Complaint To Determine Dischargeability And In Objection To Discharge

Bankruptcy

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).]

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 Sig

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