IN RE: Marsha S. HANG, Debtor Robert W. Bernier v. Marsha S. Hang

Rhode Island Bankruptcy Court, Case No. BK No. 17-11567; A.P. No. 18-010
Filed: June 22, 2018

Creditors like Mr. Bernier have a legal right to such complete and accurate financial disclosures and are sufficiently harmed by a debtor's failure to do so. Such rights and the remedies afforded by § 727(a)(3) and (4) give rise to their standing to seek the denial of a discharge under these provisions. See DenBeste v. Power(In re DenBeste) , Nos. NC-12-1087-HPaMk, NC-12-1180-HPaMk, 2012 WL 5416513 , at 5 (9th Cir. BAP 2012) ; Lussier v. Sullivan (In re Sullivan) , 455 B.R. 829 , 835-36 (1st Cir. BAP 2011).

This brings us to Ms. Hang's remaining arguments of mootness and lack of ripeness.

B. Mootness

"The Supreme Court has described mootness as 'the doctrine of standing set in a time frame: The requisite personal interest that must exist at the commencement of the litigation (standing) must continue through its existence (mootness).' " D.H.L. Assocs., Inc. v. O'Gorman , 199 F.3d 50 , 54 (1st Cir. 1999) (quoting United States Parole Comm'n v. Geraghty, 445 U.S. 388 , 397, 100 S.Ct. 1202 , 63 L.Ed.2d 479 (1980) ). Mootness applies when a case no longer satisfies Article III's case-or-controversy requirement. Rosenfeld v. Rosenfeld (In re Rosenfeld) , 535 B.R. 186 , 190 (Bankr. E.D. Mich. 2015). To satisfy this continuing standing requirement, "the dispute between the parties must be 'actual' and 'ongoing' " because "[f]ederal courts have no power to decide questions that cannot affect the rights of *247litigants in the case before them." Mapley v. Mapley (In re Mapley) , 437 B.R. 225 , 227 (Bankr. E.D. Mich. 2010) (quoting Day v. Klingler(In re Klingler) , 301 B.R. 519 , 523-24 (Bankr. N.D. Ill. 2003) ). As Klingler more fully explained:

When the controversy ceases to be actual or ongoing-when the issues presented are no longer live, or the parties lack a legally cognizable interest in the outcome, it is moot ....
A controversy ceases to exist, and the claim in question becomes moot, if events outrun the controversy so that the court can grant no meaningful relief. In particular, a claim is moot when the court can grant no effective relief because the plaintiff has already received all the relief he could.

Klingler , 301 B.R. at 523-24 (internal quotations and citations omitted).

Mootness challenges have been successfully lodged in nondischargeability actions brought under § 523(a) where a debtor has been permanently denied a discharge under § 727(a). Under those circumstances, courts have concluded that § 523(a) determinations are "meaningful only in the context of a discharge" and are moot when a debtor is ineligible for a general discharge under § 727(a). Perotti v. Perotti(In re Perotti) , Adversary No. 1-07-ap-00144, 2008 WL 5158543 , at 10 (Bankr. M.D. Pa., Aug. 27, 2008) ; see also Ammini v. Labgold (In re Labgold) , 532 B.R. 276 , 280 (Bankr. E.D. Va. 2015) (stating it is "almost universally agreed" that when a debtor is denied a discharge any action under the § 523(a) discharge exceptions for a particular debt becomes moot); Siu v. Martinez(In re Martinez) , 500 B.R. 608 , 635 (Bankr. N.D. Cal. 2013) (holding denial of discharge rendered § 523 nondischargeability claims moot); Ng v. Adler (In re Adler) , 494 B.R. 43 , 56 (Bankr. E.D.N.Y. 2013) (same); Kiel v. U.S. Dept. of Health & Human Servs.(In re Von Kiel) , 473 B.R. 78 , 88 (Bankr. E.D. Pa. 2012) (same).

In the reverse situation, courts also have held actions for denial of discharge under § 727(a) moot where the moving creditor's claim is already excepted from discharge under one of the § 523(a) nondischargeability provisions. See In re Rosenfeld , 535 B.R. at 191 (concluding the court lacked subject matter jurisdiction over plaintiff's § 727(a) action where any debt owed the plaintiff was already nondischargeable under § 523(a)(15) ); Mapley, 437 B.R. at 228-30 (dismissing as moot the § 727(a) proceeding brought by the debtor's ex-wife because any debts owed to her by the debtor were nondischargeable under either § 523(a)(5) or 523(a)(15) and, therefore, the relief she sought under § 727(a)"would give her nothing she does not already have").

Neither of these situations is presented here; Mr. Bernier seeks to deny Ms. Hang a discharge solely under § 727(a)(3) and (4) and has not asserted the nondischargeability of his claim under § 523(a). The parties have not cited to specific case law addressing whether a debtor's ineligibility under § 727(a)(8) moots an action brought under § 727(a)(2) through (7), and the Court was unable to find any cases directly on point. Still, given the important distinctions between the purposes of these subsections, their underlying legislative goals, and the consequences of such discharge denials under §§ 727(a)(3) and (4) and 523(a)(10), the Court easily concludes that Mr. Bernier's claims are not moot. Ms. Hang's characterization of the relief sought under § 727(a)(3) or (4) as simply whether a discharge is entered or denied is far too constricted; it disregards § 523(a)(10)'s permanent sanctions for the blameworthy conduct in or in connection with a particular *248case that is the focus of these § 727(a) subsections. See In re Filice , 580 B.R. at 263 . In short, adjudication of this proceeding on the merits will enable Mr. Bernier, should he be successful, to pursue his rights as a creditor irrespective of whether Ms. Hang files a subsequent case. Mr. Bernier has, therefore, demonstrated a legally cognizable interest in the outcome of this proceeding and this Court can afford him meaningful relief (if he proves his claims) by denying Ms. Hang a discharge under § 727(a)(3) or (4).

C. Ripeness

Similar to standing, the ripeness doctrine is "mandated by the constitutional requirement that federal jurisdiction extends only to actual cases or controversies." Ernst & Young v. Depositors Econ. Prot. Corp. , 45 F.3d 530 , 535 (1st Cir. 1995) (citing U.S. Const. art. III, § 2). The doctrine also encompasses "prudential considerations of judicial restraint from unnecessary or premature decision of constitutional questions." In re Cushman , 2017 WL 818254 , at 3 (citing Sindicato Puertorriqueno de Trabajadores v. Fortuno , 699 F.3d 1 , 8-9 (1st Cir. 2012) ). Just as the standing doctrine "seeks to keep federal courts out of disputes involving conjectural or hypothetical injuries, the Supreme Court has reinforced that the ripeness doctrine seeks to prevent the adjudication of claims relating to 'contingent future events that may not occur as anticipated, or indeed may not occur at all.' " Reddy v. Foster , 845 F.3d 493 , 500 (1st Cir. 2017) (quoting Texas v. United States , 523 U.S. 296 , 300, 118 S.Ct. 1257 , 140 L.Ed.2d 406 (1998) ). "[T]he facts alleged, under all the circumstances, [must] show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of" the relief sought. Labor Relations Div. of Constr. Indus. of Mass., Inc. v. Healey , 844 F.3d 318 , 326 (1st Cir. 2016) (internal quotations and citations omitted).

Whether a proceeding is ripe for judicial review is an aspect of subject matter jurisdiction that may be challenged by a Rule 12(b)(1) motion to dismiss. In re Cushman , 2017 WL 818254 , at 1. The plaintiff must prove sufficient facts to establish ripeness. Id. (citing Healey , 844 F.3d at 326 ). In considering the ripeness of a dispute, courts "evaluate both the fitness of the issues for judicial decision and the hardship to the parties by withholding court consideration." Id. at *3 (citations omitted). The fitness prong concerns the timing of the request for relief and "typically involves subsidiary queries concerning finality, definiteness, and the extent to which resolution of the challenge depends upon facts that may not yet be sufficiently developed." Ernst & Young, 45 F.3d at 535 ; see also In re Cushman, 2017 WL 818254 , at 4 (finding fitness prong satisfied where the propriety of the defendant's conduct would not be placed "in sharper focus" by events that had not yet occurred or may never occur).

The hardship prong "focuses on the hardship that may be entailed in denying judicial review." Ernst & Young, 45 F.3d at 536 . It "involves a prudential analysis of the utility of judicial review." In re Cushman , 2017 WL 818254 , at *4. "The ultimate question is whether granting relief would serve a useful purpose, or, put another way, whether the sought-after declaration would be of practical assistance in setting the underlying controversy to rest." Id. at 5. (internal quotations and citation omitted). The First Circuit has stated that "although both prongs of the test must be satisfied, 'a strong showing on one may compensate for a weak one on the *249other.' " Id. at *4 (quoting McInnis-Misenor v. Me. Med. Ctr. , 319 F.3d 63 , 70 (1st Cir. 2003) ).

Ms. Hang's ripeness challenge fails because it erroneously assumes that Mr. Bernier will only sustain an injury and suffer a hardship if she files a future bankruptcy case and his debt is discharged. Mr. Bernier's alleged injury, the propriety of Ms. Hang's alleged conduct, and the hardship Mr. Bernier would sustain in the absence of this Court's adjudication of this adversary proceeding are not contingent on whether Ms. Hang files a subsequent bankruptcy case.

i. Fitness Prong Applied

The events leading to Ms. Hang's alleged liability under § 727(a)(3) and (4) have already occurred. The allegations in the Complaint relate to her alleged misconduct in connection with the present case-the failure to maintain appropriate business records of her pre-petition business and the knowing failure to disclose material information about her assets, income, and financial affairs. If proven, such behavior contravenes Mr. Bernier's legal rights as a creditor to such information, and the impairment of his rights qualifies as the requisite injury for purposes of standing and ripeness. See Lujan , 504 U.S. at 578 , 112 S.Ct. 2130 . Already having occurred, the events leading to Ms. Hang's alleged liability under § 727(a)(3) or (4) and Mr. Bernier's resulting injury "will not be placed in sharper focus by events that have not yet occurred[.]" In re Cushman , 2017 WL 818254 , at *4.

ii. Hardship Prong Applied

The nature of the relief sought-denial of discharge under § 727(a)(3) and (4), rendering Mr. Bernier's claim permanently nondischargeable under § 523(a)(10) -underscores the hardship he would sustain if denied review by this Court. Although Mr. Bernier's claims (as well as those of all the other creditors) would soon be vulnerable to discharge in another bankruptcy case Ms. Hang could file as soon as the present one is closed, this by itself does not satisfy the hardship prong for ripeness. Rather, what does satisfy this prong is the forfeiture of Mr. Bernier's right to seek a denial of Ms. Hang's discharge under § 727(a)(3) and (4) for her alleged misconduct in or in connection with the present case, leading to § 523(a)(10)'s permanent exception to the discharge of his claim. His loss of this relief would occur whether or not Ms. Hang files a future bankruptcy case. The allegations supporting these claims are unique to this case and cannot be reasserted in a subsequent case as grounds for discharge denial. In the end, denying review of his claims in this proceeding would deprive Mr. Bernier of his right to seek redress for Mr. Hang's alleged conduct in this case and to obtain the automatic, permanent nondischargeability of his claims under § 523(a)(10).

Lastly, the Court would be remiss if it overlooked the important public policy issues at stake here. Were the Court to accept Ms. Hang's position and dismiss this proceeding, she would escape the severe consequences of her alleged wrongdoing exclusive to this case. Allowing § 727(a)(8)'s temporary discharge denial to be used as both a sword and a shield thwarts the clear purposes and legislative objectives of §§ 727(a)(3) and (4) and 523(a)(10).

VII. Conclusion

Granting the motion to dismiss this adversary proceeding simply because of the temporal limits of § 727(a)(8) would unfairly deprive Mr. Bernier of his present right to obtain redress for Ms. Hang's alleged abusive behavior in connection with this case and the automatic, permanent nondischargeability *250of his claims against her. Such an outcome would trample the vitally important public policies encompassed in § 727(a)(3) and (4), effectuated through § 523(a)(10).

The motion to dismiss is DENIED.

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Opinion Details

Court
Rhode Island Bankruptcy Court
Case Number
BK No. 17-11567; A.P. No. 18-010
Filed Date
June 22, 2018
Format
XML

Additional Information

Attorneys
*239Christopher Lefebvre, Law Office of Claude Lefebvre & Sons, Pawtucket, RI, for Plaintiff., Stephen P. Levesque, Cranston, RI, for Defendant., Diane Finkle, U.S. Bankruptcy Judge *240Creditor Robert Bernier commenced this adversary proceeding seeking the denial of debtor Marsha Hang's discharge under Bankruptcy Code § 727(a)(3) and (4)1 based on her alleged misconduct in or in connection with her bankruptcy case. As it turns out, Ms. Hang is ineligible for a discharge under the temporal discharge bar of § 727(a)(8) because she received a discharge in a prior bankruptcy case filed within eight years of the filing of her present case. She moves to dismiss the complaint for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b). The motion raises the issues of Mr. Bernier's Article III standing, the ripeness of his claims for judicial review, and whether Ms. Hang's ineligibility for a discharge under § 727(a)(8) moots Mr. Bernier's § 727(a)(3) and (4) claims. Mr. Bernier objects to the motion, citing the immediate adverse impact an order dismissing the complaint would have on his rights as a creditor and his ability to assert those rights under §§ 727(a)(3) and (4) and 523(a)(10)., The use of the temporal discharge bar of § 727(a)(8) as a shield against denial of discharge under § 727(a)(2) through (7), which relate to a debtor's misconduct in or in connection with a case, presents an issue of first impression. At first blush, Ms. Hang's position appears deceptively straightforward and appealing. Why waste judicial time and resources adjudicating such claims if the debtor is ineligible for a discharge under § 727(a)(8) ? Upon a more in-depth review, however, the flaws in her arguments become apparent; they ignore the important distinctions between § 727(a)'s subsections, their underlying legislative goals, and the significance of the interplay between §§ 523(a)(10) and 727(a)(2) through (7). Accordingly, the motion to dismiss must be denied., Although required to do so, Ms. Hang did not disclose on her bankruptcy petition that she previously filed a chapter 7 bankruptcy case in the United States Bankruptcy Court for the Middle District of Florida on June 6, 2010, and received a discharge on October 7, 2010. See Bk. No. 10-13349-KRM. Some seven years later, on September 8, 2017, she filed the present chapter 7 case in this Court. Ms. Hang readily agrees that § 727(a)(8)'s eight-year bar renders her ineligible for a discharge in this present case. In fact, her discharge ineligibility is the foundation of her dismissal arguments., In support of his § 727(a)(3) claim, Mr. Bernier alleges that Ms. Hang unjustifiably failed to maintain business records for *241the cleaning business she operated for at least five years before filing this case, a business which was her primary source of income during that period. See Plaintiff's Complaint to Deny Discharge (\"Complaint,\" Doc. # 1). To support his § 727(a)(4) claim, Mr. Bernier alleges that Ms. Hang knowingly engaged in fraudulent behavior in connection with this case by omitting, misrepresenting, or failing to accurately disclose on her bankruptcy petition, schedules, and statement of financial affairs material information about her pre-bankruptcy financial condition, the value of her assets and liabilities, her prior filing history, past and present employment and income, property interests, bank accounts, and pre-petition property transfers or sales. Notably, Ms. Hang stated under oath at the initial § 341 meeting of creditors that she had read each page of these documents before they were filed and that they contained accurate and true information.2, Seeking dismissal under Rule 12(b)(1), Ms. Hang asserts that: (i) Mr. Bernier lacks standing because there is no particularized injury that is actual or imminent, (ii) her ineligibility for a discharge under § 727(a)(8) precludes the Court from affording him meaningful relief and renders this proceeding moot, (iii) the controversy is not ripe because any alleged harm is merely prospective, and (iv) Mr. Bernier will not suffer a hardship if review is denied because his request for relief is moot. See Defendant's Motion to Dismiss Complaint to Deny Discharge (\"Motion,\" Doc. # 7). At their core, her arguments are that Mr. Bernier's claims fail to present a justiciable \"case or controversy,\" thereby divesting the Court of subject matter jurisdiction over this adversary proceeding.3, Defending against the motion, Mr. Bernier counters that Ms. Hang erroneously conflates the temporal discharge bar under § 727(a)(8) with the significantly different grounds for denial of a discharge under § 727(a)(3) and (4). See Plaintiff's Objection to Motion to Dismiss (\"Objection,\" Doc. # 8). He maintains that the Court has *242jurisdiction to hear his claims because of the \"critical distinction\" between temporary ineligibility for discharge for an objective time period and the permanency of the discharge bar effectuated by § 523(a)(10) where discharge has been denied under § 727(a)(2) through (7). Unlike the time limitations imposed by § 727(a)(8), he emphasizes, § 523(a)(10) severely sanctions a debtor for misconduct in or in connection with a particular case that undermines the integrity of the bankruptcy system. This distinction, Mr. Bernier contends, gives rise to a concrete injury for purposes of standing, which ripens his adversary proceeding for adjudication and provides the basis for meaningful relief., Section 727(a) provides that the court shall grant a discharge to a chapter 7 debtor unless one or more of the grounds for denial of discharge listed in subsections (a)(1) through (12) are established. Enforcement of these subsections is through § 727(c)(1), which vests the right in \"[t]he trustee, a creditor, or the United States trustee [to] object to the granting of a discharge under subsection (a) of this section.\" 11 U.S.C. § 727(c)(1). The permanency of a discharge denial under subsections (a)(2) through (7), however, is established by § 523(a)(10), which provides that:, Section 523(a)(10) applies where the debtor is denied a discharge under any of the grounds listed in § 727(a)(2) through (7). See Cheng v. Wong(In re Wong) , Adversary No. 09-01112 (REG), 2010 WL 1544415, at *2 (Bankr. S.D.N.Y. Apr. 19, 2010) (\"By negative implication and basic logic, § 523(a)(10) is not applicable when a debtor was denied a discharge in a previous case solely pursuant to a subsection of § 727(a) that is not listed in § 523(a)(10).\"). The denial of a discharge under any of the enumerated subsections in § 523(a)(10) renders debts in a prior case permanently and automatically nondischargeable. See McDermott v. Graft(In re Graft) , 489 B.R. 65, 73 (Bankr. S.D. Ohio 2013) (discussing revocation of discharge under § 727(a)(6) and ability to apply § 523(a)(10) in later case); Osenkowski v. Moretti(In re Moretti) , 278 B.R. 300, 301 n.1 (Bankr. D.R.I. 2002) (\"Because the Debtor's prior Chapter 7 case[ ] was filed more than six years prior to the instant Chapter 7 petition, *243Section 727(a)(8) [then a 6-year bar] is not implicated and the Debtor is entitled to another discharge in this proceeding.\"). Unlike the denial of a discharge based on an objective time period, \"the grounds for denial of [a] chapter 7 discharge under §§ 727(a)(2) through (a)(7) are all on account of blameworthy conduct[.]\" Filice v. United States (In re Filice) , 580 B.R. 259, 263 (Bankr. E.D. Cal. 2018). Section 523(a)(10) does not prevent the discharge of debts in a subsequent bankruptcy that survived the earlier case because of the time-limited discharge bar of § 727(a)(8). Id., A party invoking § 727(a)(3)\"must make a prima facie showing that the debtor has failed to maintain adequate records. Record-keeping need not be precise .... [A] debtor's records must sufficiently identify the transactions [so] that intelligent inquiry can be made of them.\" Harrington v. Simmons(In re Simmons) , 810 F.3d 852, 857-58 (1st Cir. 2016) (internal quotations and citations omitted). The standard is an objective one, and a debtor can be denied a discharge under § 727(a)(3) regardless of the lack of any subjective intent to conceal financial information. Id. at 858. Although § 727(a)(3) provides for a justification defense, \"the debtor has the burden of proving justification and his ability to prevail on such a defense turns on whether his asserted justification is objectively reasonable.\" Id. (internal citations omitted)., A false oath is material if it relates \"to the [debtor's] business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.\" Id. (quoting Chalik v. Moorefield (In re Chalik) , 748 F.2d 616, 618 (11th Cir. 1984) ). \"A statement is considered to have been made with knowledge of its falsity if it was known by the debtor to be false, made without belief in its truth, or made with reckless disregard for the truth.\" Id. at 426 (quoting Montey Corp. v. Maletta (In re Maletta) , 159 B.R. 108, 112 (Bankr. D. Conn. 1993) ). A debtor is not likely to admit to fraudulent intent and so it may be inferred from the particular facts and circumstances of a case. See Giansante & Cobb, LLC v. Singh(In re Singh) , 433 B.R. 139, 159 (Bankr. E.D. Pa. 2010). Reckless indifference also \"can be inferred from numerous errors and omissions in the bankruptcy schedules or statement of financial affairs.\" In re Oakley , 503 B.R. at 426. Once the plaintiff produces \"persuasive evidence of a false statement under oath ... the burden shifts to the defendant to prove it was not intentionally false[.]\" In re Maletta , 159 B.R. at 112., The paramount distinction between §§ 727(a)(2) through (7) and 727(a)(8) is readily apparent. The former subsections address a debtor's failure to provide truthful and complete information to the trustee and creditors. As a sanction for such abusive conduct, § 523(a)(10) renders the creditors' claims permanently nondischargeable. In contrast, § 727(a)(8) represents congressional intent to limit the frequency by which an \"honest\" debtor may obtain a discharge of debts. The punitive sanction of § 523(a)(10) does not apply. Even though § 727(a)(8) affords a creditor temporary relief from the discharge of its claims, the \"post-bankruptcy legal consequence of not entering a discharge for any reason other than the grounds specified in § 523(a)(10) for permanent nondischargeability is that the debtor remains liable for debts but might be eligible for discharge in a future chapter 7 case\" once the eight-year bar to discharge expires. In re Filice , 580 B.R. at 269. Thus, the remedy afforded a party moving under § 727(a)(2) through (7) by virtue of § 523(a)(10) is vastly different from the time-limited relief provided by § 727(a)(8)., Prudential standing is concerned with litigants \"asserting the rights or legal interests of others in order to obtain relief from injury to themselves.\" In re Magnesium Corp. , 583 B.R. at 647 (internal quotations and citations omitted). Prudential (or statutory) standing \"is not really standing in a jurisdictional sense, and as such, a defendant may not bring a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) where the alleged 'lack of standing' is merely prudential[.]\" Id. (citing Lexmark Int'l, Inc. v. Static Control Components, Inc. , 572 U.S. 118, 134 S.Ct. 1377, 1388 n.4, 188 L.Ed.2d 392 (2014) ). When a plaintiff \"asserts a cause of action based on a statute, the Court should inquire whether the particular plaintiff has a cause of action under the statute.\" Id. (internal quotations and citations omitted). Challenges to the validity of a cause of action do not fall under the constitutional standing inquiry \"because the absence of a valid ... cause of action does not implicate subject-matter jurisdiction ....\" Id. (internal citations and quotations omitted).5, The unforgiving consequences of § 727(a)(3) and (4)\"make certain that those who seek the shelter of the bankruptcy code do not play fast and loose with their assets or with the reality of their affairs ... so that decisions can be made by the parties in interest based on fact rather than fiction ....\" In re Tully , 818 F.2d at 110. \"In exchange for a fresh start, a debtor must paint a basic picture of his financial condition and satisfactorily explain the disposition of his assets during the period leading up to the filing of his bankruptcy petition.\" In re Simmons , 810 F.3d at 855. The purpose of § 727(a)(3) is \"to give interested parties and the court a reasonably complete picture of the debtor's financial condition during the period prior to bankruptcy.\" Id. at 857. Similarly, § 727(a)(4) seeks to ensure that the debtor has made \"full, honest, and accurate disclosure of her financial circumstances so the bankruptcy trustee and the creditors have sufficient information for the proper administration of the chapter 7 case without having to incur the time and expense of an investigation into her affairs.\" In re Oakley , 503 B.R. at 424 (citations omitted).
History

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157(b), and Rule 109 of the Local Rules of the United States District Court for the District of Rhode Island. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J).

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