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Andrew H. Wilson, Esq., SBN 063209
WILSON, RYAN & CAMPILONGO
115 Sansome Street
Fourth Floor
San Francisco, CA 94104
(415) 391-3900

Laurie J. Bartilson, Esq., SBN 139220
MOXON & BARTILSON
6255 Sunset Blvd., Suite 2000
Hollywood, CA 90028
(213) 960-1936

Attorneys for Creditor
CHURCH OF SCIENTOLOGY INTERNATIONAL

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re

GERALD ARMSTRONG,

Debtor


CHURCH OF SCIENTOLOGY
INTERNATIONAL, a California non-
profit religious corporation,

Plaintiff,

v.

GERALD ARMSTRONG,

Defendant.


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CASE NO. 95-10911 aj

Chapter 7

Adv. No. [stamp] 95 1164

COMPLAINT TO DETERMINE
DISCHARGEABILITY AND
IN OBJECTION TO
DISCHARGE

[11 U.S.C. §§
727(a)(4)(A);
727(a)(5); 523(a)(2);
and 523(a)(6).]

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Church of Scientology International ("CSI"), plaintiff, and

creditor of the above-named debtor, Gerald Armstrong

("Armstrong") in a sum in excess of $1,000,000 alleges:

INTRODUCTION

1. Debtor Armstrong has engaged in a pattern of fraud and

deceit that mandates dismissal of his bankruptcy petition without

discharge, or, alternatively, that his debt to plaintiff be

deemed nondischargeable. First, he has lied to this Court, the

   
   

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trustee and his creditors by failing to include, as part of his

Schedule B, his ownership in the Gerald Armstrong Corporation.

In 1993, Armstrong testified that the assets of the Gerald

Armstrong Corporation were worth $1 billion. In 1994, Armstrong

admitted under oath that he owned 80% of the shares of the stock

in the corporation, and was its president and sole employee.

Second, while testifying at a meeting of creditors, Armstrong

asserted that the Gerald Armstrong Corporation no longer

possessed any assets having any commercial value. Armstrong has

failed to satisfactorily explain how he disposed of not only the

$1 billion in assets claimed by the Gerald Armstrong Corporation,

but also $518,000 of the $800,000 which he received as proceeds

of a legal settlement, and at least $15,000 which he received in

large increments in 1992 and 1993. These actions render

Armstrong ineligible for discharge pursuant to 11 U.S.C. §§

727(a)(4)(A) and (5). Third, Armstrong has also admitted under

oath that he entered into an agreement with CSI in 1986, which he

intended to breach, and which he has in fact repeatedly and

maliciously breached, resulting in the debt to CSI which he now

seeks to discharge. These actions render Armstrong's debt to CSI

nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2) and (6).

JURISDICTION

2. This is an adversary proceeding in the debtor's Case

No. 95-10911 aj under Chapter 7 of Title 11 of the United States

Bankruptcy Code, now pending in this Court. This Court has

jurisdiction of this adversary proceeding pursuant to 11 U.S.C.

§§ 727, 523 and 365. This is a core proceeding under 28 U.S.C.

§§ 157(b)(2)(I) and (J).

 
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3. Defendant Armstrong is not eligible for discharge as a

debtor in his bankruptcy action pursuant to 11 U.S.C. §§

727(a)(4)(A) and (5). Armstrong is also indebted to plaintiff

creditor as fully detailed below, and the debt is not

dischargeable in bankruptcy by virtue of the provisions of 11

U.S.C. §§ 523(a)(2) and (6).

PARTIES

4. Plaintiff Church of Scientology International ("CSI")

is, and was at all times relevant herein, a California non-profit

religious corporation having its principal office in the City of

Los Angeles, County of Los Angeles, State of California.

5. Defendant Gerald Armstrong is an individual who at all

times relevant herein has been a resident of the City of San

Anselmo, County of Marin, State of California.

GENERAL AVERMENTS

6. Armstrong's debt to CSI arises in the context of an

ongoing state court action for breach of contract, Church of

Scientology International v. Gerald Armstrong, Marin County

Superior Court, Case No. 157 680 ("the State Court Action"). CSI

obtained summary adjudication of two of its claims in that action

on January 27, 1995, resulting in a judgment against Armstrong of

$100,000. Eleven claims against Armstrong for breach of contract

remain to be adjudicated, with additional liability claimed of

$1,750,000 plus contractual attorneys' fees and costs. In

addition, the Church is seeking a permanent injunction

prohibiting Armstrong from further breaching certain terms of the

contract.

7. The contract which forms the basis of the State Court

   
   

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Action was entered into by Armstrong and CSI in December, 1986

("the Agreement"). A true and correct copy of the Agreement is

attached hereto as Exhibit A. It settled outstanding litigation

between CSI and Armstrong according to certain terms and

conditions. Armstrong has admitted that the settlement proceeds

which he received were $800,000, and that he received $518,000

after paying attorneys' fees and expenses.

8. Pursuant to the Agreement, Armstrong, who had been

actively pursuing a career as an anti-Scientology "expert" and

paralegal, agreed, inter alia, that he would not disclose his

knowledge of or experiences in Scientology to anyone, and would

not voluntarily aid other litigants or would-be litigants in

anti-Scientology litigation. (Agreement, ¶¶ 7(D), 7(G), 7(H) and

10). The Agreement also provided that Armstrong would pay CSI

$50,000 in liquidated damages for every prohibited disclosure.

9. In February, 1992, CSI brought the State Court Action

against Armstrong, alleging that he had repeatedly breached the

provisions of the Agreement delineated in Paragraph 8, supra.

CSI sought and obtained a preliminary injunction enforcing

portions of the Agreement.

10. Armstrong claims that in August, 1990, he was directed

by God to give away his material assets. He transferred real

property valued at approximately $530,000 and at least $35,000 in

cash to his friend and lawyer, Michael Walton. He also claims

that he forgave an outstanding debt to Walton of $30,000.

Armstrong further claims that he forgave other debts to friends

and family members totalling approximately $133,000 and gave away

additional cash totalling $1,500. Armstrong has asserted under

 
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oath that he received no valuable consideration for any of these

transfers. Although he was asked to do so in the State Court

Action, Armstrong has not produced any records of any of these

transactions, other than a few documents concerning the transfer

of the real property to Walton.

11. In or about August, 1987, Armstrong incorporated a

California corporation which he called the Gerald Armstrong

Corporation ("GAC"). Armstrong was the only incorporator,

officer, and director of the corporation.

12. Armstrong testified in the State Court Action that, on

incorporation, GAC issued a single share of stock to a single

shareholder: Gerald Armstrong. Armstrong also testified that he

transferred significant personal assets to GAC in 1988, including

personal and intellectual property. Armstrong has testified that

in August, 1990, the value of GAC's assets was $1,000,000. He

based this figure on an appraisal of some of Armstrong's works

owned by GAC, which he testified were independently valued at

$900,000. In addition, in August, 1990, Armstrong listed the

following personal property as further assets of GAC: office

equipment, office furniture, four filing cabinets and contents,

photocopier, drafting table, drafting machine, MAC and Image

Writer II, VCR, opaque projector, projector table, Morantz

portable twin head recorder, microphone, 2 sets of headphones, 3

chests of drawers, futon frame, cover, linen, futon, pillows,

Chines rug and 2 rockers.

13. Armstrong claimed, under oath in the State Court

action, that GAC "possesses a number of Gerald Armstrong's

artistic and literary works, possesses rights to a number of his

 
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inventions and rights to certain formulas, and is in the business

of bringing peace and exploiting its assets for commercial and

peaceful purposes." He also testified that GAC owns "equipment

and products." The business of GAC, according to Armstrong, is

to care for, promote and exploit "the works of Gerald Armstrong."

14. Armstrong testified in the State Court Action that in

August, 1990, at the same time that he made the transfers

described in paragraph 10, supra, he transferred his ownership in

GAC to Michael Walton, Michael Douglas, Lorien Phippeny and Nancy

Rhodes. According to Armstrong, his single share of stock was

divided into 100 shares, and each of the four received 25 shares.

Walton, Douglas, Phippeny and Rhodes paid Armstrong nothing for

the shares of stock.

15. Shortly after making the transfers referred to in

paragraphs 10 and 14, supra, Armstrong initiated successive

breaches of the Agreement, which resulted in the filing of the

State Court Action. When Armstrong disclosed the transfers in

the State Court Action, CSI brought a fraudulent conveyance

action against Armstrong and Michael Walton. That action was

consolidated into the State Court Action in September, 1994.

16. Armstrong admitted in deposition in the State Court

Action that he reacquired the shares of stock in GAC which he had

distributed to Walton, Douglas, Phippeny and Rhodes. In October,

1992, Armstrong testified that GAC had 9 shareholders. He owned

80 shares. Single shares were owned by Armstrong's friends and

relatives, Michael Douglas, Michael Walton, Andrew Armstrong,

Thomas McPherson, Joseph Yanny, Michael Dick, Trevor and Colin

Dick, and Anthony Armstrong. In 1993, GAC issued a single share

 
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to Armstrong's brother, Andrew Armstrong. In 1994, GAC issued a

single share to Armstrong's brother, Anthony Armstrong.

Armstrong testified again in 1994 that he owned 80% of GAC's

stock.

17. Armstrong has testified, in deposition in the State

Court Action, that he is currently the President, and only

officer, of GAC, one of its two directors, and its only employee.

In 1993, he testified that GAC has a single bank account, and

that he was the sole signatory on that account.

18. In March, 1993, Armstrong testified under oath that he

estimated the value of the assets owned by GAC to be

$1,000,000,000 to $1,500,000,000.

19. In May, 1995, at an early meeting of creditors,

Armstrong testified under oath that GAC no longer possessed any

assets of commercial value.

FIRST CLAIM FOR RELIEF

(For a Determination That Armstrong's Debts Are Not

Dischargeable Pursuant to 11 U.S.C. §727(a)(4)(A))

20. Plaintiff incorporates by reference the allegations

contained in paragraphs 1 through 19 above as though set forth

fully herein.

21. On April 18, 1995, Armstrong filed a Voluntary Petition

for Bankruptcy with this court. He swore under penalty of

perjury that the information which he provided in the Petition

was true and correct. On Schedule B of his Petition, Line 12,

Armstrong stated that he owned no stock or interests in

incorporated or unincorporated businesses. CSI is informed and

believes, and therefore alleges that on April 18, 1995, Armstrong

 

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owned and still owns at least 80% of the stock of the Gerald

Armstrong Corporation. 22. CSI is informed and believes and

therefore alleges that GAC is, and at all times relevant herein

was, operated by and for the benefit of Gerald Armstrong as his

alter ego. The alleged corporate form of GAC should,

accordingly, be disregarded, and GAC's assets considered the

assets of Armstrong.

23. Armstrong's failure to include his ownership of GAC in

Schedule B is a deliberate omission of a material matter

constituting a false oath or account in connection with the case.

24. Armstrong failed to disclose his ownership of GAC and

its assets with the intent to mislead creditors and the trustee

as to the debtor's true financial condition, or with reckless

disregard for the truth with regard to a matter material to the

case.

SECOND CLAIM FOR RELIEF

(For a Determination That Armstrong's Debts Are Not

Dischargeable Pursuant to 11 U.S.C. §727(a)(5))

25. Plaintiff incorporates by reference the allegations

contained in paragraphs 1,through 24 above as though set forth

fully herein.

26. In 1986, Armstrong received a substantial sum of money

from CSI in settlement of litigation. Armstrong has testified

under oath that he invested the money in real property and GAC,

and that GAC, set up solely to exploit Armstrong and his literary

and artistic ventures, prospered. He has claimed, under oath in

the State Court Action, that GAC's assets were valued, in 1990,

at $1 million, and, in 1993, he valued them at $1 billion to $1.5

 

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billion.

27. In 1993, Armstrong received 3 large payments from

sources unknown to plaintiff totalling $15,000.

28. Armstrong's Bankruptcy Petition claims assets of

$6,485, and liabilities of $1,005,367.52. At the meeting of

creditors, on May 17, 1995, Armstrong claimed under oath that

GAC possessed no assets of any commercial value.

29. Armstrong has offered no satisfactory explanation for

his claimed losses of $518,000 since 1986, $1 million since 1990,

$15,000 since 1993, or $1 billion to $1.5 billion since 1994.

THIRD CLAIM FOR RELIEF

(For a Determination That Armstrong's Debt To CSI Is Not

Dischargeable Pursuant to 11 U.S.C. §523(a)(2))

30. Plaintiff incorporates by reference the allegations

contained in paragraphs l through 19 above as though set forth

fully herein.

31. CSI entered into the Agreement with Armstrong in 1986

in good faith, and performed its part of the Agreement in full.

32. Armstrong falsely represented to CSI when he entered

into the Agreement that he understood and agreed to every

provision of the Agreement. He and his attorney met with a CSI

representative and CSI's attorney, and Armstrong, laughing and

joking, initialed each page of the Agreement, and signed it

happily.

33. Armstrong has stated repeatedly under oath in the State

Court Action that, at the time that he entered into the Agreement

with CSI, he did not believe that the nondisclosure provisions of

the Agreement were enforceable and binding on him, and that he

 

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did not intend to abide by these portions of the Agreement if

they proved inconvenient to him.

34. Armstrong has stated repeatedly under oath that he was

"heartsick" concerning the nondisclosure provisions in the

Agreement, and that he merely "put on a happy face" for the

signing of the Agreement in order to persuade CSI to enter into

the Agreement and pay him his settlement.

35. CSI reasonably relied on Armstrong's representations

that was entering into the Agreement in good faith, and that he

(a) had read the entire Agreement, (b) agreed with all of its

provisions, (c) intended to abide by it in its entirety and (d)

entered into it voluntarily and on the advice of independent

counsel.

36. Had CSI known that Armstrong did not intend to abide by

the nondisclosure provisions contained in the Agreement, CSI

would not have entered into the Agreement with Armstrong, and

would not have paid him $800,000.

37. Armstrong's conduct at the time that he entered into

the Agreement with CSI constitutes false pretenses and/or false

representations, which Armstrong knew to be false and/or which

Armstrong made with reckless disregard as to their truth or

falsity.

FOURTH CLAIM FOR RELIEF

(For a Determination That Armstrong's Debt To CSI Is Not

Dischargeable Pursuant to 11 U.S.C. §523(a)(6))

38. Plaintiff incorporates by reference the allegations

contained in paragraphs 1 through 37 above as though set forth

fully herein.

 

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39. After Armstrong transferred and/or hid his assets in

1990, he set out on a course of conduct intended deliberately to

damage and harass CSI. For years, and despite ongoing

litigation, Armstrong has deliberately and repeatedly violated

his Agreement not to discuss his claimed Scientology knowledge

and experiences, and he has done so with the intent and purpose

of impeding, injuring and destroying CSI and the Scientology

faith. Since August, 1990, he has spoken negatively to the media

about Scientology at least 21 times; made an anti-Scientology

videotape; prepared and offered for sale a treatment for an anti-

Scientology screenplay; gone to work for three different anti-

Scientology attorneys, etc., all as set forth in plaintiff's

Second Amended Complaint in the State Court Action.

40. Armstrong's anti-Scientology actions are both

deliberate and malicious. When they began, Armstrong asked CSI to

pay him additional funds to keep silent. Armstrong's anti-

Scientology campaign escalated when CSI refused. They did not

halt even when the State Court issued a summary adjudication

order against Armstrong for $100,000.

WHEREFORE, plaintiff prays for the entry of judgment against

defendant as follows:

1. That the Court determine that the debts of defendant be

ruled nondischargeable as a result of defendant's knowingly and

fraudulently making a false oath in connection with a bankruptcy

case by virtue of the provisions of 11 U.S.C. § 727(a)(4)(A); and

2. That the Court determine that the debts of defendant be

ruled nondischargeable as a result of defendant's failure to

satisfactorily explain his loss of and/or deficiency of assets by

 

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virtue of the provisions of 11 U.S.C. § 727(a)(5); or in the

alternative

3. That the Court determine that the debt owed to

plaintiff by defendant as a result of defendant's false pretenses

and/or false representations, upon which plaintiff relied to its

detriment, and as a result of defendant's wilful and malicious

injury to plaintiff, is nondischargeable by virtue of the

provisions of 1l U.S.C. §§ 523(a)(2) and (a)(6);

4. For an award of attorney's fees as allowable by law in

an amount the Court determines to be reasonable;

5. For costs of suit herein incurred; and

6. For such other and further relief as this Court deems

just and proper.

DATED: July 12, 1995

Signature Laurie Bartilson

 

 

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