Robinson v. Worley

Summarized by Brett Weiss , The Weiss Law Group, LLC
8 years 12 months ago

Case Type:

Consumer

Case Status:

Affirmed

Citation:

15-2346 (4th Circuit, Feb 28,2017) Published

Tag(s):

Ruling:

In his Chapter 7, Worley, a sophisticated investor, used a low value for his interest in a real estate venture. The bankruptcy court found that he intentionally lowballed the value and denied his discharge under the false oath provision of § 727(a)(4). The district court agreed. The Fourth Circuit affirmed, rejecting an advice of counsel defense and arguments that the valuation of the debtor’s illiquid minority interest in the venture was proper, and finding that the bankruptcy court reasonably inferred fraudulent intent from Worley’s background, course of conduct, and absence of credibility.

Procedural context:

This appeal was from a ruling of the District Court affirming the Bankruptcy Court’s denial of the debtor’s discharge.

Facts:

Worley, the Debtor, was a very sophisticated investor. He had a bachelor’s degree in finance, an MBA, and worked as a financial advisor. He personally invested in several real estate ventures. When he filed for Chapter 7, he valued a minority interest in one of these ventures at $2,500. He testified that he was unsure how to value his interest, but sought the advice of counsel and applied the capitalization rate method, taking the largest annual distribution he received ($483, rounded up to $500) and multiplied by a capitalization rate of five. Worley never consulted with the majority owners of the venture to determine value. Creditors filed an Adversary Proceeding, alleging that Worley intentionally misrepresented the value of his interest in the venture by more than 95%, and sought a denial of discharge pursuant to the false oath provision of 11 U.S.C. § 727(a)(4). At trial, there was testimony that the illiquid nature of the venture’s land investments complicated the valuation analysis, but that Woolsey’s interest was worth more than $2,500, perhaps as much as ten times that. Unfortunately for the debtor, however, one day before trial, the Trustee discovered that the a portion of the venture’s land holdings had been sold, and that it would receive a $100,000 distribution. After trial, the bankruptcy court denied Worley’s discharge under § 727(a)(4), finding that Worley made a “false oath or account” by understating the value of the venture on his schedule of assets. While it acknowledged that the venture’s illiquid interest might be worth less than the appraised value of the land, the court concluded that—in light of his capital contribution and recent $100,000 distribution—Worley’s $2,500 estimate was “so low as to be unrealistic.” Second, the court found that Worley acted with the requisite fraudulent intent because the use of the capitalization rate method was “inconsistent” with his knowledge and “extensive background in finance.” The district court affirmed the denial of discharge. After rejecting Worley’s argument that a debtor’s undervaluation of a single asset was insufficient to warrant a denial, it then rejected the advice of counsel defense, stating that the bankruptcy court could plausibly have concluded that any such reliance was unreasonable given Worley’s “extensive investment history” and knowledge of the capitalization rate method.

Judge(s):

J. Harvie Wilkinson, III, Paul V. Niemeyer, and Barbara Milano Keenan

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