Knowledge of a debtor’s fraud before discharge precludes the revocation of discharge under Section 727(d)(1). However, knowledge before discharge that the debtor fraudulently took estate property does not bar revoking discharge under Section 727(d)(2), according to the Eleventh Circuit.
The debtors began in chapter 13, converted to chapter 11, and ended up in chapter 7. On three occasions before the debtors received their chapter 7 discharges, the U.S. Trustee was told allegations about the debtor’s misconduct with respect to estate property.
Less than one year after the debtors received their discharges, the U.S. Trustee moved to revoke their discharges. On motion for summary judgment, the bankruptcy court dismissed claims based on Section 727(d)(1), because the U.S. Trustee was aware of the alleged fraud before the entry of discharge.
After a bench trial, the bankruptcy court revoked the discharges, ruling that knowledge of fraud before the entry of discharge did not preclude the revocation of discharge under Section 727(d)(2).
The district court affirmed, and so did the Eleventh Circuit in an October 7 opinion by Circuit Judge Elizabeth L. Branch.
Section 727(d) provides four alternative grounds for revoking discharge. Subsections (d)(1) and (d)(2) were pertinent to the case at hand.
Subsection (d)(1) permits revocation if “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 such discharge.”
On its face, subsection (d)(2) does not require lack of knowledge before discharge. The subsection permits revocation if “the debtor acquired property that is property of the estate . . . and knowingly and fraudulently failed to report the acquisition of . . . such property . . . .”
According to Judge Branch, the debtors argued on appeal that the “Court should incorporate the lack-of-knowledge requirement of Section 727(d)(1) into Section 727(d)(2).”
To divine the answer, Judge Branch traced the history of Section 727(d).
Originally, Section 15 of the Bankruptcy Act of 1898 permitted the revocation of discharge if “knowledge of the fraud has come to the petitioners since the granting of the discharge . . . .”
In 1970, Section 15 was amended to read much like it does now. As Judge Branch said, the 1970 revision “did not include a lack-of-knowledge requirement” in the subsection dealing with receipt of estate property.
With the adoption of the Bankruptcy Code in 1978, Judge Branch explained that “Congress completely rewrote the statute to its current form” but maintained “the lack-of-knowledge requirement for Section 727(d)(1) only.”
For Judge Branch, the “statutory history is clear enough on its own” without resorting to legislative history. She went on: “Section 727(d)(1) contains a lack-of knowledge requirement, while Section 727(d)(2) does not.”
For the “nail in the coffin,” Judge Branch cited Keene Corp. v. U.S., 508 U.S. 200 (1993), where the Supreme Court said that inclusion of language in one section but omission in another generally leads to the presumption that the exclusion was intentional and purposeful.
Judge Branch therefore upheld revocation of the discharges under Section 727(d)(2), even though the U.S. Trustee was told about the underlying facts before the entry of discharge. “If there ever was a case where the fundamental principle explained in Keene should apply, it is this one,” she said.
Knowledge of a debtor’s fraud before discharge precludes the revocation of discharge under Section 727(d)(1). However, knowledge before discharge that the debtor fraudulently took estate property does not bar revoking discharge under Section 727(d)(2), according to the Eleventh Circuit.
The debtors began in chapter 13, converted to chapter 11, and ended up in chapter 7. On three occasions before the debtors received their chapter 7 discharges, the U.S. Trustee was told allegations about the debtor’s misconduct with respect to estate property.
Less than one year after the debtors received their discharges, the U.S. Trustee moved to revoke their discharges. On motion for summary judgment, the bankruptcy court dismissed claims based on Section 727(d)(1), because the U.S. Trustee was aware of the alleged fraud before the entry of discharge.
After a bench trial, the bankruptcy court revoked the discharges, ruling that knowledge of fraud before the entry of discharge did not preclude the revocation of discharge under Section 727(d)(2).
The district court affirmed, and so did the Eleventh Circuit in an October 7 opinion by Circuit Judge Elizabeth L. Branch.