DN Enter. v. Navarro (In re Navarro)

IN THE MATTER OF: JOHN J. NAVARRO, Debtor(s).

DN ENTERPRISES, Plaintiff, v. JOHN J. NAVARRO, Defendant.

CASE NO. BK19-81567-TLS

ADV. NO. A19-8034-TLS

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEBRASKA

August 11, 2020

CHAPTER 7

ORDER

This matter is before the court on the defendant's motion for partial judgment on the pleadings (Fil. No. 12) and the plaintiff's motion for summary judgment (Fil. No. 27). Dean J. Jungers represents the plaintiff, and Richard L. Johnson represents the debtor-defendant. Evidence and briefs were filed and, pursuant to the court's authority under Nebraska Rule of Bankruptcy Procedure 7056-1, the motions were taken under advisement without oral arguments.

Both motions are denied.

DN Enterprises is a creditor holding a judgment issued in 2018 against John Navarro for the wrongful conversion of funds belonging to DN. The substance of that lawsuit concerns the transfer of real property owned by DN. In 2005, Navarro purchased real property located at 1926 South 14th Street in Omaha, Nebraska. He then deeded the property to DN. Thereafter, Navarro as an officer, director, and sole shareholder of DN pledged the property as collateral for a promissory note with Nebraska State Bank. On January 1, 2006, Navarro transferred all of DN's stock to his brother and Navarro's employment with DN was terminated. In 2009, Navarro entered into a land contract with a third party to sell the subject property. DN sued Navarro in state court and obtained a ruling that DN was the rightful owner of the real property. As a result, Navarro had no right to receive monies derived from the property. The court entered judgment against Navarro and in favor of DN for the installment payments made on the land contract from September 2010 through June 2014, totaling $36,889.70

Navarro filed a Chapter 7 bankruptcy petition in October 2019. DN promptly filed this adversary proceeding requesting a denial of discharge under 11 U.S.C. § 727 for failing to disclose certain assets on the bankruptcy schedules and at the initial § 341 meeting, or, alternatively, an order excepting the judgment debt from discharge under 11 U.S.C. § 523(a)(4). The parties have filed cross-motions seeking judgment in their favor, which are now before the court. Defendant's motion for partial judgment on the pleadings

The debtor-defendant has filed a Rule 12(c) motion for partial judgment on the pleadings as to the § 727 allegations. Federal Rule of Civil Procedure 12(c) is made applicable in adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b). Motions for judgment on the pleadings are generally reviewed under the same standard as a Rule 12(b)(6) motion. Schultz v. U.S. Dep't of Educ. (In re Schultz), ___ B.R. ___, Case No. AP 19-03031, 2020 WL 2026611, at *4 (Bankr. D. Minn. Feb. 11, 2020) (citing In re Pre-Filled Propane Tank Antitrust Litig., 893 F.3d 1047, 1056 (8th Cir. 2018)); Ginsburg v. InBev NV/SA, 623 F.3d 1229, 1233 n.3 (8th Cir. 2010).

In determining whether to grant judgment on the pleadings in the first instance, a court must accept as true all facts pleaded by the non-moving party and draw all reasonable inferences in its favor. Allegations in a complaint which are denied by the nonmovant are assumed to be false. When considering a motion for judgment on the pleadings, a court generally must ignore materials outside the pleadings, but it may consider materials that are part of the public record, as well as materials that are necessarily embraced by the pleadings. After determining the facts in this fashion, the movant is entitled to judgment on the pleadings only if those facts "clearly establish that no material issue of fact remains to be resolved and he is entitled to judgment as a matter of law."

McDermott v. Swanson (In re Swanson), 476 B.R. 236, 239 (B.A.P. 8th Cir. 2012) (internal citations omitted).

The allegations in the complaint must be sufficient to "raise a right to relief above the speculative level" and to "state a claim to relief that is plausible on its face." Schultz, 2020 WL 2026611, at *4 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). However, the court is "not bound to accept as true a legal conclusion couched as a factual allegation." Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

DN's complaint alleges that Navarro was a shareholder of Navarro Lawn & Landscape, Inc. ("NL&L"), in 2019 but did not include his ownership interest or his income from that business in his bankruptcy schedules. He testified at the § 341 meeting that he had not received any wages or other income in January or February 2019, and further testified that he owned NL&L but it had no value. DN asserts both statements are untrue because the company's tax return and the garnishment interrogatories answered by the company's controller show otherwise.

After the § 341 meeting, the debtor amended his bankruptcy schedules to include his 100% ownership of NL&L, which he valued at $0, and his interest in a $141,000 receivable for work done by NL&L. His original Statement of Financial Affairs was not amended, as it already listed an amount for 2019 wages as of the petition date, as well as his ownership of NL&L.

DN also points out that Navarro's § 341 testimony pertaining to a couple of other matters is suspect. One example was the location of Navarro's business premises, when the debtor said he had not worked out of the Ralston location since 2016 or 2017, although records from the NebraskaSecretary of State indicate as recently as March of this year that NL&L operated at the Ralston address. Another example is the purported assignment of NL&L contracts and transfer of real estate to a third party for no apparent consideration.

DN's complaint focuses on the absence of relevant information in Navarro's initial bankruptcy schedules and his testimony at the § 341 hearing. DN argues that Navarro should be denied a discharge of his debts because he gave false information under oath in his schedules and at the § 341 meeting.

Denial of discharge is "a serious matter not to be taken lightly by a court." McDonough v. Erdman (In re Erdman), 96 B.R. 978, 984 (Bankr. D.N.D. 1988). It "is akin to financial capital punishment" and "is reserved for the most egregious misconduct by a debtor." United States Trustee v. Beard (In re Beard), 595 B.R. 274, 289 (Bankr. E.D. Ark. 2018) (quoting Manning v. Watkins (In re Watkins), 474 B.R. 625, 630 (Bankr. N.D. Ind. 2012)).

The provisions of § 727 are strictly construed in the debtor's favor, while remaining cognizant that § 727 exists to prevent a debtor's abuse of the Bankruptcy Code. Fox v. Schmit (In re Schmit), 71 B.R. 587, 589-90 (Bankr. D. Minn. 1987). When a party objecting to a debtor's discharge "establishes a prima facie case, the burden then shifts to the debtor defendant to offer credible evidence to satisfactorily explain his conduct." Robbins v. Haynes (In re Haynes), 549 B.R. 677, 685 (Bankr. D.S.C. 2016); Kaler v. Charles (In re Charles), 272 B.R. 680, 683-84 (B.A.P. 8th Cir. 2012); Fed. R. Bankr. P. 4005.

Section 727(a)(4)(A) of the Bankruptcy Code authorizes the court to withhold a discharge of all of a debtor's debts when the debtor knowingly and fraudulently makes a false oath or account in the bankruptcy case. The purpose of § 727(a)(4)(A) is to "promote[] truth-telling in the statements and schedules so that creditors and trustees will not have to resort to independent investigation and fact-finding." Wetzel v. Eichler (In re Eichler), 599 B.R. 31, 46 (Bankr. E.D. Ark. 2019) (quoting Daniel v. Boyd (In re Boyd), 347 B.R. 349, 355 (Bankr. W.D. Ark. 2006)).

To deny a debtor a discharge under § 727(a)(4)(A), the plaintiff must prove 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 related materially to the Debtor's bankruptcy case."

Kaler v. Charles (In re Charles), 272 B.R. 680, 684 (B.A.P. 8th Cir. 2012) (citing Lincoln Sav. Bank v. Freese (In re Freese), 460 B.R. 733, 738 (B.A.P. 8th Cir. 2011)).

Well-established case law holds that because the statements made by a debtor in his schedules and statements and at the meeting of creditors are signed under penalty of perjury and made under oath, they constitute "oaths" for purposes of § 727(a)(4)(A). Id. (citing Korte v. United States (In re Korte), 262 B.R. 464, 474 (B.A.P. 8th Cir. 2001)); Fed. R. Bankr. P. 1008.

A matter is "material" if it concerns the discovery of assets or the existence and disposition of estate property, or bears a relationship to the debtor's business transactions or estate. Mertz v. Rott, 955 F.2d 596, 598 (8th Cir. 1992); Ellsworth v. Bauder (In re Bauder), 333 B.R. 828, 830 (B.A.P. 8th Cir. 2005); Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984) (per curiam).

Intent can be established by circumstantial evidence, Korte, 262 B.R. at 474, and reckless disregard for the truth will support a finding of fraudulent intent for the purpose of denying a debtor his discharge under § 727(a)(4)(A). Bank of Bennington v. Thomas (In re Thomas), 431 B.R. 468, 472 (B.A.P. 8th Cir. 2010) (citing Korte at 474).

In this case, there is no dispute that certain information was omitted from Navarro's initial set of bankruptcy schedules, although they were later amended, and that testimony he gave at his § 341 meeting was not factually accurate. The key issue is whether those statements were knowingly and fraudulently made. It is difficult for the court to determine whether a debtor's actions were intentional without the opportunity to hear from the debtor and gauge his credibility. For that reason, Navarro's Rule 12(c) motion is denied.

Plaintiff's motion for summary judgment

DN has filed a motion seeking summary judgment on its claim that the judgment debt is not dischargeable pursuant to § 523(a)(4) because it is for fraud or...