling and reporting ofpre-petition

assets is its undoing. Nowhere does the Complaint describe the Debtor’s failure to report or

disclosehis acquisition of or entitlement to anypost-petition assets. Even acceptingas true all

the Complaint’s allegations andmakingall reasonable inferences in the light most favorable to

the Plaintiff, I concludethat the Complaint fails to assert the Debtor acquired any post-petition

property of the estate that he failed to disclose to thechapter 7trustee.5

Accordingly, the Motion to Dismiss will be granted.

5 The Complaint alleges that the Debtor runsBuilder Pro Contracting, for which his earnings are paid to his

wife to avoid his creditors. (¶¶51-53). Accepting this allegation as true, such post-petition earnings of the Debtor

for services performed are not included in the property of the estate. See11 U.S.C. §541(a)(6).

C. The Complaint Will Be Dismissed with Leave to Amend

Although the Complaint will be dismissed,Iwill allow thePlaintiff leave to amend.

It is well settled that a court should grant aplaintiff leave to amend “unless an

amendment would be inequitable or futile.” Alston v. Parker, 363 F.3d 229, 235 (3d Cir. 2004).

Althoughone would have expected the Complaint to state any facts known to the Plaintiff

regarding the Debtor’s failure to report his post-petition acquisition of or entitlement to property

of the estate,it is nevertheless possible that the Plaintiffcan supplement the Complaint with

allegations necessary to state a claim under §727(d)(2), thereby resuscitatinghis claim for

revocation of the Debtor’s discharge. Given that possibility, I will err on the side of cautionand

grant leave to amend.

Further, the facts alleged in the Complaint were likely sufficient to put the Debtor on

notice of a potential revocation of discharge claim under §727(d)(1), a Code provision that was

at least mentioned in the Complaint, therebypotentiallytriggering the “relation back” provision

of Fed. R. Civ. P. 15(c)(1)(B) (incorporated by Fed. R. Bankr. P. 7015).See, e.g.,Glover v.

F.D.I.C., 698 F.3d 139, 145–46 (3d Cir. 2012); Feldman v. Am. Asset Fin., LLC, 534 B.R. 627,

637 (E.D. Pa. 2015).6

6 I note that a complaint under §727(d)(1) must be filed “within one year after [the] discharge is

granted. The Complaint here, filed on the anniversary date of the entry of discharge,is (just) timely. See

Monkelis v. Mobay Chem., 827 F.2d 937, 938 (3d Cir. 1987);Brewer v. Johnson, 2016 WL 7235652, at

*2n.1(D. Del. Dec. 12, 2016);Krajci v. Provident Consumer Disc. Co., 525 F. Supp. 145, 150 (E.D. Pa.

1981), aff'd, 688 F.2d 822 (3d Cir. 1982). So, it does not appear that permitting an amendment of this

nature would be futile.

VI. CONCLUSION

For the reasons stated, the Motion will be granted. Because the Plaintiff has not

adequately pled a cause of action under §727(d)(2), the Complaint will be dismissed. However, I

will grant the Plaintiff leave to amend.

Date: March 26, 2020 Tt

ERIC L. FRANK

U.S. BANKRUPTCY JUDGE

12