Lim v. Stewart (In re Stewart)

634 B.R. 740

IN RE: Katrina Marie STEWART, Debtor.

K. Jin Lim, Trustee, Plaintiff,

v.Katrina Marie Stewart, pro se, Defendant.

Case No. 20-48595

Adv. Pro. No. 21-4213

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed December 9, 2021

Sandra L. O'Connor, Sandra O'Connor Law, PLLC, Walled Lake, Michigan, Attorney for Plaintiff Trustee.

Katrina Marie Stewart, Defendant, pro se.

OPINION REGARDING THE PLAINTIFF TRUSTEE'S MOTION FOR DEFAULT JUDGMENT, AND DISMISSAL OF TRUSTEE'S CLAIMS

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

This adversary proceeding raises issues about the grounds for revoking a Debtor's discharge under 11 U.S.C. §§ 727(d)(1) and 727(d)(2).

This case is before the Court on the Plaintiff Chapter 7 Trustee's motion for a default judgment against the Defendant-Debtor (Docket #10, the "Motion"). The Trustee's two-count complaint (Docket # 1) seeks to revoke the Debtor's discharge under 11 U.S.C. §§ 727(d)(1) (Count I), and 727(d)(2) (Count I[I]). On November 18, 2021, the Court filed an order requiring the Plaintiff to file a written supplement to the Motion (Docket # 11, the "November 18 Order"), to answer the following questions:

1. Should the Court decline to grant a default judgment on Count I of the Trustee's complaint (revocation of discharge based on 11 U.S.C. § 727(d)(1) ), and instead dismiss that count, on the ground that the Debtor made the post-petition transfer at issue several months after she obtained her discharge, such that the transfer cannot be the basis for a claim that the Debtor obtained her discharge through fraud?

2. Should the Court decline to grant a default judgment on Count [II] of the Trustee's complaint (revocation of discharge based on 11 U.S.C. § 727(d)(2) ), and instead dismiss that count, on the ground that the property that the Debtor transferred in the post-petition transfer at issue was not property that the Debtor acquired post-petition?

The Court will further consider the Motion after the Plaintiff Trustee files the required supplement.

On November 29, 2021, the Plaintiff filed her supplement to the Motion. (Docket # 12, the "Supplement"). The Court has reviewed and considered the Motion and the Supplement. For the reasons explained below, the Court will decline to grant a default judgment to the Plaintiff, because the Plaintiff's Complaint fails to state a claim upon which relief can be granted. The Court also will dismiss both counts of the Plaintiff's complaint, but give the Plaintiff an opportunity to file an amended complaint.

II. Facts

On August 10, 2020, the Defendant-Debtor Katrina Marie Stewart ("Stewart") filed a voluntary petition for relief under Chapter 7, commencing Case No. 20-48595. At all times, the Debtor has been represented by an attorney in the bankruptcy case. Stewart's attorney has received notices of all things filed in this case, by e-mail, through the Court's ECF system. K. Jin Lim was appointed the Chapter 7 Trustee in Stewart's case. On Stewart's Schedule A/B, she listed her ownership interest in property located at 1526 Virginia Park, Detroit, MI 48026 (the "Property"), and stated that the current value of the Property was $20,000.00.¹ On her Schedule C, Stewart claimed an exemption in the Property in the amount of $20,000.00, under 11 U.S.C. § 522(d)(1).² The Trustee did not file any objection to Stewart's claimed exemptions.

On September 24, 2020, the Trustee filed an application for authority to employ Century 21 Curran & Oberski as a real estate broker, for the purpose of determining the value of the bankruptcy estate's interest in the Property, and marketing and selling the Property, "if it has sufficient equity" (the "Employment Application").³ On September 25, 2020, the Court entered an order granting the Trustee's Employment Application, and authorizing the Trustee to employ Century 21 Curran & Oberski as a real estate broker.⁴

On November 20, 2020, the Court entered an order granting Stewart a discharge under 11 U.S.C. § 727.⁵

On February 19, 2021, the Trustee filed a notice stating that assets would be administered in Stewart's bankruptcy case, and the Clerk issued a notice setting a deadline of May 20, 2021 to file claims (the "Notice").⁶ The Clerk's Notice was mailed to all creditors on February 24, 2021.⁷

On October 4, 2021, the Plaintiff Trustee filed a two-count complaint to revoke the Debtor's discharge under 11 U.S.C. §§ 727(d)(1) (Count I), and 727(d)(2) (Count I[I]). The basis for both counts in the Plaintiff's complaint was Stewart's post-petition transfer by quit claim deed of the Property to Nathaniel Banner for $1,000.00 (the "Transfer").⁸ As the Complaint alleges, the quitclaim deed was recorded on May 25, 2021.⁹

Stewart did not timely plead or otherwise respond to the Complaint, and on November 15, 2021, the Clerk entered a default against Stewart.¹⁰ The Plaintiff Trustee now seeks a default judgment, revoking Stewart's discharge.

In the Supplement, the Plaintiff Trustee answers "No" to each of the two questions posed by the Court in its November 18 Order. After considering the matter, however, the Court concludes that the answer to each of the two questions it posed in its November 18 Order is "Yes."

III. Jurisdiction

This Court has subject matter jurisdiction under 28 U.S.C. §§ 1334(b), 157(a) and (b)(1), and Local Rule 83.50(a) (E.D. Mich.). As an adversary proceeding to revoke a debtor's discharge under 11 U.S.C. §§ 727(d)(1) and/or 727(d)(2), this is a core proceeding, under 28 U.S.C. § 157(b)(2)(J). The Plaintiff's claims in this adversary proceeding also are "core" because they fall within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc .), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This matter is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," id. , namely, 11 U.S.C. §§ 727(d)(1) and 727(d)(2). And this matter is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." Id .

IV. Discussion

The Court cannot grant a default judgment for the Plaintiff, because her complaint fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6) (applicable under Fed. R. Bankr. P. 7012 ). Under the allegations pled by the Plaintiff, she fails to satisfy the requirements to revoke Stewart's discharge under either 11 U.S.C. § 727(d)(1) or 11 U.S.C. § 727(d)(2). Plaintiff therefore is not entitled to a default judgment.

A. Revocation of discharge under 11 U.S.C. § 727(d)(1)

Section 727(d)(1) states:

(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--

(1) such 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[.]

11 U.S.C. § 727(d)(1) (emphasis added). In its November 18 Order, the Court questioned whether under the facts of this case, the Plaintiff Trustee could establish the "discharge ... obtained through fraud" element of § 727(d)(1). As noted above, the Court posed the following question:

Should the Court decline to grant a default judgment on Count I of the Trustee's complaint (revocation of discharge based on 11 U.S.C. § 727(d)(1) ), and instead dismiss that count, on the ground that the Debtor made the post-petition transfer at issue several months after she obtained her discharge, such that the transfer cannot be the basis for a claim that the Debtor obtained her discharge through fraud?

In the Supplement, the Plaintiff Trustee answered this question "No," relying on the case of Scribner v. Bosket (In re Bosket ), 369 B.R. 106 (Bankr. W.D.N.Y. 2007), which case she alleges "has virtually the same facts as in this case."¹¹ The Court disagrees, however, and considers the facts in Bosket to be materially different from the facts in this case.

In Bosket , the court found that the debtor had transferred property of the bankruptcy estate with the fraudulent intent of hindering, delaying, and defrauding his creditors. The debtor made the transfer after he filed his voluntary Chapter 7 petition, but before his discharge was granted. The court also found that the debtor did not advise the trustee of the transfer, and the trustee did not learn of the transfer until after the debtor had been granted a discharge. The Bosket court found that these facts satisfied the requirement under 11 U.S.C. § 727(d)(1) that the debtor's discharge be obtained through fraud. See Bosket , 369 B.R. at 107-111.

Under the facts alleged in the complaint in this case, however, Stewart did not make the unauthorized post-petition Transfer until more than six months after the Court granted her a discharge. The mere fact that Stewart made that undisclosed Transfer at that time, without more, does not permit the Court to draw an inference that Stewart earlier obtained her discharge "through fraud." Nor does the Plaintiff's complaint allege any other facts that might permit such an inference. For example, the complaint does not allege that Stewart secretly formed a plan, before she obtained her discharge, to make the unauthorized Transfer.

For these reasons, the complaint in this case fails to state a plausible claim for revocation of discharge under § 727(d)(1).

B. Revocation of discharge under 11 U.S.C. § 727(d)(2)

Section 727(d)(2) states:

(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

...