Opinion ID: 389546
Heading Depth: 1
Heading Rank: 3

Heading: evidence offered to rebut presumption

Text: 13 Bateman has raised three arguments in support of his attempt to rebut the presumption: (1) the transfer was done to ensure domestic peace and tranquility, (2) the transfer was done on advice of counsel, and (3) Bateman's good faith and innocence is shown by the fact that Payless was either making a profit or could reasonably be expected to make a profit when the transfer was made. 14 We first examine the contention that the transfer was done to quell marital discord between the Batemans arising out of the purchase of Payless. Evelyn Bateman was not called as a witness at the bankruptcy hearing, so only William's testimony is available. All William stated was that Evelyn objected to the purchase of Payless, and at one point William testified that she even got to the point she went to see a lawyer about a divorce over it. There was no elaboration, and the bankruptcy judge found only that he has testified that his wife violently opposed that (the purchase of Payless). These fleeting references are hardly persuasive, particularly since the transfer was not completed, according to William, until June 16, 1978, nearly eight months after the dispute purportedly arose. 15 We next consider bankrupt's argument that the transfer was made on advice of counsel. Although William testified that the transfer began in November 1977, there was no testimony that counsel was consulted for any purpose at or before that time. In fact, the first time an attorney was contacted in regard to the transfer was in February 1978, three months after the commencement of the so-called continuous transfer. Finally, the bankruptcy judge found that, I think that he did this (the transfer) at a time when Albert Pike was paid off    I think he did it on the advice of Franklin Wilder (an attorney), or his accountant. So, the court finds that this was a technical fraudulent conveyance, and lacks the element of an intentional act. The Pike store was not paid off until April 1978. Therefore, the evidence refutes any contention that advice of counsel figured in the actual decision to transfer the interest. 16 We finally examine bankrupt's contention that innocence and good faith are shown by the favorable financial situation of Payless. Bateman asserts that the transfer began in November 1977, and was completed on June 16, 1978, when the Pike store was incorporated. Despite his attempts to explain the delay and the sequence of events, the timing of the various actions reinforces the presumption of fraud and refutes his arguments. First, the Payless store was simply never profitable. In 1977, after slightly more than one month of operation, the store reported a loss in excess of $6,000. The record shows that in early 1978, legal advice was sought regarding how to consummate the oral transfer and incorporation of the Pike store. On March 22, 1978, three weeks after some of the first incorporation documents were signed, William was forced to renew the note for $90,000 to City National Bank with no reduction of principal. Payless thus appears to have been unprofitable for the four months between November 1977 and March 1978. 17 The $20,000 loan on the Pike store was satisfied on April 22, 1978, eleven months prior to Bateman filing his petition in bankruptcy. Bateman testified that he deliberately waited until after the loan was paid off to incorporate the Pike store. It is difficult to determine whether Bateman had transferred his interest in the store at this point, but it is clear that there is no documentary evidence of a transfer prior to this time. Within two months, however, on June 16, 1978, the transfer and incorporation were purportedly consummated. Four days later, on June 20, 1978, William again was forced to renew his note to City National Bank. The loan officer testified Bateman informed him that the store still was not generating a profit. 18 In view of the timing of these events, Bateman's explanations do not rebut the presumption of fraud. His only evidence that sales were picking up was the state sales tax returns; but these show only gross sales, not profits, and none of his books or records were produced. Bateman claims that the transfer was made in good faith while the business was not in trouble, although four days after the transfer the loan was renewed for the second time with no reduction of principal because after seven months of operation the business had not yet turned a profit. The evidence shows that a valuable asset was transferred for no consideration at a time when Bateman was deeply in debt and while his business venture was performing poorly. The claim that good faith was shown by the lack of knowledge of the imminent demise of Payless is not supported in the record. 19 There is additional evidence in this case which reflects unfavorably upon Bateman's defense. First, Bateman reported on his federal income tax returns for both 1977 and 1978 that he was the sole proprietor of the Pike store. This is inconsistent with his claims that he orally commenced a transfer of his interest in the Pike store to Evelyn in November 1977, and the claim that the store was transferred to the corporation in June 1978. The evidence also raises an inference that the transfer was in form only, and that William considered himself as retaining control over the Pike store. William's testimony that he was merely following his accountant's advice is inadequate. 20 The omissions from the bankruptcy petition are likewise notable. Question 5 of the statement of affairs asks, (w)hat amount of income, other than from operation of your business (Payless) have you received during each of the 2 years immediately preceding the filing of the original petition herein? The answer given is None, despite the fact that for 1977 and 1978 William showed income on his income tax returns as the sole proprietor of Albert Pike Grocery. Question 14 of the same form asks, (h)ave you made any gifts, other than ordinary and usual presents to family members    during the year immediately preceding the filing of the original petition herein? The answer given is No, despite the alleged 1978 gift to Evelyn of the one-half interest in the Pike store. 21 William testified that he fully disclosed his affairs and relied upon advice of counsel in the preparation of the petition. However, reliance on counsel must be reasonable. Stephens v. Stinson, 292 F.2d 838 (9th Cir. 1961). Despite disclosure to counsel, a petitioner must still attest to the truth and completeness of answers given under oath. To exclude income and the gift from the bankruptcy petition under the circumstances was unreasonable. 22 We are mindful of the clearly erroneous standard applied to the bankruptcy court's findings of fact. Matter of PRS Products, Inc., 574 F.2d 414 (8th Cir. 1978). Nevertheless, on examination of the record, we are left with the definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). Bateman's explanations did not rebut the presumption which arose under section 14c. The district court therefore erred in affirming the bankruptcy court's finding that an intent to defraud 5 was not established. The objection to discharge is sustained. 6 23 Reversed.