Advice of Counsel Defense Negates Fraudulent Intent in False Oath Ca...

A North Carolina Bankruptcy Court recently upheld the advice of counsel defense to allegations that a debtor knowingly and fraudulently made a false oath in bankruptcy, confirming once again that debtors who reasonably act, after full disclosure to their attorneys, on the advice of counsel do not intend to deceive or cheat creditors.  The case, DFWMM Holdings, LLC v. Richmond (In re Richmond), Case No. 17-11413; Adv Proc. No. 18-02010 (Bankr. M.D. N.C. April 24, 2020) (opinion here), was on remand from the U.S. District Court for the Middle District of North Carolina, No. 1:19CV667 (M.D. N.C. March 9, 2020) (opinion here).   The advice of counsel defense is interpreted consistently across civil proceedings to deny a debtor's discharge (11 U.S.C. 727(a)) and criminal cases construing the parallel bankruptcy crimes provisions (18 U.S.C. 152).

A prepetition judgment creditor commenced an adversary proceeding to deny the debtor's discharge on the ground that he knowingly and fraudulently made a false oath or account in his chapter 7 case.  Following trial, the bankruptcy court found that the debtor made three false statements in the schedules or statement of financial affairs: (1) his debtors were primarily consumer debts; (2) his gross income from operation of a business was $0; and (3) failure to list his interest in a Harley Davidson motorcycle on Schedule A/B.  The secured debt owed to the financial company and the motorcycle itself was identified as collateral on Schedule D.  The court found that counsel for the debtor was fully informed of the facts in each case and the debtor reasonably relied on counsel's advice in each matter when completing the schedules.  The debtor's reasonable reliance on the advice of counsel therefore negated any inference of fraudulent intent - an essential element of the cause of action.