In Re: Michael D. Schimek

Background

Michael D. Schimek filed for Chapter 7 bankruptcy protection on February 8, 2024. Gloria Allred, who held an unsecured $25,000 breach-of-contract claim against him, filed an adversary proceeding seeking to prevent his bankruptcy discharge under four provisions of the Bankruptcy Code: 11 U.S.C. §§ 727(a)(2)(A), 727(a)(3), 727(a)(4)(A), and 727(a)(5).

Schimek moved to dismiss the complaint for failure to state a claim. The Bankruptcy Court granted that motion and dismissed the complaint in its entirety. Allred appealed to the district court.

Schimek had reported that Lisa Weksler provided $2,553 per month for his personal expenses. The opinion states that he did not allocate any of that support to rent, utilities, or the support of the parties’ two minor children. He also did not include those payments in his reported current monthly income for the bankruptcy means test. The means test uses a broader income calculation that includes regular payments made by someone else for a debtor’s household expenses or the expenses of the debtor’s dependents.

District Court’s Review

The district court reviewed the Bankruptcy Court’s dismissal decision without deference. On a motion to dismiss, the question is whether the complaint alleges enough facts to make a legally plausible claim, accepting its factual allegations as true at that stage.

The district court agreed that Weksler’s income and assets were not part of Schimek’s bankruptcy estate merely because they supported him. The opinion explains, however, that the income calculation used for the bankruptcy means test is broader than the definition of the bankruptcy estate. It can include amounts paid by another person for the debtor’s household expenses or dependents even when the debtor has no legal or equitable ownership interest in that person’s income or assets.

Claims That Remain Dismissed

The district court affirmed dismissal of Allred’s first cause of action under Section 727(a)(2)(A). That provision concerns transferring, removing, destroying, or concealing the debtor’s property with intent to hinder, delay, or defraud a creditor. The court concluded that the complaint did not allege facts showing that Schimek concealed or transferred his property before filing for bankruptcy. It also agreed that Weksler’s income and assets did not need to be disclosed as part of Schimek’s bankruptcy estate.

The court also affirmed dismissal of the second cause of action under Section 727(a)(3). That provision concerns a debtor’s failure to preserve financial records from which the debtor’s financial condition or business transactions could be determined. The court found that the complaint did not allege facts showing that Schimek falsified or failed to maintain financial records.

The court affirmed dismissal of the fourth cause of action under Section 727(a)(5). That provision concerns a debtor’s failure to satisfactorily explain a loss or deficiency of assets. The court agreed that the complaint did not allege a loss or deficiency of assets and an inadequate explanation for that loss.

Third Cause of Action

The district court vacated dismissal of Allred’s third cause of action under Section 727(a)(4)(A). That provision can prevent discharge when a debtor knowingly and fraudulently makes a false oath or account in connection with the bankruptcy case.

To state this claim, Allred had to allege that Schimek made a statement under oath, that it was false, that he knew it was false, that he intended to deceive, and that it was material to the bankruptcy case. The district court held that the complaint adequately alleged each element at the pleading stage.

The court concluded that the complaint plausibly alleged that Schimek’s current monthly income was understated. It identified two categories of support that could count toward his means-test income: payments for household expenses attributable to Schimek’s housing, including rent and utilities, and payments for the support of his two children. The court reasoned that the children were Schimek’s dependents under New York law because both biological parents were legally responsible for their support, even though Schimek was not then making financial payments for them.

The court also held that the complaint adequately alleged fraudulent intent. It noted that intent is generally a factual question and ordinarily cannot be resolved on a motion to dismiss. The court concluded that the alleged underreporting, together with the circumstances described in the complaint, was sufficient at this stage to support an inference that Schimek knowingly and fraudulently understated his income.

Finally, the court found the alleged statements material because correcting the income disclosures could affect whether Schimek was presumed unable to proceed under Chapter 7’s means test. The court emphasized that this ruling only allowed the claim to proceed; it did not determine that Schimek actually made false statements or that he ultimately would be denied a discharge.

Disposition

The district court AFFIRMED IN PART and VACATED IN PART the Bankruptcy Court’s order. The third cause of action was not dismissed, and the case was REMANDED to the Bankruptcy Court for further proceedings consistent with the opinion. The court stated that Allred still had to prove, among other things, that Schimek’s properly calculated annualized income exceeded the applicable median and that he acted with fraudulent intent.