Opinion ID: 468198
Heading Depth: 2
Heading Rank: 3

Heading: Disclosure of Transfers and Recovery of Property Transferred

Text: 20 Finally, Adeeb contends that a debtor who is able to recover improperly transferred property prior to the filing of a bankruptcy petition should not be denied a discharge of his debts. In other words, Adeeb urges us to read section 727(a)(2)(A) so as to require that the property transferred with the requisite intent within one year of the filing of the bankruptcy petition must also remain transferred on the filing date. As far as we have been able to determine, this is a question of first impression under the new Bankruptcy Code. 2 21 We are concerned in this case with section 727(a)(2)(A)'s prohibition of transfers within one year of bankruptcy. The resolution of Adeeb's contention turns on the meaning of transferred as it is used in section 727(a)(2)(A). The bankruptcy act's general definition of transfer, found in 11 U.S.C. Sec. 101(48) (1982), is of little help in resolving the issue before us. 3 The legislative history of section 727(a)(2)(A) also sheds no light on the proper interpretation of transferred in this context. If Congress has not defined a term in a manner that is helpful in a given context and the legislative history does not aid in the proper interpretation of the term, our best approach is to construe the statutory language in accordance with its purpose. Burroughs v. Operating Engineers Local Union No. 3, 686 F.2d 723, 727 (9th Cir.1982) (citing Chapman v. Houston Welfare Rights Organization, 441 U.S. 600, 608, 99 S.Ct. 1905, 1911, 60 L.Ed.2d 508 (1979)). 22 In our view, reading transferred as used in section 727(a)(2)(A) to mean transferred and remained transferred is most consistent with the legislative purpose of the section. The language of section 727(a)(2)(A) demonstrates that Congress intended to deny discharge to debtors who take actions designed to keep their assets from their creditors either by hiding the assets until after they obtain their discharge in bankruptcy or by destroying them. See D. Cowans, Cowans Bankruptcy Law and Practice Sec. 5.20 (interim ed. 1983). The only type of transfer that has the effect of keeping assets from creditors is a transfer in which the property remains transferred at the time the bankruptcy petition is filed. 23 Our conclusion is supported by the purpose of the Bankruptcy Code. As we have said: 24 The bankruptcy statutes have a two-fold purpose--first, to secure the equitable distribution of the bankrupt's estate among his creditors, [citations omitted] and, second,  'to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh from the obligations and responsibilities consequent upon business misfortune.'  Matter of Esgro, Inc., 645 F.2d 794, 798 (9th Cir.1981) (quoting Williams v. United States Fidelity & Guarantee Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915)). 25 In re Devers, 759 F.2d 751, 754-55 (9th Cir.1985). Both of these purposes are served by reading transferred in section 727(a)(2)(A) to mean transferred and remained transferred. First, this reading encourages honest debtors to recover property they have transferred during the year preceding bankruptcy. Encouraging debtors to recover improperly transferred property facilitates the equitable distribution of assets among creditors by ensuring that the trustee has possession of all of the debtor's assets. Second, this reading permits the honest debtor to undo his mistakes and receive his discharge. 26 We are also persuaded by practical considerations that a discharge should not be denied in the present situation. It is not uncommon for an uncounseled or poorly counseled debtor faced with mounting debts and pressure from his creditors to attempt to protect his property by transferring it to others. Upon later reflection or upon obtaining advice from experienced bankruptcy counsel, the debtor may realize that his original transfer of the property was a mistake. If the debtor is informed that his mistake bars him from a discharge in bankruptcy, he will have no incentive to attempt to recover the property or to reveal its existence to his creditors. Rather, he will have a strong incentive to continue to hide his assets. 27 If possible, these results should be avoided. They are avoided by reading transferred in section 727(a)(2)(A) to mean that the property transferred within one year of bankruptcy must remain transferred at the time the bankruptcy petition is filed. Such a reading encourages debtors to reveal transfers and to attempt to recover the property previously transferred. It also gives bankruptcy attorneys who are retained after the debtor has made some mistakes an incentive to see that those mistakes are corrected. 28 We conclude that a debtor who transfers property within one year of bankruptcy with the intent penalized by section 727(a)(2)(A) may not be denied discharge of his debts if he reveals the transfers to his creditors, recovers substantially all of the property before he files his bankruptcy petition, and is otherwise qualified for a discharge. 29 Our conclusion is consistent with cases interpreting concealed as used in section 727(a)(2)(A). Those cases state that a debtor who fully discloses his property transactions at the first meeting of creditors is not fraudulently concealing property from his creditors. In re Waddle, 29 B.R. 100, 103 (Bankr.W.D.Ky.1983); see 4 Collier on Bankruptcy p 727.02[b] (15th ed. 1985). Although a concealment may be undone simply by disclosing the existence of the property, disclosure does not undo a transfer. However, a transfer may be undone by recovering the property. 30 As we have indicated, Adeeb may not have recovered all of the transferred property prior to the time his creditors filed the involuntary bankruptcy petition in this case. Therefore, he may not meet the requirement we have articulated above of recovering substantially all the transferred property prior to the filing of the bankruptcy petition. However, our discussion assumes the filing of a voluntary petition by the debtor. In that situation, the debtor controls the time of filing the petition. He is therefore able to time the filing to allow recovery of substantially all of his property. 31 In this case, Adeeb was not allowed to time the filing of his petition. 4 Rather, an involuntary petition was filed by his creditors soon after he told them about the transfers. It would be inequitable for us to allow the voluntary debtor to plan the filing of his bankruptcy petition so as to allow himself time to recover all the property he transferred and yet to allow the creditors of a debtor to cut him off in his attempt to recover the property by filing an involuntary petition and thereby deny the debtor a discharge of his debts. Cf. In re Andreotti, 16 B.R. 28, 31 (Bankr.E.D.Cal.1981) (It would be inequitable for this Court to allow the voluntary debtor to plan out his exemptions well in advance of the date he volitionally files his petition and yet to deny the involuntary debtor any such opportunity to plan his exemptions.). 32 We therefore hold that a debtor who has disclosed his previous transfers to his creditors and is making a good faith effort to recover the property transferred at the time an involuntary bankruptcy petition is filed is entitled to a discharge of his debts if he is otherwise qualified. We emphasize that the debtor must be making a good faith effort to recover the property prior to the filing of the involuntary petition, and he must actually recover the property within a reasonable time after the filing of the involuntary petition. A debtor's failure to establish these conditions would justify relief under section 727(a)(2)(A). 33 The record does not indicate whether Adeeb has recovered substantially all of the property he transferred and, if he has, whether he did so prior to the time the bankruptcy petition was filed or within a reasonable time after it was filed. We therefore remand this case to the district court for further proceedings not inconsistent with this opinion. Because the bankruptcy court did not reach the section 523 issues, we express no opinion on the plaintiffs' claims under that section. 34 REVERSED AND REMANDED.