Ambank v. Suelflow

1That section provides, in relevant part:
The court shall grant the debtor a discharge, unless –
(1) the debtor knowingly and fraudulently, in or in connection with the case,
(A) made a false oath or account[.]
11 U.S.C. § 727(a)(4)(A).
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	ADAM SUELFLOW, 	No. 7-07-12045 ML
Debtor.
______________________________________________________________________________
AMBANK,
Plaintiff,
v. 	Adversary No. 08-1070 M
ADAM SUELFLOW,
Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS MATTER is before the Court following a trial on the merits to determine whether
to revoke the Defendant’s discharge under 11 U.S.C. § 727(d). Plaintiff AmBank asserts that
Defendant Adam Suelflow failed to disclose on his statements and schedules a sale of real
property that occurred less than two years before the filing of the petition from which he
received over $90,000, and that Defendant knowingly and fraudulently reported in his statements
and schedules that he received only $525.00 from the sale of another parcel of real property
when, in fact, he received over $31,000.00. 	After consideration of the evidence presented at
trial, and being otherwise sufficiently informed, the Court finds that, while the Defendant’s mis-
statements and omissions contained in his statements and schedules would otherwise have
supported a claim to deny the Defendant’s discharge under either 11 U.S.C. § 727(a)(4) 1
,
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AmBank failed to exercise sufficient diligence in investigating the facts to support its claims
and, therefore, cannot demonstrate that it did not have reason to know of the Defendant’s fraud
until after the discharge was entered. Accordingly, the Court will dismiss Plaintiff’s complaint
for revocation of the Defendant’s discharge under 11 U.S.C. § 727(d).
FINDINGS OF FACT
1. 	Defendant Adam Suelflow filed a voluntary petition under Chapter 7 of the
Bankruptcy Code, along with a Statement of Financial Affairs (“SOFA”) and Schedules A - J on
August 21, 2007.
2. In response to the request in paragraph 10 of the SOFA for information concerning
“Other Transfers” made within the two year period preceding the commencement of the
bankruptcy proceeding, Defendant reported that on January 26, 2007 he received $525.00 from
the sale of certain real property known as the Iron Horse Corral Motorcycle shop building (“Iron
Horse Property).
3. Defendant and his former business partner, Thomas J. Burke, sold the Iron Horse
Property to Mr. James U. Fleming, Jr. for $549,352.00. 	See Exhibit 3 - Closing Statement.
4. Defendant received $31,292.81 from the sale of the Iron Horse Property. See Exhibit
2 - Cancelled check payable to Defendant Adam Suelflow in the amount of $31,292.81.
5. 	Defendant acknowledged that he received $31,292.81 from the sale of the Iron Horse
Property, but stated that he cashed the check and used the proceeds to pay workers in connection
with his construction business and to pay his own living expenses, and that the $525.00 he
reported on the SOFA was the money he had left at the time his bankruptcy was filed.
Defendant did not keep any records to document the use of the proceeds from the sale of the Iron
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Horse Property.
6. Defendant sold his interest in a parcel of commercial real estate consisting of 1.891
acres of undeveloped real property located adjacent to Highway 180 in Silver City, New Mexico
(“Undeveloped Property”) on or about May 10, 2006.
7. 	Defendant does not recall whether he received any proceeds from the sale of the
Undeveloped Property, and believes that the proceeds were used to pay off the mortgage secured
by the Undeveloped Property and to pay a portion of the loan to AmBank.
8. 	Defendant did not disclose the sale of the Undeveloped Property in his statements and
schedules filed in his bankruptcy case.
9. Defendant did not amend the SOFA.
10. Defendant’s tax return from 2007 reflects a capital gain in the amount of $31,292.12
from the sale of the Iron Horse Property.
11. In 2003 Plaintiff AmBank extended a loan for floor plan financing in the
approximate amount of $250,000 to Defendant Adam Suelflow, his partner, Mr. James Burke,
and a third party, Mr. H.R. Quintero. 	All three guaranteed the loan. 	The loan was secured by
the inventory of the business, a Harley Davidson motorcycle shop, but was not secured by any
real property. 	Mr. Quintero was released from the note and guaranty in 2004 or 2005.
Testimony of Mr. Mike Trujillo, Executive Vice President of AmBank.
12. In 2006, Mr. Burke was in poor health and he and Defendant decided to liquidate
their business assets.
13. 	Mr. Burke and Defendant surrendered the inventory from their business to AmBank.
14. 	They informed AmBank that they sold the Iron Horse Property, but that they had not
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netted any proceeds from the sale. 	Testimony of Mr. Trujillo.
15. In April 2007 Mr. Fleming approached AmBank because he wanted to make an offer
to purchase a trailer that was part of the inventory Mr. Burke and Defendant had turned over to
AmBank. 	It was at this time that AmBank learned from Mr. Fleming of the sale of the Iron
Horse Property and that there were significant net proceeds from the sale. 	Testimony of Mr.
Trujillo. 	Mr. Fleming led AmBank to believe that he would give them copies of the documents
from the closing of the Iron Horse Property, but he did not. AmBank did not attempt to obtain
the documents from the title company at that time.
16. AmBank attended Defendant’s meeting of creditors on September25, 2007.
17. Pre-petition, AmBank filed a lawsuit and obtained a judgment against Mr. Burke and
Defendant for the unpaid balance under its floor plan financing loan. 	AmBank learned that Mr.
Burke had moved to Arizona and purchased a home there, so AmBank took steps to file its
judgment against Mr. Burke’s Arizona residence. 	Testimony of Mr. Trujillo.
18. The last day to file a compliant objecting to the Defendant’s discharge or to the
dischargeability of a particular debt was November 26, 2007.
19. 	Defendant received a discharge on December 14, 2007. 	See Case No. 7-07-12045
ML, Docket No. 15.
20. Plaintiff AmBank subpoenaed the documents relating to the sale of the Iron Horse
Property from Western New Mexico Title Company in the spring of 2008. 	Testimony of Mr.
James Gruwell, manager of Western New Mexico Title Company.
21. 	AmBank filed this adversary proceeding on June 10, 2008.
CONCLUSIONS OF LAW
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2The Lincoln Nat’l Life Ins. Co. v. Silver (In re Silver), 367 B.R. 795, 800
(Bankr.D.N.M. 2007), aff’d, 378 B.R. 418 (10th Cir. BAP 2007)(stating that the revocation
statute “is construed strictly against the objecting party and liberally in favor of the
debtor.”)(citations omitted); Mazer v. Jones (In re Jones), 178 B.R. 1, 3 (Bankr.D.N.M.
1995)(“Section 727(d)(1) is strictly construed against the objector and liberally in favor of the
debtor.”)(citations omitted); Lightfoot v. Landry (In re Landry), 350 B.R. 51, 56 (Bankr.E.D.La.
2006)(same)(citations omitted).
3See Jones, 178 B.R. at 3 (plaintiff must “prove by a preponderance of the evidence that
(1) the debtors obtained their discharge through fraud; and (2) he did not know about the fraud
until after the granting of the discharge.”)(citing Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654,
112 L.Ed.2d 755 (1991)(establishing preponderance of the evidence standard for proving
5
1. Revocation of discharge is governed by 11 U.S.C. § 727(d), which provides, in
relevant part:
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 the discharge[.]
11 U.S.C. § 727(d)(1).
2. 	The Court will construe the revocation of discharge provisions strictly against the
creditor and liberally in favor of the debtor.2
3. 	A creditor seeking to revoke a debtor’s discharge under 11 U.S.C. § 727(d)(1) must
file a complaint for revocation of discharge within one year after the debtor has been granted a
discharge. 11 U.S.C. § 727(e)(1).
4. 	AmBank timely filed its complaint seeking to deny Defendant’s discharge under 11
U.S.C. § 727(d)(1).
5. The creditor bears the burden of proving each element necessary to its claim for
revocation of a debtor’s discharge by a preponderance of the evidence.3
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dischargeability claims)).
4 See United States Trustee v. Eppers (In re Eppers), 311 B.R. 826, 831 (Bankr. D.N.M.
2004)(standard for revoking a debtor’s discharge under 11 U.S.C. § 727(d) requiring fraud in
fact “necessarily implicates the grounds for denial of a debtor’s discharge enumerated in §
727(a).”). See also, Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10 th
Cir. 1991)(stating that revocation of discharge requires that “the debtor must have committed a
fraud in fact which would have barred the discharge had the fraud been known” and clarifying
that it is generally “insufficient that a debtor’s fraud rendered a particular debt nondischargeable;
claimant must allege that the entire discharge would not have been granted but for debtor’s
fraud.”)(citations omitted).
5Quicken Loans, Inc. v. Splawn (In re Splawn), 376 B.R. 747, 760 (Bankr.D.N.M.
2007)(citing In re Reed, 293 B.R. 65, 69 (Bankr.D.Kan.)(citations omitted).
6See In re Chalik, 748 F.2d 616, 618 (11 th Cir. 1984)(stating that “[t]he subject matter of
a false oath is ‘material,’ and thus sufficient to bar discharge, if it bears a relationship to the
bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings,
or the existence and disposition of his property.”)(citations omitted)
7See In re Calder, 907 F.2d 953, 955 (10 th Cir. 1990)(citing 4 Collier on Bankruptcy, ¶
727.04[1] at 727-54 to 727-57 (15th ed. 1987)).
6
6. False oaths made in connection with a debtor’s bankruptcy proceeding which would
warrant a denial of discharge under 11 U.S.C. § 727(a)(4) are sufficient to establish the first
element under 11 U.S.C. § 727(d)(1) that a debtor obtained a discharge through fraud. 4 “False
oaths” within the meaning of 11 U.S.C. § 727(a)(4) include omissions and mis-statements
contained in a debtor’s schedules and statements.5 To deny a debtor’s discharge under 11
U.S.C. § 727(a)(4) the false statement must be material, meaning that it relates to the debtor’s
assets or financial condition6, and must be made wilfully with intent to defraud. 7
7. 	Defendant’s misstatement concerning the proceeds he received from the sale of the
Iron Horse Property constitutes a false oath within the meaning of 11 U.S.C. § 727(a)(4). His
2007 tax return accurately reflected the full amount of the proceeds he received from the sale of
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8Cf. In re Fehrs, 391 B.R. 53, 80 (D.Idaho 2008)(dismissing creditor’s complaint for
revocation of discharge despite proof that debtor’s false oaths would have otherwise warranted a
denial of discharge under § 727(a)(4) where creditor failed to satisfy the lack of knowledge
requirement under § 727(d)).
9See also, In re Landry, 350 B.R. at 56 (stating that the plaintiff “has the burden of
proving all the facts upon which the revocation is conditioned by the statute, including the
exercise of diligence in uncovering the facts.”)(citing In re Stein, 102 B.R. 363 (Bankr.S.D.N.Y.
1989)).
7
the Iron Horse Property, yet his SOFA only disclosed receipt of $525.00. The fact that he knew
that he was required to report the full amount of the proceeds on his tax return belies his
explanation that his partial disclosure on his SOFA was unintentional. 	But because AmBank
had reason to know of the Defendant’s false statements within the sixty-day period within which
it could have timely filed a complaint objecting to discharge, its effort to revoke the Defendant’s
discharge under 11 U.S.C. § 727(d), though timely filed within limits imposed by 11 U.S.C. §
727(e)(1), fails.8
8. “[A] party requesting revocation of discharge has the burden of proving its lack of
knowledge of the fraud before discharge, and a failure to carry this burden is fatal to the party’s
case.” 6 Collier on Bankruptcy ¶ 727.15[3] at 727-75 (Alan N. Resnick and Henry J. Sommer,
eds., 15th ed. rev. 2008)(citing Continental Builders v. McElmurry (In re McElmurry), 23 B.R.
533 (W.D.Mo. 1982)(remaining citations omitted)).9
9. “‘[K]nowledge in a § 727(d)(1) revocation action occurs when the party seeking
revocation first becomes aware of facts such that he is put on notice of a possible fraud.’” Neary
v. Darby (In re Darby), 376 B.R. 534, 542 (Bankr.E.D.Tex. 2007)(quoting Landry, 350 B.R. at
56). A creditor need not have actual knowledge of the fraud; it is enough to bar an action for
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10See Vereen, 219 B.R. at 696 (stating that, “[a]s a general rule, the trustee is entitled to
rely on the truthfulness and accuracy of the debtor’s schedules and is not required to assume that
the debtor is lying.”)(citations omitted).
8
revocation of a debtor’s discharge if the creditor is put on notice to inquire further in order to
timely file a complaint objecting to the debtor’s discharge. Silver, 367 B.R. at 817. 	To satisfy
the lack-of-knowledge requirement under 11 U.S.C. § 727(d)(1), a “plaintiff must show due
diligence in investigating and responding to possible fraudulent conduct once he or she is aware
of it or is in possession of facts such that a reasonable person in his or her position should have
been aware of a possible fraud.” Anderson v. Vereen (In re Vereen), 219 B.R. 691, 696
(Bankr.D.S.C. 1977).
10. 	AmBank had reason to know of Defendant’s fraud prior to the expiration of the
deadline for filing complaints objecting to the Defendant’s discharge and failed to exercise
reasonable diligence to investigate its claims. AmBank first learned of the sale of the Iron Horse
Property from Mr. Fleming in the spring of 2007 when he approached AmBank about purchasing
a trailer that Defendant and Mr. Burke had turned over to AmBank. Mr. Trujillo testified that
the Defendant and Mr. Burke had represented to AmBank that they did not receive any net
proceeds from the sale of the Iron Horse Property, yet the purchaser, Mr. Fleming, indicated to
AmBank that Mr. Burke and Defendant had received proceeds from the sale. 	AmBank could
have subpoenaed the closing documents at that time, but did not do so until the spring of 2008.
AmBank attended the Defendant’s meeting of creditors, but did not further investigate the
transaction involving the sale of the Iron Horse Property at that time. 	A trustee is entitled to
rely on the statements contained in a debtor’s statements and schedules. 10 AmBank, however,
was put on notice by Mr. Fleming prior to the filing of Defendant’s bankruptcy proceeding that
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Defendant and Mr. Burke had not been forthcoming about the proceeds from the sale of the Iron
Horse Property. The documents AmBank ultimately obtained from the title company, in fact,
established that Defendant received over $31,000.00 from the sale of the Iron Horse Property.
Under these circumstances, the Court concludes that AmBank failed to exercise reasonable
diligence in investigating its claim. Had it done so, it could have timely filed a complaint
objecting to the Defendant’s discharge. 	AmBank cannot now sustain a complaint to revoke the
Defendant’s discharge.
The Court has entered these findings and conclusions in accordance with Rule 7052,
Fed.R.Bankr.P. The Court will enter a separate judgment consistent with these findings and
conclusions.
________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: June 23, 2009
COPY TO:
William Perkins
Attorney for Plaintiff
PO Box 1289
Silver City, NM 88062-1289
R. Trey Arvizu, III
Attorney for Defendant
PO Box 1479
Las Cruces, NM 88004-1479
J:\OPINIONS\SuelflowMemorandum727(d).wpd
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