In Re: W. Wesley Drummon

Background

W. Wesley Drummon filed for Chapter 7 bankruptcy protection. The City of Atlantic City alleged that Drummon had defrauded it in connection with agreements involving Zemurray Street Capital LLC and a $3 million lending fund. The City had deposited the money into an escrow account, and Drummon, Zemurray’s sole authorized signatory, later transferred the money to Tennessee Business and Industrial Development Company to acquire that company. The lending program did not provide loans to the City’s residents, and the City sought to prevent discharge of the debt it alleged Drummon owed.

In the bankruptcy adversary proceeding, the City asserted claims under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6) seeking to keep alleged debts from being discharged. It also asserted claims under §§ 727(a)(4)(A) and 727(a)(4)(B) seeking to deny Drummon a bankruptcy discharge. Those latter claims concerned Drummon’s original bankruptcy schedules, which listed his interest in Zemurray but did not disclose that he held that interest through Taipan Holdings LLC. Drummon later amended the schedules to disclose Taipan and valued the interest at zero.

The Bankruptcy Court granted Drummon summary judgment on Counts One and Three, which sought to prevent discharge based on fraud and willful and malicious injury. It denied the City’s motion for an adverse inference based on Drummon’s invocation of the Fifth Amendment. The Bankruptcy Court later granted Drummon judgment on the pleadings on Counts Four and Five, concerning alleged false statements and false claims in the bankruptcy schedules. The City appealed. The district court noted that the City’s appellate briefs did not substantively address Count Two and therefore reviewed Counts One and Three from the first Bankruptcy Court order.

Rulings on Counts One and Three

For Count One, the City argued that Drummon’s conduct qualified as “actual fraud” under section 523(a)(2)(A), relying on the Supreme Court’s decision in Husky International Electronics, Inc. v. Ritz. The district court explained that Husky recognized fraudulent conveyances as a possible form of actual fraud, but held that the City was extending that decision too far. The transfers used to acquire TN BIDCO were authorized by the MOU and escrow agreement. Although the agreements were poorly drafted and the arrangement produced an unfavorable result for the City, the record did not establish fraud. The court therefore held that the Bankruptcy Court properly granted Drummon summary judgment on Count One.

For Count Three, the City argued that the same alleged fraudulent scheme established a willful and malicious injury under section 523(a)(6). The district court explained that this provision requires a deliberate or intentional injury, malicious conduct, and resulting injury to the creditor or its property. The City relied on the possible overlap between sections 523(a)(2)(A) and 523(a)(6), but offered no additional facts showing that Drummon acted willfully and maliciously toward the City. The court therefore held that summary judgment for Drummon on Count Three was proper.

Rulings on Counts Four and Five

Count Four invoked section 727(a)(4)(A), which can deny a discharge for a knowingly and fraudulently made material false statement under oath in a bankruptcy case. The district court agreed that the City adequately alleged that Drummon’s omission of Taipan from his original schedules was a false, knowing, and material statement. But the City did not plead facts supporting the required inference that Drummon made the omission with fraudulent intent. Merely asserting that the omission was fraudulent was a legal conclusion, not a factual allegation satisfying Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity. The court therefore upheld judgment on the pleadings for Drummon on Count Four.

Count Five invoked section 727(a)(4)(B), which concerns knowingly and fraudulently presenting or using a false claim in a bankruptcy case. The district court held that the City’s allegation that Drummon failed to disclose Taipan was not a “false claim” in this statutory sense. The City did not allege that Drummon listed inflated debts, fictitious debts, or a false proof of claim. The court therefore upheld judgment on the pleadings for Drummon on Count Five.

Adverse Inference

The City also sought an adverse inference, meaning an inference that Drummon’s unanswered questions would have produced evidence unfavorable to him, based on his invocation of the Fifth Amendment during civil proceedings. The district court recognized that such an inference may be available in a civil case, but held that the request must identify the particular questions and facts supporting the requested inference. The City instead pointed generally to Drummon’s entire deposition and did not identify the specific unanswered questions. The City also failed to provide independent evidence corroborating the alleged wrongdoing. The district court therefore held that the Bankruptcy Court properly denied the adverse-inference motion.

Disposition

Judge Valerie Caproni affirmed the Bankruptcy Court’s orders and denied the City’s appeal. The court directed the Clerk of Court to close the case.