Opinion ID: 777016
Heading Depth: 3
Heading Rank: 1

Heading: Redemption for a Less Than Honest Debtor

Text: 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.