In re: Joseph Ellison ( 2017 )

FILED
SEP 08 2017
1 NOT FOR PUBLICATION
2 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-16-1328-PaTaKu
)
6 JOSEPH ELLISON, ) Bk. No. 2:14-bk-24463-RK
)
7 Debtor. ) Adv. No. 2:15-ap-01001-RK
______________________________)
8 )
JOSEPH ELLISON, )
9 )
Appellant, )
10 )
v. ) M E M O R A N D U M*
11 )
JPMORGAN CHASE BANK, N.A.; )
12 JPMORGAN SECURITIES, LLC, )
)
13 Appellees. )
______________________________)
14
Argued and Submitted on July 27, 2017
15 at Pasadena, California
16 Filed - September 8, 2017
17 Appeal from the United States Bankruptcy Court
for the Central District of California
18
Honorable Robert N. Kwan, Bankruptcy Judge, Presiding
19
20 Appearances: David Scott Hagen of Law Offices of David S. Hagen
argued for appellant; Stefan Perovich of Keesal
21 Young & Logan argued for appellees.
22
Before: PAPPAS,** TAYLOR, KURTZ, Bankruptcy Judges.
23
24
*
25 This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may
26 have, see Fed. R. App. P. 32.1, it has no precedential value, see
27 9th Cir. BAP Rule 8024-1.
**
28 The Honorable Jim D. Pappas, United States Bankruptcy
Judge for the District of Idaho, sitting by designation.
1 Chapter 71 debtor Joseph Ellison (“Debtor”) appeals from the
2 bankruptcy court’s judgment denying him a discharge under
3 § 727(a)(2)(A). Debtor argues that the bankruptcy court erred,
4 as a matter of law, by considering certain transfers he made
5 prior to the bankruptcy filing as evidence of his intent to
6 hinder or delay a creditor. Absent those errors, Debtor
7 contends, the bankruptcy court could not have found he had the
8 requisite intent in order to deny discharge. Debtor also argues
9 that several of the bankruptcy court’s critical factual findings
10 were clearly erroneous. For the reasons explained below, we
11 disagree and AFFIRM.
12 I. FACTS2
13 A. The FINRA Action and Shustak Fee Dispute
14 Debtor lived in Los Angeles, California; he was employed by
15 JPMorgan Chase Bank, N.A. and JPMorgan Securities, LLC (“JPM”) as
16 a financial advisor until approximately April 2012. While
17 employed by JPM, Debtor developed an animus towards JPM.
18 In June 2012, Debtor commenced an arbitration action against
19 JPM before the Financial Regulatory Authority (“FINRA”) asserting
20 various claims related to his employment. JPM filed a
21 counterclaim in the FINRA action alleging that Debtor breached a
22
23 1
Unless otherwise indicated, all chapter and section
24 references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and
all Rule references are to the Federal Rules of Bankruptcy
25 Procedure, Rules 1001–9037.
26 2
These facts are drawn largely from a stipulation of facts
27 entered into by the parties in the bankruptcy court, and from
Debtor’s testimony at both a Rule 2004 examination and at the
28 trial in the § 727 action.
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1 contract by failing to repay a $750,000 loan.
2 Initially, Debtor was represented in the FINRA action by
3 Shustak & Partners LLP ("Shustak"). However, Debtor terminated
4 Shustak due to a fee dispute, and a new attorney appeared for
5 Debtor. While Debtor believed that he did not owe Shustak
6 additional fees, Shustak disagreed, sued Debtor in state court,
7 and promptly scheduled an ex parte hearing before the court
8 seeking to freeze all of Debtor’s assets. Debtor testified that
9 he did not learn about the hearing until the night before, and
10 as a result, his wife, who is a lawyer, had to make a 4 a.m. trip
11 to San Diego to attend the hearing to thwart Shustak’s efforts.
12 Based upon this experience, Debtor testified he feared Shustak’s
13 further collection efforts.
14 B. Debtor Consults an Asset Protection Attorney
15 In January 2014, Debtor was concerned enough with protecting
16 his assets that he thought it prudent to travel to Nevada to meet
17 with an asset protection attorney, Glen Woods (“Woods”). Debtor
18 testified he understood that Woods’ financial planning services
19 were legal and appropriate and that one of his goals in meeting
20 with Woods was to learn how to protect his assets from potential
21 creditors.
22 Although Debtor found Woods to be sophisticated and
23 knowledgeable, Debtor testified that he declined to follow Woods’
24 advice and sought a refund of the fees paid to Woods because, in
25 the days following the meeting, Woods failed to return his calls
26 and provide documents requested by Debtor.
27 C. Bank Accounts
28 During relevant times, Debtor had several financial
-3-
1 accounts, including a City National Bank account ("Debtor's CNB
2 Account") and a Mutual Securities, Inc. account ("Joint
3 Account"). Importantly, when he later filed for bankruptcy
4 relief, Debtor did not effectively claim an exemption in the
5 funds in either of these accounts.3
6 Debtor’s wife had an account in the name of her law office
7 at City National Bank (“Wife’s CNB Account”). Debtor testified
8 that this was an account she used to pay both their personal
9 bills and law office expenses. Debtor indicated he was not a
10 signatory on the account and had no control over the way she used
11 the funds in it. Even so, Debtor claimed the funds in Wife’s CNB
12 Account as exempt in his bankruptcy schedules.
13 In the years leading up to the bankruptcy filing, the
14 couple’s income was insufficient to support their lifestyle.
15 Debtor testified that they were living off withdrawals from two
16 IRAs maintained by him and his wife while he rebuilt his
17 business. He explained that he would regularly transfer funds
18 from the IRAs to Debtor’s CNB Account, and then transfer the
19 funds from Debtor’s CNB Account to Wife’s CNB Account, to pay
20 their personal bills.
21 D. The Refinancing of Debtor’s Home Mortgages
22 Debtor and his wife owned a home in Los Angeles ("the
23 Property"). While the FINRA action was pending, they refinanced
24
3
25 To be precise, in his Schedule C, Debtor listed the
accounts with “(exempt)” in parenthesis at the end of the
26 description. But the value of the claimed exemption in the
27 schedule was “$0.00.” Debtor perhaps did this because he had
used the entire amount of the exemption provided under C.C.P.
28 § 703.140(b)(5) to claim the funds in Wife’s CNB Account exempt.
-4-
1 the two mortgages on the Property. Debtor testified that the
2 purpose of this refinancing was to survive during the arbitration
3 and to allow him to avoid further depleting the IRAs. Debtor
4 began his efforts to refinance the mortgages in the fall of 2013.
5 On February 14, 2014, Debtor and his wife obtained a new
6 loan for approximately $1,500,000 secured by a deed of trust on
7 the Property ("First DOT"). Two weeks later, Debtor and his wife
8 obtained another loan for $200,000 secured by a second deed of
9 trust on the Property ("Second DOT"). After the existing deeds
10 of trust encumbering the Property were paid off, the remaining
11 cash proceeds from the First and Second DOTs were deposited in
12 Debtor’s CNB Account. As a result of these deposits, as of
13 March 1, 2014, Debtor’s CNB account contained approximately
14 $249,000 of loan proceeds.
15 Debtor testified that based on appraisals he saw prior to
16 refinancing, he believed there was still significant equity in
17 the Property after refinancing. According to Debtor, he did not
18 realize the Property may be worth only approximately $1.5 million
19 until June 2014, when he saw “Zillow” numbers and appraisals done
20 in anticipation of his bankruptcy filing. If the Property was
21 indeed valued at $1.5 million when the mortgages were refinanced,
22 and the First and Second DOTs totaled approximately $1.7 million,
23 the Property was fully encumbered after the refinance.
24 E. Transfers and the Outcome of the FINRA Action
25 In March 2014, Debtor transferred approximately $38,000 from
26 Debtor’s CNB account to two of his friends. Debtor testified at
27 his Rule 2004 examination that he did so to repay a personal
28 loan, and a business project loan, although Debtor acknowledged
-5-
1 that he had used the purported business loan proceeds to pay for
2 living expenses.
3 In April 2014, Debtor made payments to two experts for the
4 litigation with JPM. Debtor testified that, at that time, he
5 still believed he would prevail against JPM.
6 From April 28 to May 6, 2014, the FINRA panel conducted an
7 evidentiary hearing concerning Debtor’s claim and JPM’s
8 counterclaim.
9 Later in May 2014, Debtor transferred $18,000 from Debtor’s
10 CNB Account into Wife’s CNB Account.
11 On June 3, 2014, the FINRA panel issued a decision rejecting
12 Debtor’s claims against JPM; the decision awarded JPM
13 approximately $790,000.
14 Following entry of the award, in June 2014, Debtor
15 transferred an additional $51,000 from Debtor’s CNB Account to
16 Wife’s CNB Account. Debtor also transferred $121,000 from
17 Debtor’s CNB Account to the bank account of a corporation wholly-
18 owned by Debtor, Clownputsch, Inc. (“the Clownputsch Account”).
19 But a few days later, Debtor transferred $119,000 back from the
20 Clownputsch Account to Debtor’s CNB Account. Debtor testified at
21 his Rule 2004 examination that he made the transfer to the
22 Clownputsch Account, in part, because he was afraid people were
23 going to take his money and leave his family destitute.
24 F. Prepayment of the Property Mortgages
25 On July 9, 2014, six days after receiving notice of the
26 FINRA award, and three weeks before filing his bankruptcy
27 petition, Debtor used funds in Debtor’s CNB Account to make
28 payments of approximately $41,000 and $11,000 to the lenders on
-6-
1 the First and Second DOTs, respectively. Debtor instructed them
2 to apply these amounts to the next six monthly payments due on
3 the loans.
4 Debtor acknowledged that he had never previously made
5 prepayments on the mortgages so far in advance. He explained
6 that he made these payments because he wanted to protect his
7 family and to ensure money was not available for Shustak to
8 seize. At his Rule 2004 examination, Debtor also testified he
9 felt the need to protect his family because of the FINRA award
10 and threatening letters he received from JPM.
11 On July 17, 2014, JPM commenced an action in the United
12 States District Court for the Central District of California for
13 judicial confirmation of the FINRA award.
14 G. The Bankruptcy Case and More Transfers
15 On July 29, 2014, Debtor filed a chapter 7 petition. Debtor
16 acknowledged that, but for the JPM award, he would not have filed
17 for bankruptcy relief. Debtor’s Schedule F lists unsecured debts
18 totaling approximately $925,000, including an undisputed claim of
19 $789,000 owed to JPM on account of the FINRA award, and a
20 disputed $45,000 debt owed to Shustak for attorneys fees. These
21 were Debtor’s two largest unsecured creditors.
22 Just before Debtor filed his petition, in four separate
23 transactions, Debtor transferred approximately $31,600 from the
24 non-exempt Joint Account to various parties, including a $17,000
25 transfer to Wife’s CNB Account on the petition date. As a result
26 of the four transfers, the balance of the Joint Account decreased
27 from approximately $33,000 to the approximately $2,000 Debtor
28 disclosed in his Schedule B.
-7-
1 H. The Adversary Proceeding
2 On January 2, 2015, JPM filed an adversary complaint
3 objecting to Debtor’s discharge pursuant to § 727(a)(2)(A).4 The
4 parties filed a pre-trial stipulation setting forth uncontested
5 facts, which the bankruptcy court approved. On November 19,
6 2015, the bankruptcy court conducted a trial in the adversary
7 proceeding at which Debtor testified. On September 23, 2016, the
8 bankruptcy court entered a memorandum decision and judgment
9 denying Debtor’s discharge under § 727(a)(2)(A) because, it
10 determined, Debtor made transfers within the year preceding the
11 filing of his bankruptcy petition with the intent to hinder or
12 delay a creditor.
13 Debtor timely appealed the judgment denying discharge.
14 II. JURISDICTION
15 The bankruptcy court had jurisdiction under 28 U.S.C.
16 §§ 1334 and 157(b)(2)(J). The Panel has jurisdiction over this
17 appeal under 28 U.S.C. § 158(b).
18 III. ISSUE
19 Did the bankruptcy court err by denying Debtor’s discharge
20 under § 727(a)(2)(A)?
21 IV. STANDARD OF REVIEW
22 In reviewing a judgment denying a discharge, we review:
23 ”(1) the bankruptcy court's determinations of the historical
24
4
25 JPM also objected to Debtor’s discharge under
§ 727(a)(2)(B). The bankruptcy court decided that JPM abandoned
26 this claim by failing to introduce evidence or argument to
27 support it at trial. Thus, the court based its judgment against
Debtor solely on § 727(a)(2)(A). JPM has not argued otherwise in
28 this appeal.
-8-
1 facts for clear error; (2) its selection of the applicable legal
2 rules under § 727 de novo; and (3) its application of the facts
3 to those rules requiring the exercise of judgments about values
4 animating the rules de novo.” DeNoce v. Neff (In re Neff),
5 505 B.R. 255, 262 (9th Cir. BAP 2014) (citing Searles v. Riley
6 (In re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004), aff'd,
7 212 Fed.Appx. 589 (9th Cir. 2006)).
8 The bankruptcy court’s determinations concerning the
9 debtor’s intent are factual matters reviewed for clear error.
10 Beauchamp v. Hoose (In re Beauchamp), 236 B.R. 727, 729 (9th Cir.
11 BAP 1999). Fact findings are clearly erroneous if they are
12 illogical, implausible, or without support in the record. Retz
13 v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). We
14 give great deference to the bankruptcy court’s fact findings when
15 based upon its determinations as to the credibility of witnesses.
16 Id. If two views of the evidence are possible, the trial judge’s
17 choice between them cannot be clearly erroneous. Anderson v.
18 City of Bessemer City, N.C., 470 U.S. 564, 573–75 (1985); Ng v.
19 Farmer (In re Ng), 477 B.R. 118, 132 (9th Cir. BAP 2012).
20 V. DISCUSSION
21 The bankruptcy court denied Debtor’s discharge under
22 § 727(a)(2)(A), which provides that:
23 The court shall grant the debtor a discharge, unless
. . . the debtor, with intent to hinder, delay, or
24 defraud a creditor . . . has transferred . . . property
of the debtor, within one year before the date of the
25 filing of the petition.
26 § 727(a)(2)(A).
27 The party seeking denial of a discharge under § 727(a)(2)
28 must prove by a preponderance of evidence that there was: “(1) a
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1 disposition of property, such as a transfer or concealment, and
2 (2) a subjective intent on the debtor’s part to hinder, delay or
3 defraud a creditor through the act [of] disposing of the
4 property.” Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240
5 (9th Cir. 1997); Khalil v. Developers Sur. & Indem. Co.
6 (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007) (holding
7 that the burden of proof in a § 727 action is a preponderance of
8 the evidence). Courts should interpret § 727 liberally in favor
9 of debtors and strictly against parties objecting to discharge.
10 In re Retz, 606 F.3d at 1196 (quoting Bernard v. Sheaffer
11 (In re Bernard), 96 F.3d 1279, 1281 (9th Cir. 1996)).
12 A. Transfers
13 Relying on the Code’s definition of “transfer”, § 101(54),
14 the bankruptcy court concluded that, because each of the
15 following transactions involved the disposition of or parting
16 with property occurring within the statutory time period, they
17 constituted transfers by Debtor for purposes of the first Lawson
18 element:
19 (1) the refinancing of the mortgages on the Property and the
20 transfers of the loan proceeds to Debtor’s accounts;
21 (2) the $38,000 transfer to pay off loans from friends;
22 (3) the $51,000 transfer to Wife’s CNB Account;
23 (4) the five months of prepayments made to the mortgage
24 lenders;5
25
26 5
The bankruptcy court found that because the amounts Debtor
27 paid the lenders included the currently-due monthly payment, the
transfers amounted to only a five month prepayment, despite the
28 (continued...)
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1 (5) the $31,600 in transfers from the Joint Account,
2 including $17,000 to Debtor’s wife on the petition date; and
3 (6) the $2,000 transferred to the Clownputsch Account that
4 was not later transferred back.
5 We agree with the bankruptcy court that these transactions
6 were transfers for purposes of deciding whether Debtor’s
7 discharge should be denied under § 727(a)(2)(A).6
8 B. Intent
9 Whether Debtor acted with the intent to hinder, delay, or
10 defraud a creditor in making the subject transfers in this case
11 “is a question of fact that requires the trier of fact to delve
12 into the mind of the debtor.” In re Searles, 317 B.R. at 379
13 (citing Emmett Valley Assocs. v. Woodfield (In re Woodfield),
14 978 F.2d 516, 518 (9th Cir. 1992)). To do so, the bankruptcy
15 court could infer Debtor’s intent from the circumstances
16 surrounding the transactions. In re Woodfield, 978 F.2d at 618
17 (citing First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339,
18 1342-43 (9th Cir. 1986)). Debtor’s course of conduct could also
19 be probative on the question of his intent. Wolkowitz v. Beverly
20 (In re Beverly), 374 B.R. 221, 243 (9th Cir. BAP 2007), aff'd in
21
5
22 (...continued)
parties’ stipulation that it was six months.
23
6
At oral argument, Debtor for the first time challenged the
24
bankruptcy court’s decision that some of these transactions
25 qualified as “transfers” for purposes of § 727(a)(2)(A).
However, Debtor waived that argument by failing to raise it in
26 his opening brief, and we decline to address it. See Darby v.
27 Zimmerman (In re Popp), 323 B.R. 260, 273 (9th Cir. BAP 2005)
(citing Laboa v. Calderon, 224 F.3d 972, 982 n.6 (9th Cir.
28 2000)).
-11-
1 part, dismissed in part, 551 F.3d 1092 (9th Cir. 2008) (citing
2 In re Adeeb, 787 F.2d at 1343 and other cases)).
3 In this appeal, Debtor focuses on two questions, both of
4 which he argues are “legal” issues concerning the bankruptcy
5 court’s decision:
6 (1) Did the bankruptcy court commit an error of law by
considering Debtor’s pre-bankruptcy payments to
7 creditors as evidence of his intent to hinder, delay,
or defraud a creditor?
8
(2) Did the bankruptcy court err, as a matter of law,
9 by considering his transfer of community property funds
from Debtor’s CNB Account to Wife’s CNB Account as
10 evidence of Debtor's intent to hinder, delay, or
defraud a creditor?
11
12 Debtor also contests a number of the specific factual findings
13 made by the bankruptcy court.
14 1. Payments to Creditors as Evidence of Intent to Hinder
or Delay a Creditor
15
16 The bankruptcy court concluded that while Debtor’s
17 prepayments to the mortgage lenders, standing alone, could not
18 support a denial of discharge, those transfers could be
19 considered as evidence of his intent in making the transfers, and
20 others, in connection with the other relevant facts. Relying on
21 the Ninth Circuit’s decision in Hultman v. Tevis, Debtor argues
22 that the bankruptcy court erred, as a matter of law, when it
23 considered the mortgage prepayments as evidence of his intent to
24 hinder or delay a creditor. 82 F.2d 940 (9th Cir. 1936). We
25 disagree.
26 In Hultman, within the year preceding the debtor’s
27 bankruptcy, he used money he received from a spendthrift trust to
28 partially pay a large debt owed to his son. 82 F.2d at 941.
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1 Prior to making the payment, the debtor’s attorney advised him
2 that the money received from the trust could not be taken by his
3 creditors, even after it reached his hands. Id. In litigation
4 in his bankruptcy case, a special master found that:
5 The bankrupt, in good faith, believed and relied on his
attorneys’ advice and acted on it in making the
6 transfer to his son. Furthermore, the amount of money
so transferred was less than the amount then owing by
7 the bankrupt to his son. The mere fact a bankrupt has
made a preferential payment or transfer to one of his
8 creditors is no ground for denying a discharge.
9 Id. (emphasis added). Based upon these findings, the district
10 court rejected the trustee’s objection to the debtor’s discharge.
11 Id. On appeal by the trustee to the Ninth Circuit, the master’s
12 findings of fact were not challenged by the trustee, and were
13 accepted by the Ninth Circuit. Id.
14 Debtor urges us to interpret the highlighted statement that
15 was accepted by the Ninth Circuit in Hultman to mean that a
16 debtor’s payment or transfer to a creditor can never be
17 considered as evidence of the debtor’s intent to hinder, delay,
18 or defraud his other creditors. But Hultman does not so hold.
19 First, the debtor in Hultman was found to have made the transfers
20 in good faith because of his reliance on the advice of counsel.
21 82 F.2d at 941. And second, because the debtor in Hultman made
22 the transfers in good faith, “the mere fact” that the debtor
23 elected to pay a creditor was the “only” fact that supported
24 denial of discharge. Id.
25 Unlike in Hultman, here, Debtor did not rely on advice of
26 counsel in making the various transfers to his creditors. In
27 addition, the bankruptcy court identified more than a single
28 payment to a creditor to support its decision to deny Debtor’s
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1 discharge. Therefore, Hultman does not control. Instead, we
2 conclude that, in determining whether Debtor should benefit from
3 a discharge of creditors’ claims against him, the bankruptcy
4 court did not err by considering Debtor’s prepetition payments to
5 his mortgage and other creditors, along with all other relevant
6 evidence, to discern whether Debtor acted with the sort of intent
7 discouraged under § 727(a)(2)(A).
8 This interpretation of § 727(a)(2)(A) and Hultman is
9 consistent with the Panel’s prior decisions. Recently, in Cooke,
10 although all but one of the debtor’s transfers were payments to
11 creditors, a majority of the Panel affirmed the bankruptcy
12 court’s decision denying a discharge under § 727(a)(2)(A),
13 perceiving no clear error had been made by the bankruptcy court
14 in finding that debtor intended to hinder or delay a judgment
15 creditor. 2016 WL 4039699 at * 6.7 In that case, like here, the
16 debtor testified that he knew the objecting creditor might try to
17 collect and that he did not want the creditor to have the money
18 he paid to other creditors. Id. There was also other evidence
19 to support the bankruptcy court’s finding that the debtor acted
20 with the requisite intent. Id. at *78; see also Perrine v.
21 Speier (In re Perrine), 2008 WL 8448835, *5 (9th Cir BAP 2008)
22 (“unlike [in] Hultman, there was additional evidence of intent to
23
7
24 The majority in Cooke distinguished Hultman because the
debtor did not effectively raise any “advice of counsel” defense.
25 2016 WL 4039699 at *5 n. 5.
26 8
The bankruptcy court considered the timing and amount of
27 the transfers, debtor's motivation to make the transfers, and the
credibility of the debtor's explanation regarding the transfers.
28 In re Cooke, 2016 WL at *7 n.6.
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1 defraud or delay . . . .”).
2 Of course, the Cooke decision was not unanimous, and Debtor
3 urges us to adopt the position taken in the dissent. But the
4 dissent specifically acknowledges that its “analysis is
5 independent of the bankruptcy court’s finding of intent.” Id. at
6 *14. Thus, the dissent’s reasoning in Cooke is inapplicable
7 under the facts in this case.
8 For these reasons, the Panel concludes that the bankruptcy
9 court committed no legal error and properly considered the
10 transfers made by Debtor to some of his creditors, with other
11 relevant evidence, to determine his intent to hinder or delay a
12 creditor.
13 2. Transfer of Community Property from Debtor’s CNB
Account to Wife’s CNB Account
14
15 In a similar vein to his first argument, relying on Gill v
16 Stern (In re Stern), 345 F.3d 1036 (9th Cir. 2003), Debtor argues
17 that the bankruptcy court erred, as a matter of law, by
18 considering Debtor’s transfer of funds from the non-exempt Joint
19 and Debtor’s CNB Accounts to the exempt Wife’s CNB Account as
20 evidence that he “crossed the line” between acceptable and
21 prohibited pre-bankruptcy planning. The bankruptcy court
22 considered Stern, and concluded that, although a debtor’s pre-
23 bankruptcy transactions converting non-exempt assets to exempt
24 assets may not be fraudulent in isolation, such transfers could
25 support a denial of discharge if accompanied by a subjective
26 intent to hinder, delay, or defraud a creditor. The Panel
27 agrees.
28 In Stern, the Ninth Circuit examined whether a transfer was
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1 fraudulent for purposes of determining whether the debtor could
2 claim an exemption in the funds transferred. 345 F.3d at
3 1042–1044. “[T]he principle evidentiary inference relied upon by
4 the Trustee [was] that non-exempt assets were converted to exempt
5 assets immediately prior to bankruptcy.” Stern, 345 F.3d at
6 1044. The Ninth Circuit held that “this inference is
7 insufficient as a matter of law to establish a fraudulent
8 transfer.” Id. (citing Wudrick v. Clements, 451 F.2d 988, 989
9 (9th Cir. 1971) (“the purposeful conversion of non-exempt assets
10 to exempt assets on the eve of bankruptcy is not fraudulent per
11 se.”)) To Debtor, this means that a bankruptcy court cannot
12 consider the conversion of nonexempt assets to exempt status as
13 evidence of an intent to hinder or delay a creditor under
14 § 727(a)(2)(A). But Stern is distinguishable when compared to
15 the facts of this case.
16 Of course, Stern was not a denial of discharge case; and it
17 only considered whether the debtor acted with fraudulent intent,
18 not the intent to hinder or delay a creditor at issue here.
19 Furthermore, the debtor’s transfer in Stern was between two
20 exempt retirement accounts, there was no direct evidence
21 probative of intent, and the circumstantial evidence was little
22 more than the timing of the transfer in question. Beverly,
23 374 B.R. at 241 (summarizing Stern, 345 F.3d 1036).
24 In contrast, in this contest, Debtor’s transfers effectively
25 converted assets from non-exempt to exempt status, there is
26 direct evidence probative of intent, including Debtor’s own
27 testimony about his pre-bankruptcy intentions, and the
28 circumstantial evidence of Debtor’s intent goes beyond the timing
-16-
1 of the transfers.
2 The discharge denial analysis in Beverly is more on point
3 than Stern. Indeed, the Panel published Beverly “to dispel the
4 myth that the toleration of bankruptcy planning for some purposes
5 insulates such planning from all adverse consequences—it does
6 not.” 374 B.R. at 226. There, a lawyer, anticipating a large
7 judgment on community debt, employed a marital settlement
8 agreement to transfer virtually all of the couple’s non-exempt
9 assets to his soon-to-be former wife, in exchange for her
10 relinquishment of the exempt assets that their creditors could
11 not reach. Id. at 227. In reversing the bankruptcy court’s
12 decision to not deny the debtor’s discharge, the BAP held the
13 bankruptcy court had “overstat[ed] the effect of exemption
14 planning”. Id. at 244.
15 In Beverly, the Panel recognized that certain types of
16 bankruptcy planning is permissible but observed that “the
17 existence of intent to hinder, delay, or defraud creditors
18 nevertheless may warrant denial of discharge.” Id. at 245
19 (citing Smiley v. First Nat’l Bank of Belleville (In re Smiley),
20 864 F.2d 562, 568 (7th Cir. 1989); Norwest Bank Nebraska, N.A. v.
21 Tveten, 848 F.2d 871, 874–76 (8th Cir. 1988); First Texas Savings
22 Ass’n, Inc. v. Reed (In re Reed), 700 F.2d 986, 990–92 (5th Cir.
23 1983)). It further explained that while the line between
24 legitimate bankruptcy planning and a prohibited intent to defraud
25 a creditor is difficult to draw, “two things are certain about
26 the line.” Id. First, “denial of discharge involving exemption
27 planning requires that there be evidence other than the mere
28 timing of the transformation of property from non-exempt to
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1 exempt status.” Id. And “[s]econd, there is a principle of ‘too
2 much.’” Id.
3 Contrary to Debtor’s position here, as explained in Beverly,
4 bankruptcy courts can properly rely on the debtor’s conversion of
5 non-exempt assets to exempt status, in conjunction with
6 additional evidence of a debtor’s intent, to support a denial of
7 discharge under § 727(a)(2)(A). Here, relying on Beverly, the
8 bankruptcy court identified evidence other than Debtor’s
9 transformation of property from non-exempt to exempt, and the
10 timing thereof, to support its findings about Debtor’s intent.
11 Because of this, it did not err, as a matter of law, in finding
12 that Debtor’s bankruptcy planning was “too much” and supported a
13 denial of discharge. Debtor argues that Beverly is
14 “distinguishable for the candor in which the debtor expressed his
15 intent to hinder, delay or defraud his creditors.“ Debtor’s Br.
16 at 45. But regardless of the extent of the facts in Beverly, the
17 legal principles announced in that decision hold true here.
18 3. Totality of Circumstances
19 In isolation, many of the Debtors’ transfers may seem to
20 have been benign. However, in considering the totality of the
21 circumstances, the bankruptcy court found that Debtor crossed the
22 line from permissible prebankruptcy transactions to making
23 prohibited transfers with an intent to hinder or delay a
24 creditor. Debtor argues the bankruptcy court erred in its
25 ultimate conclusion because “every circumstance that forms the
26 ‘totality’ is flawed and cannot support the judgment that denied
27 [Debtor’s] discharge.” Reply at 1. But when we examine Debtor’s
28 citations of error, we conclude that the bankruptcy court
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1 committed no clear error in finding the facts.
2 a. Admissions of Intent
3 Debtor argues that the bankruptcy court erred by finding his
4 admitted desire to prefer some of his creditors equated to an
5 admission that he intended to hinder or delay a creditor for
6 purposes of § 727(a)(2)(A). But, to be accurate, Debtor admitted
7 to more than intending to prefer certain creditors. Debtor
8 explicitly testified that he preferred his mortgage lenders in
9 order to keep funds from JPM and Shustak. Moreover, the
10 bankruptcy court found Debtor’s various admissions were only
11 “additional evidence of his intent” to hinder or delay his
12 creditors and also rested its decision on additional
13 circumstantial evidence such as the timing and quantity of the
14 prepayments, as well as their irregular nature and the fact that
15 they were not yet legally due. It also took exception to the
16 fact that the funds used to prepay the mortgage lenders
17 originated from the equity in the Property that was available to
18 creditors until it was monetized through the refinancing. Thus,
19 the bankruptcy court properly considered Debtor’s admissions as
20 support of its finding of Debtor’s intent to hinder or delay a
21 creditor.
22 Debtor further argues his fear of Shustak’s future
23 unscrupulous collection actions were well founded and cannot
24 support a finding that he intended to hinder or delay a creditor.
25 But given the record, his supposed fear does not persuade the
26 Panel that the bankruptcy court erred in finding he intended to
27 hinder or delay Shustak’s efforts to collect, both scrupulous and
28 unscrupulous.
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1 b. Debtor’s Meeting with Woods
2 Debtor argues that the bankruptcy court erred by relying on
3 his meeting with attorney Woods as evidence of his intent,
4 because the meeting preceded any of the critical transfers, and
5 any intent he had at the time of that meeting was vitiated before
6 he made those transfers.
7 But recall, bankruptcy courts may rely on a debtor’s course
8 of conduct, or other circumstantial evidence, to infer intent to
9 hinder or delay a creditor. In re Woodfield, 978 F.2d at 618;
10 In re Beverly, 374 B.R. at 243. Here, the bankruptcy court was
11 not relying on Debtor’s intent in meeting with Woods alone as
12 sufficient to support a finding of his intent to hinder or delay
13 a creditor. Rather, it found that the timing of Debtor's meeting
14 with Woods, together with Debtor’s knowledge and planning in
15 doing so, was "additional evidence" that supported a finding of
16 Debtor's intent to hinder or delay a creditor, particularly in
17 prepaying his home loan lenders. In sum, the bankruptcy court
18 appropriately relied on Debtor’s intent in meeting with Woods as
19 circumstantial evidence to supports its finding of Debtor’s
20 intent at the time he made the transfers to his creditors.
21 c. Refinancing
22 The bankruptcy court found that, through refinancing, Debtor
23 extracted almost $250,000 from equity in the Property, depleting
24 almost all of it, and shielding the equity that exceeded the
25 limited $100,000 homestead exemption. Debtor argues that the
26 fact that he likely over-encumbered the Property via the
27 refinancing should not be held against him because he believed
28 the Property was worth more than the amount he borrowed when he
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1 refinanced. But the bankruptcy court’s findings show that it gave
2 Debtor’s version of the facts little weight. The bankruptcy
3 court did not err in doing so. The Panel gives great deference
4 to the bankruptcy court’s determination of Debtor’s credibility.
5 Additionally, the limited amount of the new second mortgage loan
6 and Debtor’s admission that traditional lenders had declined to
7 extend credit to him for a second mortgage support such a
8 finding.
9 Debtor also argues his intent in refinancing was not to
10 hinder or delay his creditors, but that he only intended to limit
11 his dependence on the IRAs while he survived during the
12 arbitration with JPM. But even if this was one reason Debtor
13 refinanced, his intent to hinder or delay a creditor still
14 warrants denial of discharge "notwithstanding any other
15 motivation" for the transfer. In re Adeeb, 787 F.2d at 1343
16 (holding the intent to hinder or delay warrants denial of
17 discharge “notwithstanding any other motivation” for the
18 transfer).
19 For these reasons, the bankruptcy court did not err in
20 finding that refinancing the Property supported a finding of
21 Debtor’s intent to hinder or delay a creditor and denial of his
22 discharge.
23 d. The Transfers to Wife’s CNB Account
24 Debtor next argues the bankruptcy court erred in
25 considering his transfer of funds from his bank account to his
26 wife’s bank account as evidence of an intent to hinder or delay
27 his creditors because it “overlooked” the fact that his wife had
28 a community property interest in the funds in his account and the
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1 community estate will remain liable for his debts.
2 In addressing a similar argument the bankruptcy court found
3 that even though Debtor had a community property interest in
4 Wife’s CNB Account, and that creditors could potentially collect
5 the funds transferred to that account, Debtor intended these
6 transfers to make it difficult for his creditors to collect by
7 putting the funds out of his name and into his wife’s name and
8 control. Furthermore, although Debtor testified the $86,0009
9 that was transferred from Debtor’s CNB Account to Wife’s CNB
10 Account was used to pay “customary bills,” the bankruptcy court
11 found that $61,00010 of it was disbursed for the benefit of
12 Debtor and his wife.
13 These findings are supported by the record and similarly
14 defeat Debtor’s present argument. Although Debtor’s creditors
15 may have the option of collecting through his wife’s joint
16 liability, they would nonetheless be hindered and delayed in
17 doing so when compared to collecting directly from him. As such,
18 the bankruptcy court did not err in finding Debtor made these
19 transfers with the intent to hinder or delay a creditor.
20 e. The Transfers to Clownputsch and Friends
21 In response to statements in JPM’s brief, Debtor argues that
22 the transfer of funds to his friends and the Clownputsch Account
23
9
24 This amount includes the $18,000 transferred after the
arbitration hearing, the $51,000 transferred after the FINRA
25 award was entered against him, and the $17,000 transferred on the
eve of bankruptcy.
26
10
27 This is the difference between the $86,000 transferred to
Wife’s CNB Account and the $25,000 remaining in Wife’s CNB
28 Account as of the petition date.
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1 were not evidence of his intent to hinder or delay a creditor.
2 The bankruptcy court did not rely on the transfer to the
3 Clownputsch Account, and expressly stated the transfers to his
4 friends did not support a finding of his intent to hinder or
5 delay a creditor. As such, the Panel need not address these
6 arguments.
7 f. Intent to Hinder or Delay
8 In sum, the bankruptcy court relied on numerous facts to
9 support its finding of Debtor’s intent to hinder or delay a
10 creditor. In addition to the foregoing facts, the bankruptcy
11 court identified certain “badges of fraud” such as Debtor’s close
12 relationship with his wife, the timing of the transfers in
13 relation to the FINRA action, Debtor’s poor financial condition,
14 and that substantially all of Debtor's property was transferred.
15 Additionally, it found that Debtor’s prepetition transfers caused
16 a large dilution of non-exempt assets, and the approximately
17 $250,000 in the non-exempt Debtor’s CNB Account was reduced to
18 $600 by the time of filing.
19 On this record, the bankruptcy court did not err in finding
20 that Debtor made transfers with the intent to hinder or delay a
21 creditor justifying the denial of his discharge under
22 § 727(a)(2)(A).
23 VI. CONCLUSION
24 The bankruptcy court committed no legal or factual errors.
25 We AFFIRM.
26
27
28
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