Opinion ID: 777016
Heading Depth: 2
Heading Rank: 2

Heading: Objections to Discharge Based on Section 727(a)(2)

Text: 16 In order to succeed with an objection to discharge based on section 727(a)(2), the creditor must prove: 17 (1) that the act complained of was done at a time subsequent to one year before the date of the filing of the petition; (2) with actual intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under the Bankruptcy Code; (3) that the act was that of the debtor or his duly authorized agent; (4) that the act consisted of transferring, removing, destroying or concealing any of the debtor's property, or permitting any of these acts to be done. 18 Lee Supply Corp. v. Agnew (In the Matter of Agnew), 818 F.2d 1284, 1287 (7th Cir. 1987) (citation omitted). The facts show that three of the four elements were met. The issue was whether the second element, actual intent, had been met. Though actual intent is difficult to prove, it may be shown through circumstantial evidence, and the Fifth Circuit adopted a series of factors which, if proven, indicate actual fraud: 19 (1) the lack or inadequacy of consideration; (2) the family, friendship or close associate relationship between the parties; (3) the retention of possession, benefit or use of the property in question; (4) the financial condition of the party sought to be charged both before and after the transaction in question; (5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors; and (6) the general chronology of the events and transactions under inquiry. 20 Pavy v. Chastant (In the Matter of Chastant), 873 F.2d 89, 91 (5th Cir.1989) (citation omitted). If the creditor can show that one or some of these factors are met, [t]his creates a presumption of an intent to defraud establishing plaintiff's prima facie case and shifting ... the burden [to the debtor-defendant] of demonstrating that he lacked fraudulent intent. Id. 21 The McWilliamses did transfer the properties for $1.00 and love to their grandchildren, retained possession of the deeds, and transferred the properties after they had been notified that the Village demolished the building and would seek to recoup the costs from them. This circumstantial evidence demonstrates the McWilliamses transferred the properties to either conceal or prevent the Village from obtaining them to satisfy their debts. The bankruptcy court similarly found that several of these factors were met, yet concluded that the McWilliamses did not make the transfers with the intent to hinder, delay, or defraud creditors. The bankruptcy court concluded that the McWilliamses cured the fraud and redeemed themselves by disclosing of the transfers and subsequently recovering the properties.
22 Though it does not cite a specific case in support, the bankruptcy court's reasoning is in line with a doctrine announced in First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339 (9th Cir.1986). In Adeeb, the Ninth Circuit allowed the granting of a discharge petition over a creditor's objections because the debtor disclosed the previous transfers to the creditors and was making a good-faith effort to recover the property at the time an involuntary bankruptcy petition was filed. Id. at 1346. Adeeb, after being threatened by this creditors, consulted with an attorney who advised him to transfer title to several parcels of property to third parties for no consideration. Id. at 1341. After consulting with a second attorney, Adeeb told his creditors about the transfers, and the creditors filed for an involuntary bankruptcy. Id. Adeeb attempted to recover the properties, and the creditors objected to the discharge based on section 727(a)(2). Id. The Ninth Circuit interpreted the term transfer in section 727(a)(2) to mean `transferred and remained transferred' because, they concluded, Congress intended to deny discharge only to debtors who try to keep assets hidden until after they obtain their discharge in bankruptcy. Id. at 1344-45. 23 Adeeb, as other courts have concluded, appears to contravene the plain language of the Code. See, e.g., Davis v. Davis (In re Davis), 911 F.2d 560, 562 (11th Cir. 1990) (per curiam) (Congress certainly was capable of drafting a statute which would deny a discharge only when assets were fraudulently transferred and remained transferred at the time of filing of bankruptcy proceedings, but it did not.). However, the Ninth Circuit felt that this exception would encourages honest debtors to recover property they have transferred and permit an honest debtor to undo his mistakes and receive his discharge. In re Adeeb, 787 F.2d at 1345. This reasoning is not persuasive because the debtor was in fact dishonest, he tried to hide assets from creditors, and only after the debtor discovered he would likely be caught and pay a penalty did he reverse the transfers. Furthermore, section 727(a) already encourages debtors to be honest, or they will not be able to obtain a discharge; additional incentives need not be judicially created. See Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 501 n. 3 (1st Cir.1997) ([I]t is likely that our decision, by denying discharge, will facilitate this outcome by deterring petitioners from fraudulently transferring property within one year of filing a voluntary bankruptcy petition in the first place. ) (emphasis added). 24 Even though Adeeb purports to interpret the term transfer in section 727(a)(2), the facts surrounding the case and analysis reveal the court focused on the equities. We are also persuaded by practical considerations that a discharge should not be denied in the present situation. In re Adeeb, 787 F.2d at 1345. Rather than finding Adeeb lacked the intent to defraud, the court was forced to go another route because it was clear that Adeeb transferred the properties with full knowledge and actual intent to hinder, delay, or defraud his creditors. Id. at 1341-43. In considering the same issue, the First Circuit concluded that expanding the definition of transfer based on equitable considerations `has no place under the Code to the extent the statute addresses the question.' In re Bajgar, 104 F.3d at 498 (quoting Levit v. Ingersoll Rand Fin. Corp., 874 F.2d 1186, 1189 (7th Cir.1989)). 25 Further, Adeeb is not on all fours with this case. Adeeb's holding was limited to involuntary petitions, and any commentary on voluntary petitions was dicta. In re Adeeb, 787 F.2d at 1346. Unlike Adeeb, the McWilliamses recovered the property on May 10, 2000, only after they filed a voluntary petition for bankruptcy on March 15, 2000. See In re Bajgar, 104 F.3d at 499-500 (distinguishing In re Adeeb because in voluntary bankruptcies `[t]he Ninth Circuit requires actual reconveyance of the fraudulently transferred property before the bankruptcy filing.') (citation and emphasis omitted). Moreover, the McWilliamses disclosed the transfers and recovered the properties in March 2000, well after the Village discovered the transfers and filed a motion to set them aside under the UFTA in February 2000. Cf. In the Matter of Smiley, 864 F.2d at 566 (The policy behind the Adeeb decision ... is not applicable here where property was recovered only as a result of the action of the bankruptcy trustee and court.). Though they had disclosed the transfer in their petition, when asked by the Trustee if they had transferred anything in the past year, Ida McWilliams responded no. It was not until the Trustee asked a second specific question about the properties did Daniel McWilliams acknowledge the transfers. By the time the McWilliamses rectified the fraud, the Village had already expended considerable efforts to recover the properties and prevent the discharge in bankruptcy. Cf. In re Davis, 911 F.2d at 561 n. 2 (The creditor presumably incurred legal fees and expenses when he brought an action challenging the fraudulent transfer.). Even if the Village did not suffer any harm, the McWilliams' intent to defraud is all that is needed for a petition to be denied under section 727(a)(2). See, e.g., In the Matter of Krehl, 86 F.3d at 744 n. 4 (Yet so long as the debtor acted with the requisite intent under Section 727(a)(2), his discharge may be denied even if creditors did not suffer any harm.); In the Matter of Smiley, 864 F.2d at 569.
26 In the final paragraph of its ruling, the bankruptcy court noted that it did not believe the conveyance of the deeds was valid under Illinois law because the McWilliamses did not physically deliver the deeds to their grandchildren. Under Illinois law, delivery of a deed is essential to the operation and validity of a conveyance, but physical delivery is only one means of completing the transfer. See, e.g., Calcutt v. Gaylord, 415 Ill. 390, 114 N.E.2d 340, 343 (1953). Delivery is determined by the intention of the grantor manifested by words and acts or the circumstances surrounding the transaction, and [t]he intent to deliver may be shown by direct evidence or presumed from acts and declarations of the parties.... Id.; Herron v. Underwood, 152 Ill.App.3d 144, 105 Ill.Dec. 105, 503 N.E.2d 1111, 1118 (1987). The McWilliamses have consistently maintained that they intended to make an innocent gift of the properties to their grandchildren. If we accept the bankruptcy court's interpretation, it would have been unnecessary for the McWilliamses to have their grandchildren properly execute and file deeds reconveying the properties back to the McWilliamses. 27 Moreover, we believe that the term transfer in the Code is defined broadly enough to encompass the transfer in this case. Cf. Grogan, 498 U.S. at 284, 289, 111 S.Ct. 654 (Congress amended the Bankruptcy Act in 1970 to make nondischargeability a question of federal law independent of the issue of the validity of the underlying claim.). Transfer is defined as: every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption. 11 U.S.C. § 101(54). `Under this definition, any transfer of an interest in property is a transfer, including a transfer of possession, custody, or control even if there is not transfer of title....' In the Matter of Smiley, 864 F.2d at 565 (quoting S.REP. No. 95-989, 95th Cong., 2d Sess. 26-27 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5813, on the Bankruptcy Reform Act); see also In re Bajgar, 104 F.3d at 498-99 ([T]he legislative history of Section 101(54), which defines `transfer,' explains that `[t]he definition of transfer is as broad as possible.' Limiting the definition of `transferred' to `transferred and remained transferred,' in fact, would contradict the drafters' intent.) (quoting S.REP. No. 989, 95th Cong.) (citations omitted); In re Davis, 911 F.2d at 562. The recording of the deeds and acceptance of consideration demonstrates that the conveyance in this case was a transfer under the definition in 11 U.S.C. § 101(54). 28 Whether the McWilliams' actions are defined as a transfer or concealment, it is clear that they attempted to hide the property from their creditors. The recording, but failure to deliver the deeds, demonstrates the McWilliamses attempted to create the appearance that they no longer owned the property. Thus, even if the property was not found to have been transferred, it could be found to have been concealed. See In re Keeney, 227 F.3d 679, 682-83 (6th Cir.2000) (quoting the bankruptcy court's finding that the debtor concealed property by having it titled `in his parents' names' while retaining a beneficial interest in it); Friedell v. Kauffman (In re Kauffman), 675 F.2d 127, 128 (7th Cir.1981) (per curiam) (The transfer of title with attendant circumstances indicating that the bankrupt continues to use the property as his own is sufficient to constitute a concealment.). However, the fact that the McWilliamses did later disclose the transfer when they filed their petition might, in other circumstances, mitigate the concealment. See Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1293 (10th Cir.1997) (distinguishing between concealment and transfer in section 727(a)(2), and finding that the debtor transferred but did not conceal the transaction because he placed it on his bankruptcy schedules). In this case, it is more likely that the disclosure was prompted by the fact that the Village had discovered the transfer and moved to have it set aside under the UFTA. 29 The McWilliamses are certainly unfortunate debtors, yet they are not exactly honest debtors either. From the transcript of the hearing and the bankruptcy court's ruling, there is little doubt that the judge empathized with the McWilliamses, and because they disclosed the conduct and reconveyed the properties the judge felt there was no harm done. The counsel for the Village was also quite displeased with this outcome, and despite the judge's admonishment that an appeal would be a waste of money, pursued the action with two appeals. As the bankruptcy judge, we are confounded as to the Village's vigorous pursuit of this case because it is unlikely that the Village will see any financial gain, and any benefits will likely be offset by attorney's fees. The McWilliamses appeared pro se at oral arguments before this court and we too were not unmoved by their plight, but the Village's objections are clearly valid under the law. 5