Customers Bank v. Williams (In re Williams), Case No. 17-18198 (JKF)

In re John P. and Bridget Williams, Debtors.

Customers Bank, Plaintiff, v. John P. and Bridget Williams, Defendants.

Case No. 17-18198 (JKF)

Adversary No. 18-0034

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

July 27, 2018

Chapter 7

Statement of Reasons in Support of Order Denying in Part and Granting in Part Defendants' Motion to Dismiss

This 27th day of July, 2018, upon consideration of the Defendants John P. and Bridget Williams (the "Defendants" or "Debtors")' Motion to Dismiss this Adversary Proceeding (doc. no.4, the "Motion"):

I. PROCEDURAL BACKGROUND

AND whereas,

A. John P. and Bridget Williams filed for bankruptcy under chapter 7 on December 5, 2017.

B. This adversary proceeding was filed on February 14, 2018 and seeks to deny the Debtors' discharge pursuant to the following sections of the Bankruptcy Code: 1) §727(a)(2)(A); 2) §727(a)(4); and 3) §707(a).

C. The Defendants filed the Motion on March 12, 2018.

D. The Plaintiff filed a response to the Motion on April 11, 2018. Doc. no. 9.

II. FACTUAL BACKGROUND

the note

A. On November 18, 2013, Cornerstone Concrete ("Cornerstone") borrowed $248,938.17 from the Plaintiff; Cornerstone executed a promissory note with monthly installments of $3,500 per month through October 2014 with a balloon payment of $211,496.25 due on November 14, 2014 (the "Note"). Complaint, Ex.A.

B. John P. Williams (one of the Debtors) was a shareholder of Cornerstone and executed a personal guarantee of the Note. Complaint, Ex.B.

C. On December 11, 2014, the parties executed a modification of the Note which adjusted the maturity date and balloon payment to May 14, 2016. Complaint, Ex.C. At that point, the balance on the Note was $201,906.79.

D. On April 13, 2016, the Debtor and David Guggeis ("Guggeis"), President of Cornerstone, requested another loan modification from the Plaintiff. However, this modification was not granted because the proper financial information was not provided to the Plaintiff from Mr. Williams and Mr. Guggeis. Ex.D.

E. On May 4, 2016, the Plaintiff sent a letter to Mr. Williams and Guggeis stating that the Note was "approaching default" and that an annual review was "unable to be completed and approved" due to the borrowers' failure to provide requested financial documentation. Complaint, Ex. E.

Debtors' property and income

F. At the time the Note was executed (November 18, 2013), the Debtors owned real property located at 312 Autumn Hill Dr., Oxford, PA as tenants by theentireties (the "Property").¹ Complaint at 4.

G. On April 22, 2016, the Debtors transferred the Property to Mrs. Bridget Williams (one of the Debtors) individually for $10.00 (the "First Transfer").² Complaint, Ex. F. The same day, Mrs. Williams (in her name only) executed a mortgage on the Property in favor of United Mortgage Corp. in the amount of $276,000. Complaint, Ex. G.

H. On October 20, 2017 (within one year of the bankruptcy), Mrs. Williams transferred the Property back to both Debtors for $1.00 (the "Second Transfer"). Complaint, Ex. K. See Schedule of Financial Affairs, Doc. no. 18.

I. The Debtors Schedule A/B lists the Property as being worth $338,000.

J. The Debtors have a $269,433 mortgage on the Property. Amended Schedule D; doc. no.22.

K. The Debtors claim the Property exempt on Schedule K pursuant to 11 U.S.C. §522(d)(1), exempting an amount of $47,350.

L. The Debtors' Schedule D shows four secured creditors, Wells Fargo being the largest with a claim of $269,433. Unsecured claims total $492,742. Schedule E/F.

M. The Debtors earn a combined gross income of $6,708 per month. Schedule I. Their expenses total $6,592.22 per month. Schedule J.

confession of judgment and fraudulent transfer action

N. On August 4, 2016, due to the parties' failure to pay the Note, a Judgment by Confession was entered in the Chester County Court of Common Pleas (the "Chester County Action") in favor of the Plaintiff and against Cornerstone, Mr. Williams, Mr. Guggeis and D&J Management Associates, Inc. In the amount of $155,179.10 (plus interest at a rate of $36.17 per day from July 13, 2016) (the "Confessed Judgment"). Complaint, Ex. I.

O. In an answer to an interrogatory with regard to the Chester County Action, Mr. Williams stated, on April 25, 2017, that he lived in the Property but that he "does not own the property in which he resides." Complaint, Ex. J at 7.

P. On July 17, 2017, the Plaintiff filed a lawsuit in the Chester County Court of Common Pleas against the Debtors alleging a violation of the Pennsylvania Uniform Fraudulent Transfer Act (alleging that the Debtors had fraudulently transferred the Property) (the "PUFTA Action"). Complaint, Ex. L.

Q. The Debtors did not respond to the Plaintiff's counsel's discovery requests with regard to the PUFTA Action because "they intended to transfer the property back and file bankruptcy." Complaint, ¶29.

R. On November 15, 2017, prior to the bankruptcy, Plaintiff's Motion to Compel and for Sanctions against the Defendants in the PUFTA Action was granted in part (no counsel fees were awarded). Complaint, Ex. L.

* * *

III. STANDARD ON A MOTION TO DISMISS

A. In order to survive a motion to dismiss pursuant to Federal Rule 12(b(6), acomplaint must contain sufficient factual allegations that, if accepted as true, state a claim that is "plausible on its face." Bell Atlantic Corp. v. Twombley, 550 U.S. 544, 570 (2007).

B. "Determining whether a complaint states a plausible claim for relief will be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-50 (2009) (internal citations omitted).

C. The Third Circuit has outlined a three-part test in deciding a motion to dismiss pursuant to Rule 12(b)(6):

First, the court must tak[e] 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-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.

In re Schering Plough Corp. Intron/Temodar Consumer Class Action, 678 F.3d 235, 243 (3d Cir. 2012) (internal quotes and citations omitted).

D. According to this standard, the pleading requirement pursuant to Rule 12(b)(6) has become a more stringent one to meet in recent years. One court recently expounded:

Under Twombly and Iqbal, pleading requirements have shifted to a 'more heightened form of pleading.' SeeFowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). To prevent dismissal, all civil complaints must set out "sufficient factual matter" to show that the claim is facially plausible. Id. The plausibility standard requires more than a mere possibility that the defendant is liable for the alleged misconduct. As the Supreme Court instructed in Iqbal, "where the well-pleaded facts do not permit the court to infermore than the mere possibility of misconduct, the complaint has alleged- but it has not 'show[n]'- 'that the pleader is entitled to relief." Iqbal, 556 U.S. at 679 (citing Fed. R. Civ. P. 8(a)(2)).

GLD Foremost Hldgs, LLC v. Michael, 2017 WL 930599, at *2 (M.D. Pa. March 9, 2017). SeealsoIn re Bennett, 531 B.R. 68, 71-2 (Bankr. E.D. Pa. 2015).

E. The well plead facts of the complaint are viewed in the light most favorable to the plaintiff; legal conclusions are not assumed to be true at the motion to dismiss stage. In re Sobol, 545 B.R. 477, 487 (Bankr. M.D. Pa. 2016).

IV. STANDARD REGARDING 11 U.S.C. §727(a)(2)(A)

A. Pursuant to section 727(a)(2)(A), a court shall deny the debtor a discharge where the "debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred, removed . . . or concealed . . . property of the debtor, within one year before the date of the filing of the petition . . . ."

B. A party objecting to discharge pursuant to this section must establish the following three elements: "1) the disposition of property, such as a transfer or concealment; 2) a subjective intent on the debtor's part to hinder, delay, or defraud. . .; 3) the disposition occurred within one year of filing for bankruptcy." In re Sobol, 545 B.R. 477, 496 (Bankr. M.D. Pa. 2016). SeealsoIn re Capra, 2016 WL 5106994, at *10 (Bankr. N.D. Oh. Sept. 19, 2016); In re Lybrook, 544 B.R. 537, 548 (Bankr. W.D. Pa. 2015).

C. Before filing for bankruptcy, debtors may attempt to "maximize availableexemptions by converting nonexempt property . . . to exempt property . . . both the House and Senate Reports validate this approach by stating the following. . .

The practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law.

See 6 Collier on Bankruptcy ¶ 727.02[3][e] - [3][f] (Rev. 2013).

D. While the conversion of non exempt assets to exempt assets is not per se fraudulent, "such transfers could support a denial of discharge if accompanied by a subjective intent to hinder, delay, or defraud a creditor." In re Ellison, 2017 WL 3976304, at *7 (B.A.P. 9th Cir. Sep. 8, 2017).

V. STANDARD REGARDING 11 U.S.C. §727(a)(4)(a)

A. Pursuant to section 727(a)(4)(a), a court shall not grant a debtor a discharge if he or she "knowingly and fraudulently, in connection with the case . . . made a false oath or account."

B. In order to establish denial of discharge pursuant to this section, a party must establish the following five elements: "1) the debtor made a statement under oath;³ 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 was related materially to the bankruptcy case." In re Capra, 2016 WL 5106994, at *6 (Bankr. N.D. Oh. Sept. 19, 2016) (citingEifler v. Wilson &Muir Bank & Trust Co., 588 Fed. Appx. 473, 477 (6th Cir. 2014)) (additional citation omitted). SeealsoIn re Lybrook, 544 B.R. 537, 544 (Bankr. W.D. Pa.

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