BENCH MEMORANDUM TO: Judge Klein Judge Brandt Judge Nielsen FROM: Kymberlee Stapleton, Law Clerk to Judge Klein DATE: RE: Wolkowitz v. Beverly (In re Beverly) CC-06-1250-KBN Wolkowitz v. Beverly (In re Beverly) CC-06-1449-KBN Wolkowitz v. Beverly (In re Beverly) CC-06-1273-KBN Outland v. Wolkowitz (In re Beverly) CC-06-1284-KBN HEARING: March 21, 2007 TRIAL COURTS: U.S. Bankruptcy Court, Central District of California, Hon. Thomas B. Donovan ORDERS APPEALED: Order granting summary judgment in favor of defendant Stephanie Beverly Order granting summary judgment in favor of defendant/debtor Order denying trustee’s complaint to deny debtor a discharge under § 727 (06-1273) Order denying judgment creditors’ complaint to deny debtor a discharge under § 727 (06-1284) DATES ENTERED: 7/10/06 (CC-06-1250) 12/5/06 (CC-06-1449) 7/27/06 (CC-06-1273) 7/27/06 (CC-06-1284) DATES OF NOA: 7/14/06 (CC-06-1250) 12/11/06 (CC-06-1449)
Transcript
BENCH MEMORANDUM
TO: Judge KleinJudge BrandtJudge Nielsen
FROM: Kymberlee Stapleton, Law Clerk to Judge Klein
DATE:
RE: Wolkowitz v. Beverly (In re Beverly)CC-06-1250-KBNWolkowitz v. Beverly (In re Beverly)CC-06-1449-KBNWolkowitz v. Beverly (In re Beverly)CC-06-1273-KBNOutland v. Wolkowitz (In re Beverly)CC-06-1284-KBN
HEARING: March 21, 2007
TRIAL COURTS: U.S. Bankruptcy Court, Central District of California, Hon. Thomas B. Donovan
ORDERS APPEALED: Order granting summary judgment in favor of defendant Stephanie Beverly
Order granting summary judgment in favor of defendant/debtor
Order denying trustee’s complaint to deny debtor a discharge under § 727 (06-1273)
Order denying judgment creditors’ complaint to deny debtor a discharge under § 727 (06-1284)
DATES OF NOA: 7/14/06 (CC-06-1250)12/11/06 (CC-06-1449)8/1/06 (CC-06-1273)
8/3/06 (CC-06-1284)
RECOMMENDATION: AFFIRM IN PART; REVERSE IN PART (CC-06-1250)AFFIRM IN PART; REVERSE IN PART (CC-06-1449)REVERSE (CC-06-1273)REVERSE (CC-06-1284)
REMARKS: There are several requests for judicial notice that need to be resolved either as part of this decision, or by separate order.
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: ) BAP Nos. CC-06-1250-KBN
) CC-06-1449-KBN
WILLIAM J. BEVERLY, )CC-06-
1273-KBN )
CC-06-1284-KBN
Debtor. )
______________________________ ) Bk. No. LA 04-29840-TDEDWARD M. WOLKOWITZ, )
) Adv. Nos. LA 05-01649-TD
Appellant, ) LA 05-01254-TD ) LA 05-
01257-TDEDWARD M. WOLKOWITZ, )
Consolidated )
v. )
)STEPHANIE BEVERLY; WILLIAM J. ) BEVERLY, )
)Appellees. )
______________________________ ) )
EDWARD M. WOLKOWITZ, ) )
Appellant, ) ) (BENCH)
3
v. )MEMORANDUM*
)WILLIAM J. BEVERLY, )
)Appellee. )
)_______________________________)
)EDWARD M. WOLKOWITZ, )
)Appellant, )
) v. )
)WILLIAM J. BEVERLY, )
)Appellee. )
)_______________________________)
) CATHERINE OUTLAND; )ADMINISTRATOR OF THE ESTATE )OF CHRISTINE MARTELL; SUSAN )OUTLAND GLEASON, )
)Appellants, )
)v. )
)EDWARD M. WOLKOWITZ, Chapter )7 Trustee; WILLIAM J. )BEVERLY, )
)Appellees. )
_______________________________)
Argued and Submitted on March 21, 2007at Pasadena, California
Filed –
*This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1..
4
Appeals from the United States Bankruptcy Courtfor the Central District of California
Honorable Thomas B. Donovan, Bankruptcy Judge, Presiding
_________________________
Before: KLEIN, BRANDT, and NIELSEN,** Bankruptcy Judges.
***Hon. George B. Nielsen, U.S. Bankruptcy Judge for the District of Arizona, sitting by designation.
5
The first two appeals (filed by the chapter 7 trustee)
discussed in this memorandum are from orders granting summary
judgment in favor of the debtor and his former spouse on claims
pursuant to 11 U.S.C. §§ 544(b), 547, 548, and 550.
The other two appeals (filed by the chapter 7 trustee and
certain judgment creditors of the debtor) are from two separate
orders in favor of the debtor denying the trustee and judgment
creditors’ complaints to deny the debtor a discharge pursuant to
11 U.S.C. §§ 727(a)(2)(A), (a)(3), (a)(6)(A), and (a)(7).
For the reasons stated in the memorandum, we AFFIRM IN PART
and REVERSE [AND REMAND] IN PART the trustee’s first two appeals,
and we REVERSE the trustee and judgment creditors’ second two
appeals.
FACTS
The debtor, a lawyer, and Stephanie Beverly were married in
March 1977. Appt’s E.R. (1273) Vol II pg 283. During the
marriage, the debtor established the Beverly Law Corporation
Profit Sharing Plan and Trust (“Trust”). The debtor maintained a
90% interest in the Trust assets.
In September 1999, the debtor assigned a deed of trust
(“DOT”) to Oliver Maupin. Id. at 435.
In July 2002, the debtor and Stephanie separated. E.R.
(1273) Vol II pg 283. On August 3, 2002, the debtor and
Stephanie filed for divorce. Id.
6
In September 2002, Maupin filed for judicial foreclosure on
the assigned DOT in the Superior Court for the County of Los
Angeles against appellants Catherine Outland, May Susan Outland
Gleason, and Christine Lucile Outland Martell (“Outland
Parties”). E.R. (1273) Vol II pg 428. In 2003, the Outland
Parties filed a cross-complaint against Maupin, the debtor, the
debtor’s law firm, and others. E.R. (1273) Vol III pg 722.
Maupin cross-complained against the debtor. The cross-complaints
against the debtor were based on the debtor’s legal malpractice,
and other torts regarding the DOT and its assignment to Maupin.
Id.
After almost two years of highly contentious property
settlement negotiations, the debtor and Stephanie entered into a
Marital Settlement Agreement (“MSA”) on April 9, 2004. E.R.
(1273) Vol II pgs 283-95. The MSA expressly stated that it was
binding on the debtor and Stephanie and not “dependent upon the
entry of judgment for its efficacy.” Id at 283. The Outland
Litigation was still pending when the debtor and Stephanie
entered into the MSA.
The MSA governed the division of all property and debts of
the marriage. Id. The debtor was awarded several items of
personal property, money from several bank accounts, half the
proceeds from the sale of real property located in Baja
California, several vehicles and motorcycles, the entire
community property interest in five separate Limited Liability
7
Companies, two corporations, and one partnership, and the entire
community property interest in the Trust. E.R. (1273) Vol II Tab
1 pgs 283-86.
Stephanie was awarded several items of personal property,
money from several bank accounts, two vehicles, half the proceeds
from the sale of real property located in Baja California, and $1
million in net proceeds from the sale of the family home. Id. at
287.
The parties also divided their debt - the debtor was
assigned tax lien debt and all liabilities/obligations in
connection with the pending Outland Litigation. Id. at 287.
Stephanie was assigned approximately $26,000 in credit card debt.
Id.
On May 20, 2004, a jury verdict was reached in the Outland
Litigation. Id. at 485. Judgment was entered against the debtor
in the amount of approximately $424,000. Id. at 492-93. The
debtor appealed.
The debtor and Stephanie’s divorce became final on July 20,
2004. Id. at 326. The MSA was expressly incorporated into the
divorce judgment. Id. at 327.
In response to a set of post-judgment interrogatories, the
debtor stated that he did not have sufficient assets to pay the
Outland Judgment. E.R. (1273) pg 418 lines 27-28.
On September 15, 2004, the Outland Parties filed an
involuntary chapter 7 case against the debtor. E.R. (1273) Vol
8
VI Tab 1 pg 1313. An Order for Relief was entered on November 1,
2004, and Edward M. Wolkowitz was appointed as chapter 7 trustee.
Id. The court also entered an Order to File Schedules and
Statement of Financial Affairs within fifteen days of the
November 1, 2004 Order. Id.
On March 11, 2005, the trustee filed an adversary proceeding
objecting to the debtor’s discharge pursuant to 11 U.S.C.
§ 727(a)(6)(A) (“Adversary Case No. 05-1254"). Id. The Outland
Parties also filed an adversary proceeding on the same day
objecting to the debtor’s discharge pursuant to 11 U.S.C.
§§ 727(a)(3) and (a)(6), and to determine nondischargeability of
debt pursuant to 11 U.S.C. §§ 523(a)(3) and (a)(4) (“Adversary
Case No. 05-1257"). E.R. (1273) Vol I Tab 1.
The debtor filed his schedules and statement of financial
affairs for the first time on March 17, 2005. E.R. (1273) Vol II
pgs 365-388. The debtor claimed the Trust exempt in its entirety
($1,161,467.08). Id. at 370.
On June 10, 2005, the Outland Parties filed a First Amended
Complaint in Adversary Case No. 05-1257 adding claims under
§§ 727(a)(2) and (a)(7). E.R. (1273) Vol I Tab 13.
On June 14, 2005, the trustee filed another adversary
proceeding against the debtor and Stephanie pursuant to 11 U.S.C.
§§ 544(b), 547, 548(b) and 550 (“Adversary Case No. 05-1649").
Appt’s E.R. (1250) Vol I Tab 1. The debtor and Stephanie filed
separate answers. Id. at Tabs 5 & 6.
9
In July 2005, the trustee filed a First Amended Complaint in
Adversary Case No. 05-1254 adding a claim under § 727(a)(2)(A).
E.R. (1273) Vol IV Tab 9. The bankruptcy court granted a motion
filed by the Outland Parties to consolidate the § 727 claims
contained in Adversary Case No. 05-1254 and Adversary Case No.
05-1257. E.R. (1273) Vol I Tab 23. The Outland Parties’
complaint was ultimately bifurcated to allow the § 727 claims to
be litigated with the trustee’s § 727 claims before the § 523
claims.
Stephanie filed a motion for summary judgment (“MSJ”) in
Adversary Case No. 05-1649 on March 1, 2006.1 E.R. (1250) Vol I
Tab 9. On March 3, 2006, the trustee filed a MSJ in Adversary
Case No. 05-1649. Id. at Tab 14. A series of oppositions to the
MSJs and replies by the trustee, the debtor, and Stephanie were
exchanged.
On March 27, 2006, trial commenced by declaration in
consolidated Adversary Case Nos. 05-1257 and 05-1254. E.R.
(1273) Vol V Tab 5. No live testimony was presented. Id. The
court ordered further briefing and continued the trial to May 25,
2006. E.R. (1273) Vol V Tab 5 pg 1228.
At the reconvened trial on May 25, the court also held a
hearing on Stephanie and the trustee’s MSJs in Adversary Case No.
05-1649. E.R. (1273) Vol V Tab 6. The court took all three
11At this point, the debtor did not file a MSJ nor did he formally join in Stephanie’s motion. E.R. (1250) Vol I Tab 6 pg 1274.
10
matters under submission.
On June 29, 2006, the court announced its findings of fact
and conclusions of law on the record. E.R. (1273) Tab 7. In
consolidated Adversary Case Nos. 05-1254 and 05-1257, the court
granted judgment in favor of the debtor on all the § 727 claims.
Id. In Adversary Case No. 1649, the court granted Stephanie’s
MSJ and denied the trustee’s MSJ. Id.
On July 7, 2006, the court entered judgment on Stephanie’s
MSJ. E.R. (1250) Vol V Tabs 6, 7, & 9. On July 18, 2006, the
court entered a judgment denying the trustee’s MSJ. The trustee
filed a notice of appeal (BAP No. CC-06-1250).
On July 26, 2006, the court entered judgment in favor of the
debtor on the § 727 claims in consolidated Adversary Case Nos.
05-1254 and 05-1257. The trustee and the Outland Parties filed
separate notices of appeal (BAP Nos. CC-06-1273 and CC-06-1284).
The debtor filed a MSJ and statement of uncontroverted facts
in Adversary Case No. 05-1649. E.R. (1449) Tab 5 pg 20. The
trustee filed an opposition and the debtor filed a reply.
On November 21, 2006, the court posed a tentative ruling in
favor of the debtor stating that its findings announced at the
June 29, 2006, hearing were included and adopted as findings on
the debtor’s MSJ. E.R. (1449) Vol IV Tab 2 pg 1002.
The court entered judgment on December 5, 2006 granting the
debtor’s MSJ and incorporated into the judgment its June 29,
2006, findings. Id. at Vol IV Tab 2. The trustee filed a notice
11
of appeal (BAP No. 06-1449).
JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUES
(1) Whether the bankruptcy court erred when it granted
summary judgment in favor of the debtor and Stephanie on the
§§ 544(b), 547, 548, and 550 claims.
(2) Whether the bankruptcy court erred in denying the
trustee and Outland Parties’ complaints to deny the debtor a
discharge pursuant to § 727(a)(2)(A).
STANDARD OF REVIEW
We review a bankruptcy court’s grant of summary judgment de
novo. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th
Cir. 2001); Miller v. Snavley (In re Snavley), 314 B.R. 808, 813
(9th Cir. BAP 2004). We must determine whether, viewing the
evidence in the light most favorable to the nonmoving party,
genuine issues of material fact remain for trial; we must also
determine whether the bankruptcy court correctly applied the
relevant substantive law. Gill v. Stern (In re Stern), 345 F.3d
1036, 1040 (9th Cir. 2003); Snavley, 314 B.R. at 813.
The bankruptcy court’s findings of fact are reviewed for
12
clear error, and its conclusions of law are reviewed de novo.
Revenue Serv., 496 U.S. 53, 58 (1990). Thus, the focus is not on
what Stephanie received, bur rather on what interest does the
debtor have in the property.
With respect to community property interests being a part of
a bankrupt’s estate, there are three scenarios that arise in the
context of a bankruptcy filed by one spouse (or former spouse):
(1) Intact marriage; (2) bankruptcy petition filed before a final
property settlement between divorcing spouses; and (3) bankruptcy
petition filed after a final property settlement by divorcing
spouses. Keller, 185 B.R. at 799-800.
In the first scenario (intact marriage), all interests in
community property are property of the estate. 11 U.S.C. §
541(a)(2); Keller, 185 B.R. at 799.
In the second scenario (bankruptcy petition filed before
final property settlement), the bankruptcy court had exclusive
jurisdiction over the division and distribution of the community
16
property “to assure fairness to the creditors of the individual
spouses and the marital estate.” Keller, 185 B.R. at 800; see
also Dumas v. Mantle (In re Mantle), 153 F.3d 1082, 1085 (9th
Cir. 1998).
In the final scenario (bankruptcy petition filed after final
property settlement), the state court had exclusive jurisdiction
over the division and distribution of the community property and
the final judgment is binding on the bankruptcy trustee. Keller,
185 B.R. at 800. Once the final divorce judgment is entered, any
community property interests of the spouses became the separate
property of each spouse. The debtor no longer has any interest
in the divided separate property of the non-debtor former spouse.
Gendreau v. Gendreau (In re Gendreau), 191 B.R. 798, 803 (9th
Cir. BAP 1996).
Therefore, the property awarded to the non-debtor former
spouse is not part of the debtor’s bankruptcy estate and there is
no “interest of the debtor in property” for the trustee to avoid.
Keller, 185 B.R. at 800-01.
Essentially, under federal bankruptcy law, a trustee cannot
“challenge” a final MSA that divides community property interests
between divorcing spouses before bankruptcy is filed. Any such
state court judgment is final and binding on the trustee. Thus,
the bankruptcy court did not err when it found that the debtor
did not have an interest in property subject to avoidance by the
trustee under §§ 548 and 548.
17
However, under California state law, a MSA can be challenged
by a defrauded creditor pursuant to the Uniform Fraudulent
Transfers Act (“UFTA”). In Mejia v. Reed, 31 Cal. 4th 657, 665-
68 (2003), the California Supreme Court held that even though
California Family Code § 916 appears to protect transfers of
marital property incident to divorce, California has a “policy of
protecting creditors from fraudulent transfers, including
transfers between spouses.” Such policy considerations led the
court to conclude that the UFTA applies to property transfers
under MSAs. Id. at 669.
B
11 U.S.C. § 544(b)
Section 544(b)(1) provides,(b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
11 U.S.C. § 544(b)(1).
Section 544(b) is the trustee’s “strong arm power” that
authorizes the trustee to exercise the rights of a creditor who
can avoid a transfer under applicable state law. See Butler v.
North Carolina fraudulent conveyance law pursuant to §544(b)).
As noted, under California law, a defrauded creditor can seek to
18
avoid a transfer of property under a MSA pursuant to the UFTA.
Mejia, 31 Cal. 4th at 668. Thus, § 544(b) allows the trustee to
step into the Outland Parties’ shoes and proceed to exercise
their rights against the debtor and Stephanie. See Butler, 58
F.3d at 1026.
In this case, the bankruptcy court found that the trustee
did not have any rights under the bankruptcy code “as a
hypothetical lien creditor to the property that [Stephanie]
received.” E.R. (1273) Vol V Tab 7 pg 1301. In its discussion
of Mejia, the court stated:As to Mejia, let me say that that case from the California Supreme Court didn’t really decide anything except that the California Supreme Court said that in a divorce, the [UFTA] could apply and the end result of Mejia was simply a remand on one issue concerning fraud, not a finding that there was fraud. . . .
I guess one further thing I might say is that Mejia which plaintiffs rely heavily on didn’t come to the conclusion that there was fraud in the process. Mejia came to the conclusion that it’s possible that parties to a marital dissolution may engage in that process in a fraudulent way. That’s all the California Supreme Court said in Mejia, and then the Supreme Court ended that case by remanding it to determine whether three was any fraud or not.
E.R. (1273) Vol V Tab 7 pgs 1289, 1292.
Seemingly confused, the court then addressed the
“hypothetical lien creditor” issue again and found that “when
this bankruptcy case was filed against [the debtor], [Stephanie]
no longer had a property interest in this case to convey to a
bona fide purchaser o[f] real property. Therefore, the trustee
19
has no rights as a hypothetical lien creditor under § 544[.]”
E.R. (1273) Vol V Tab 7 pgs 1304-05.
Section 544(b) contains no reference to a bona fide
purchaser of real property. Rather, § 544(a)(3) authorizes a
trustee to avoid a transfer of real property of the debtor that
is voidable by a bona fide purchaser of real property. 11 U.S.C.
§ 544(a)(3).
It is unclear if the court was ruling under the wrong
section of the statute. In any event, we conclude that pursuant
to Mejia, the trustee does have rights as a hypothetical lien
creditor under § 544(b) and the court erred as a matter of law
concluding otherwise.
[NOTE TO JUDGE KLEIN: AT THIS POINT WE CAN EITHER (1) REVERSE AND
REMAND FOR FURTHER PROCEEDINGS UNDER THE UFTA (ie: do genuine
issues of material fact remain for trial?) OR (2) ANALYZE THE
UFTA ISSUES OURSELVES IN A PART (C).]
II
Adversary Proceedings 05-1254 and 05-1257
(BAP Nos. CC-06-1273 and CC-06-1284)
The trustee and the Outland Parties sought denial of the
debtor’s discharge pursuant to §§ 727(a)(2)(A), (a)(3), (a)(6)
20
(A), and (a)(7). Section 727 is construed liberally in favor of
the debtor and strictly against those objecting to discharge.
First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1342
(9th Cir. 1986); Murphey v. Crater (In re Crater), 286 B.R. 756,
759 (Bankr. D. Ariz. 2002). The bankruptcy court found in favor
of the debtor on all claims. We will address each claim
separately.
A
11 U.S.C. § 727(a)(2)(A)
Section 727(a)(2)(A) provides,(a) The court shall grant the debtor a discharge, unless -
(2) the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, destroyed, mutilated, or concealed . . .
(A) property of the debtor, within one year before the date of the filing of the petition[.]
11 U.S.C. § 727(a)(2)(A).
Discharge may be denied under § 727(a)(2)(A) only upon a
finding of actual intent to hinder, delay, or defraud creditors.2
Adeeb, 787 F.2d at 1342-43; Devers v. Bank of Sheridan (In re
22It is undisputed that the transfers of property contained in the MSA took place on April 9, 2004, which was within one year before the date of the filing of the bankruptcy petition.
may be inferred from circumstances surrounding the transaction.
Woodfield, 978 F.2d at 518.
Here, the court found that the debtor’s exchange of non-
exempt assets for exempt assets in the process of the debtor’s
divorce was not fraudulent as a matter of law. E.R. (1273) Vol V
Tab 7 pg 1293. The court also found that the distribution of
property pursuant to the MSA was “roughly equal” to both the
debtor and Stephanie.
The court based its ruling on Gill v. Stern (In re Stern),
345 F.3d 1036 (9th Cir. 2003). In Stern, prior to filing
bankruptcy, Stern was a party to an arbitration regarding a
business dispute with Dove Audio, Inc. Id. at 1039. In 1991, an
22
arbitration award of over $4.5 million was awarded against Stern.
Id. In 1992, Stern created a profit sharing plan (“Pension”).
Id. Later that year, the Los Angeles Superior Court issued a
writ of attachment to secure the arbitration award. Id. A few
days after the writ of attachment was issued, Stern transferred
the proceeds of an individual retirement account (“IRA”) to his
Pension. Id.
Dove Audio, Inc. filed a fraudulent transfer action in state
court arguing that the transfer of proceeds from Stern’s IRA to
his Pension was “fraudulently designed to shield his assets from
creditors.” Id. Stern then filed a chapter 7 bankruptcy and
Dove Audio, Inc. removed its fraudulent transfer action to the
bankruptcy court. Id.
In the bankruptcy court, the issue was whether the
purposeful conversion of non-exempt property to exempt property
was fraudulent per se so as to justify a denial of exemption
under 11 U.S.C. § 522. Id. at 1043.
The Stern court held,We are constrained by our prior opinion in Wudrick v. Clements, 451 F.2d 988 (9th Cir. 1971). In that case, we ruled ‘that the purposeful conversion of nonexempt assets to exempt assets on the eve of bankruptcy is not fraudulent per se.’
Id. (citations omitted)
Wudrick was also a objection to claim of exemption case,
and, as stated in Stern, held that the deliberate conversion of
non-exempt assets to exempt assets just before filing bankruptcy
23
is permitted.Congress also approves of the practice:
As under current law, the debtor will be permitted to convert non-exempt property into exempt property before filing a bankruptcy petition. The practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law.
Coughlin v. Cataldo (In re Cataldo), 224 B.R. 426, 429 (9th Cir.
BAP 1998) quoting S. Rep. No. 95-989, at 76, reprinted in 1978
U.S.C.C.A.N. 5787, 5860; H.R. Rep. No. 95-595, at 361 (1977),
reprinted in 1978 U.S.C.C.A.N. 5963, 6317.
“‘The Code presumes that creditors know that law and bear
the risk that debtors will position their property to their best
advantage.’” Cataldo, 224 B.R. at 429 quoting Roosevelt v. Ray
(In re Roosevelt), 176 B.R. 200, 208 (9th Cir. BAP 1994).
However, the permitted practice of converting non-exempt
property to exempt property is limited if the party objecting to
the claim of exemption can prove fraudulent use of the exemption.
Cataldo, 224 B.R. at 430. In other words, if the objecting party
can prove fraudulent exemption planning, as opposed to simple
asset protection planning, as exemption may be denied.3 Id.
33Indicia of fraudulent use of an exemption include,
(1) conduct intentionally designed to materially mislead or deceive creditors about the debtor’s position;
(2) use of credit to buy exempt property;(3) conversion of a very great amount of property; and(4) conveyance for less than adequate consideration.
Cataldo, 224 B.R. at 430.
24
As noted, Stern and Wudrick were objection to exemption
cases, not objection to discharge cases. Most courts have held
that even though a debtor is permitted to convert non-exempt
property to exempt property without affecting the granting of
exemptions under § 522, that same conduct may be a basis to deny
a discharge under § 727. Cataldo, 224 B.R. at 430. A discharge
may be denied under § 727 if the debtor has committed acts
extrinsic to the conversion that hinders, delays, or defrauds
creditors. Id.; see also Smiley v. First Nat’l Bank of
Belleville (In re Smiley), 864 F.2d 562, 567 (7th Cir. 1989);
Norwest Bank Neb., N.A. v. Tveten, 848 F.2d 871 (8th Cir. 1988).
Therefore, if the trustee and Outland Parties provided
sufficient evidence of the debtor’s intent to hinder or delay or
defraud creditors that is extrinsic to the fact that the debtor
exchanged non-exempt property for exempt property, then a denial
of discharge may be warranted under § 727(a)(2)(A).
The trustee and Outland Parties point to several letters in
the record that evidence the debtor’s actual intent to hinder and
delay creditors. Pertinent excerpts of those letters include,
(1) Letter from the debtor to Stephanie’s divorce lawyer
(January 14, 2004): The bad news is that we lost another round in the Outland case and the other side was awarded interim attorneys’ fees of about $93,000. Our total exposure now is between $500,000 and $600,000 by my estimate. That is all of the equity in the Ardmore house. What are you doing while Rome burns?
25
E.R. (1273) Vol II pg 186
(2) Letter from the debtor to Stephanie’s divorce lawyer
(January 29, 2004): As to 1(a), that appears to be a very bad idea because a substantial judgment will certainly be entered against me the week following close of escrow and that new account would be the primary if not sole liquid asset from which the judgment would be satisfied. I do not mind adopting 1(b) if we have an agreement to trade for retirement plan equity now. . . . In summary, Stephanie would trade $400,000 in taxable assets for $200,000 in tax free assets. This arrangement protects the sale proceeds by making my share judgment proof. If you want to hold the money in a joint account, I can not agree because that is the same as giving the money away. If you run to court and get such an order you are setting Stephanie up to loose [sic] the entire amount. . . .
I suggest that we each take $100,000 now and make it disappear as fast as we can for the same reason. Pay debts etc. now. I am fully expecting that bankruptcy will be my only option six months from now.
E.R. (1273) Vol II pg 229-30.
(3) Letter from the debtor to Stephanie’s divorce lawyer
(January 30, 2004):If you do not agree to my ‘equity trade’ proposal, I have no choice but to agree to allow the funds to sit in a joint account as you suggest and expose the funds to a judgment creditor. I simply can not . . . allow myself to be put in the position of distributing $600,000 to Stephanie and trusting her to be fair down the road.
E.R. (1273) Vol II pg 241.
(4) Letter from the debtor to Stephanie’s divorce lawyer
February 25, 2004):The Outland litigation will cost a minimum of
about $100,000 and possibly as much as $500,000-600,000
26
or more. What that all means to me is that I windup with the retirement plan and a bunch of used motorcycles and Stephanie gets about $1,000,000 in cash. . .
Irrespective of the imbalance, we need to get this done, because, as you know, the entire sale proceeds from the residence will be liable for a judgment against me[.]
E.R. (1273) Vol II pg 246.
(5) Letter from the debtor to Stephanie’s divorce lawyer
(March 17, 2004):The point of all that is that we better get this done this week or your client and I stand to loose [sic] almost everything. The consensus is that we are looking at a judgment in the neighborhood of one million dollars. . . .
Nancy, this is where we meet or part. I have essentially agreed to give Stephanie $1,000,000 of after tax money and $100,000 of pre-tax money which is the combined equivalent of about $1,500,000 to her. I get zero cash and pre-tax retirement plan assets of about $1,000,000 which has an after-tax value of about $600,000 and the equity in a building that I will certainly loose [sic] shortly. Everything else has no value or no equity. I also keep all tax liens, the Commonwealth tax obligation and the lawsuit exposure. . . .
Stephanie has and will have a lot of money. I will have almost none. This is it. If we cannot agree to this, you can make your motion. I will be in trial fighting to save an estate for us to fight over. I actually will relax a little knowing that Stephanie will be paying for half of the judgment if we do not settle now.
E.R. (1273) Vol II pgs 264-67.
The evidence provided by the trustee and the Outland Parties
is indicative of the debtor’s actual intent to hinder or delay
27
payment to the Outland Parties upon the anticipated loss of the
Outland Litigation in state court.
Under § 727(a)(2)(A), the debtor’s intent to hinder or delay
a creditor constitutes the requisite “intent penalized by the
statute notwithstanding any other motivation he may have had for
the transfer.” Adeeb, 787 F.2d at 1343.
We conclude that the trustee and Outland Parties presented
sufficient evidence of the debtor’s intent to hinder or delay
that is extrinsic from the fact that the debtor transferred non-
exempt property for exempt property in the MSA. It is apparent
that debtor’s intent was to become judgment proof and not just to
protect his assets.
The bankruptcy court erred as a matter of law in its
interpretation of Stern as it applies to § 727. Further, we are
left with the “definite and firm conviction” that the bankruptcy
court made a mistake with respect to its findings of fact.
CONCLUSION
The bankruptcy court did not err when it ruled that the
trustee could not bring causes of action under §§ 547 and 548
because the debtor lacked an “interest of the debtor in
property.” However, the bankruptcy court did err when it ruled
that the trustee could not bring a cause of action under
§ 544(b). Therefore, the judgments entered in BAP Nos. CC-06-
1250 and CC-06-1449 are AFFIRMED IN PART and REVERSED [AND
28
REMANDED] IN PART.
The bankruptcy court’s interpretation of Stern was erroneous
with respect to its application to § 727 claims. Because there
is sufficient evidence in the record to prove the debtor’s actual
intent to hinder or delay creditors, all elements of
§ 727(a)(2)(A) are satisfied and the debtor’s discharge should
have been denied.4 Therefore, the judgments entered in BAP Nos.
CC-06-1273 and CC-06-1284 are REVERSED.
44Because the debtor’s discharge is being denied pursuant to § 727(a)(2)(A), we need not address the remaining arguments pertaining to denial of debtor’s discharge pursuant to §§ 727 (a)(3), (a)(6)(a), and (a)(7).
