Depue v. Cox (In re Cox), 462 B.R. 746

Plaintiffs file adversary proceedings against Cox, Richardson, and Heather seeking non-dischargeability under 523(a)(2)(A), (a)(2)(B), (a)(4), (a)(6) and denial of discharge under 727(a).
Stock Redemption Agreement dated December 28, 2006 between Plaintiffs, Cox, Richardson, and Design Air provided for $275,000 payments to Plaintiffs and security interests, with escrowed stock and guarantees.
Post-agreement, Plaintiffs resign; Cox and Richardson operate Design Air and guaranty Design Air’s obligations; they pursue real estate investments including land with U.S. Bank line of credit and form H&M to hold property.
Difficulties arise with land purchase, financing, and accounting; Defendants’ actions lead to a forfeiture notice in September 2008 and eventual resignation in December 2008.
Debtors file Chapter 7 in September 2009; U.S. Bank sues; state court later enters a $350,000 judgment against Plaintiffs and K&B Properties in January 2011.
Court jointly tries the two adversaries; The court ultimately dismisses all 523 and 727 claims against Cox and Richardson and Heather, and dismisses the counterclaims for lack of standing.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Plaintiffs have standing to assert §523(a)(2) via subrogation	Depues claim subrogation rights to U.S. Bank’s rights.	Subrogation requires a paid debt and proper privity; no payment shown.	Subrogation rights not established; no §523(a)(2) claim against Debtors.
Whether Heather Richardson can be liable under §523(a)(2)	Heather engaged in fraudulent conduct through spouse’s business acts.	No evidence of Heather’s activity or agency; marital status insufficient.	Heather dismissed from §523(a)(2) claims.
Whether Cox and Richardson have non-dischargeable §523(a)(2) claims independent of subrogation	Various representations and misuses of corporate assets support nondischargeability.	Post-agreement business decisions were business judgments, not misrepresentations.	Plaintiffs failed to prove elements of §523(a)(2)(A) or (B); claims dismissed.
Whether §727(a)(3) denial of discharge is warranted	Debtors failed to maintain adequate records and disclosure.	Records existed and were sufficient; any gaps were justified or not material.	§727(a)(3) claims dismissed for lack of proven failure to maintain adequate records.
Whether §727(a)(4) false oath applies to Debtors	Omissions and errors in schedules/SOFAs indicate false oath with intent to deceive.	Omissions were not material or fraudulent; no clear intent to deceive proven.	§727(a)(4) claim dismissed.

Harmon v. Kobrin (In re Harmon), 250 F.3d 1240 (9th Cir. 2001) (sets forth the five elements for §523(a)(2)(A) claims)
In re Slyman, 234 F.3d 1081 (9th Cir. 2000) (defines elements and reliance for §523(a)(2)(A))
In re Khalil, 379 B.R. 163 (9th Cir. BAP 2007) (fraud elements and false oath standards for §727(a)(4))
In re Wills, 243 B.R. 58 (9th Cir. BAP 1999) (false oaths standard for §727(a)(4))
Roberts v. Erhard (In re Roberts), 331 B.R. 876 (9th Cir. BAP 2005) (fraudulent intent standard for §727(a)(4))
City & County of San Francisco v. PG&E Corp., 433 F.3d 1115 (9th Cir. 2006) (estate/trust standing principles in related bankruptcy actions)