CATHARINE R. ARON, Bankruptcy Judge.
This adversary proceeding came before the Court for trial on May 16, 2019. Samuel Pinero, II appeared on behalf of DFWMM Holdings, LLC ("DFWMM," or the "Plaintiff"), and Kenneth Johnson appeared on behalf of Dennis Richmond (the "Debtor" or the "Defendant"). The Debtor was also present and provided testimony. After considering the testimony, the arguments of the parties, and the record in this case, the Court finds that the debts at issue should not be excepted from discharge, and further finds the Plaintiff's remaining requests for relief should be denied, with judgment entered in favor of the Debtor, for the reasons which follow.
The Court has jurisdiction in this proceeding pursuant to 28 U.S.C. §§ 157 and 1334, and Local Rule 83.11 of the United States District Court for the Middle District of North Carolina. This is a core proceeding under 28 U.S.C. § 157(b)(2). The parties have consented to this Court's entry of a final judgment as to all matters raised in the pleadings, Consent Scheduling Memorandum, p. 2 [Doc. #23], and this Court has constitutional authority to enter final judgments herein.
The Court will address the Plaintiff's requests for relief in Counts 1 and 2 separately, beginning with Count 1.
Count 1 encompasses the nondischargeability of the 2014 and 2017 Judgments.
"The Plaintiff must prove that [a] debt is nondischargeable by a preponderance of the evidence[,] and exceptions to discharge should be strictly construed in favor of dischargeability in order to give Debtors the benefit of a fresh start." Boyd v. Loignon (In re Loignon), 308 B.R. 243, 249 (Bankr. M.D.N.C. 2004) (citations omitted).
In determining whether a debt is nondischargeable, the Court must first consider whether a particular creditor has standing to contest dischargeability. The Court will assess this threshold issue with respect to each judgment before turning to the merits of the objections.
The only evidence before the Court with respect to DFWMM's involvement with the Debtor is that DFWMM was included as a third-party beneficiary under the Settlement Agreement between the Debtor, his spouse, and the Administratrix.
However, the Court must come to a different conclusion with respect to the 2017 Judgment. DFWMM was a party to the 2017 Judgment, which was rendered in its favor. While the agreement which gave rise to the 2017 Judgment settled claims held by the Administratrix, DFWMM was designated as her third-party beneficiary under that agreement. Courts have consistently held that a third-party beneficiary of a settlement agreement between a debtor and his or her ex-spouse has standing to commence a nondischargeability proceeding under 11 U.S.C. § 523(a)(5). E.g., Manz v. Palomino (In re Palomino), 355 B.R. 349, 357-58 (Bankr. S.D. Fl. 2006). The Court sees no reason why the same logic should not apply in this instance, particularly with respect to the exceptions to discharge at issue.
Having found that the Plaintiff has standing to contest the dischargeability of the 2017 Judgment, the Court must next assess whether the Plaintiff has proven, by a preponderance of the evidence, that one of the aforementioned exceptions to discharge applies to the judgment.
In requesting that the Court find its claim for the 2017 Judgment nondischargeable, the Plaintiff is requesting that the Court apply the elements of collateral estoppel to the judgment. The 2017 Judgment constitutes a judgment for breach of contract, or a breach of the note, and contains no findings upon which to deny dischargeability. Nevertheless, the Court may look behind the judgment to determine whether the agreement giving rise to it settled any earlier claims for debts which may not be discharged in this proceeding.
The Settlement Agreement which gave rise to the 2017 Judgment attempted to resolve the claims against the Debtor and his spouse with respect to the 2014 Judgment and the Jones-Richmond Judgment. Thus, the Court will assess the nondischargeability of the 2017 Judgment as it relates to each of those judgments in turn.
With respect to the Jones-Richmond Judgment, a fatal flaw in attempting to classify the debt associated with it as nondischargeable in this proceeding is that the judgment was against the Debtor's spouse, rather than the Debtor. "[C]ases that have attributed the wrongdoing of a party to a debtor have done so based on an agency theory. . . . Where no agency relationship exists, the courts have not generally imputed the wrongdoing of a nondebtor spouse to a debtor in holding a debt nondischargeable." Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa), 258 B.R. 192, 198 (B.A.P. 9th Cir. 2001). "Marital status alone does not create an agency relationship." Boyd v. Loignon (In re Loignon), 308 B.R. 243, 250 (Bankr. M.D.N.C. 2004) (internal quotation omitted). In this case, the Plaintiff provided no evidence to the Court that the Debtor's spouse was acting as his agent when she committed her acts of constructive fraud and waste. Therefore, the debt attributable to the Jones-Richmond Judgment and reflected in the 2017 Judgment may be discharged in this bankruptcy proceeding.
Unlike the Jones-Richmond Judgment, the 2014 Judgment was, in fact, a judgment against the Debtor. Thus, the Court must determine whether that portion of the 2014 Judgment incorporated into the 2017 Judgment has collateral estoppel effect in this proceeding.
When determining whether a state court judgment has preclusive effect in a bankruptcy proceeding, the Court must apply the forum state's law of collateral estoppel. Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 19 (4th Cir. 1997) (citing Hagan v. McNallen (In re McNallen), 62 F.3d 619, 624 (4th Cir. 1995)). The 2014 Judgment was issued by the General Court of Justice of North Carolina, Superior Court Division. Therefore, the Court must apply the North Carolina law of collateral estoppel in this case.
In Sartin v. Macik, 535 F.3d 284 (4th Cir. 2008), the United States Court of Appeals for the Fourth Circuit held that, under North Carolina law, a default judgment, entered as a discovery sanction against the debtor, did not have collateral estoppel effect in a nondischargeability proceeding. Id. at 286. Sartin remains controlling precedent on this issue; the Court is unaware of any subsequent North Carolina cases to address the same. Since the 2014 Judgment was a default judgment, entered as a discovery sanction, it has no collateral estoppel effect in this proceeding. As such, the Court is unable to rely on the findings in the 2014 Judgment in order to determine whether that portion of the 2017 Judgment which represents the 2014 Judgment should be deemed nondischargeable.
At trial, the Plaintiff presented no evidence with which to enable the Court to independently assess the dischargeability of the debt represented by the 2014 Judgment under the standards of §§ 523(a)(2)(A) or (a)(6). The Plaintiff merely submitted the judgment, asked the Debtor a few questions about the events which gave rise to the judgment without providing any supporting documents for the Court to assess, and the Debtor denied any wrongdoing.
Count 2 of the Complaint requests that the Debtor's case be dismissed, or that his discharge be revoked, in light of certain information which was either included in or omitted from the schedules. The Debtor has yet to receive a discharge, and DFWMM initiated this proceeding on the last day to object to discharge. Therefore, the Court will assess the alternative request for relief in Count 2 of the Complaint as a request to deny, rather than revoke, the Debtor's discharge.
Section 727 governs the granting of a discharge in a Chapter 7 proceeding. "[D]ischarge of a debtor's debts is favored. . . .[`]However, certain provisions of § 727 prohibit discharge for those debtors who `play fast and loose with their assets or with the reality of their affairs.'[']" Anderson v. Hooper (In re Hooper), 274 B.R. 210, 214 (Bankr. D. S.C. 2001) (quoting Farouki v. Farouki v. Emirates Bank Int'l, Ltd., 14 F.3d 244, 249 (4th Cir.1994) (quoting In re Tully, 818 F.2d 106, 110 (1st Cir.1987))). A party objecting to discharge carries the burden of proof by a preponderance of the evidence. Fed. R. Bankr. P. 4005; Miller v. Young (In re Young), 578 B.R. 312, 318 (Bankr. M.D.N.C. 2017).
Under 11 U.S.C. § 727(a)(4), the Court shall grant the debtor a discharge, unless "the debtor knowingly and fraudulently, in or in connection with the case— (A) made a false oath or account." Id. To succeed in an action under § 727(a)(4), the movant must prove: "(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 bankruptcy case." Robbins v. Haynes (In re Haynes), 549 B.R. 677, 686 (Bankr. D.S.C. 2016).
"A statement or omission, known to be false, in a petition, schedule or statement, constitutes a false oath for the purposes of § 727(a)(4)." Miller v. Washabaugh (In re Washabaugh), 572 B.R. 141, 152 (Bankr. M.D.N.C. 2017). Whether a statement or omission was made with fraudulent intent may be proven by circumstantial evidence, or by inferences based on all of the facts and circumstances of the case. Williamson v. Fireman's Fund Ins. Co., 828 F.2d 249, 252 (4th Cir. 1987). However, if items were omitted or misstated in good faith, based upon the honest advice of counsel, then a finding of fraudulent intent may be negated. Robinson v. Worley, 540 B.R. 568, 578 (M.D.N.C. 2015), aff'd, 849 F.3d 577 (4th Cir. 2017).
In this case, the Debtor did make several false statements or omissions on his petition: (1) in response to question 12 of Part 3 of Official Form 101 and question 27 of Part 11 of his statement of financial affairs, the Debtor averred that he is not a sole proprietor, a statement clearly rebutted by the Debtor's own testimony and by Schedule I of his petition; (2) in response to several questions on his petition and statement of financial affairs, the Debtor stated that his debts are primarily consumer debts, a demonstrably false statement in light of the nature and amount of the debts in the case; (3) on his statement of financial affairs, the Debtor stated that his gross yearly income for the year of 2017 until the date of the petition filing was in the amount of $0, while at trial, he noted that his income during that time frame was, perhaps, more like $50,000; (4) on Schedule B of his petition, the Debtor failed to list a Harley Davidson titled in his name, a fact he admitted at the trial; and (5) on Schedule D of his petition, the Debtor failed to disclose the liens on his personal property in favor of DFWMM.
None of these statements or omissions, however, appear to have been made with fraudulent intent. The Debtor's misstatements with respect to his business were, more likely than not, a mere mistake, in light of the fact that the Debtor disclosed his sole proprietorship on Schedule I. It also appears that the Debtor's failure to disclose the liens on his personal property in favor of DFWMM was a mere mistake, as he had no difficulties in disclosing the Deed of Trust in favor of DFWMM.
Other misstatements appear to have been made upon the advice of counsel, including the declarations as to the primary nature of the debts in the case and the Debtor's gross income for 2017 until filing. Counsel should have discussed and evaluated the nature of the Debtor's debts with him, as a layperson would not necessarily have understood the terms "consumer" and "business" debts as they related to the debts in this case. Counsel also stated at the trial that the 2017 figure was derived from the Debtor's tax returns, seemingly himself confusing the terms gross and net income.
Finally, the Debtor's failure to list the Harley Davidson also appears to have been either unintentional or at the advice of counsel, who aided the Debtor in listing the debt to Harley-Davidson Credit Corporation and was seemingly aware that the Debtor did not believe he owned the vehicle, though it was titled in his name.
Because the Plaintiff has failed to establish that the Debtor in fact made any misstatements or omissions on his petition with fraudulent intent, it has also failed to carry its burden of proving that the Debtor's discharge should be denied under § 727(a)(4). The Plaintiff has further failed to establish any grounds upon which to dismiss the Debtor's bankruptcy proceeding. Therefore, the Court finds Count 2 of the Complaint should also be denied.
For the above stated reasons, the Court finds that Counts 1 and 2 of the Complaint should be denied, with judgment entered in favor of the Debtor. A separate order will be entered consistent with this memorandum opinion in accordance with Rule 7058 of the Federal Rules of Bankruptcy Procedure.
