In their Chapter 7, the Youngs agreed, in a court approved settlement, to allow the sale of their residence, splitting the net proceeds equally with the Trustee and were to keep “only those furnishings necessary to furnish their new residence”, with the remainder of their personal property to be auctioned. After initially identifying the property they were to retain with the Trustee’s auctioneer, the Young sold all of their additional property with a different auction company, using the funds to pay for moving costs. It appears that the proceeds from the sale of the personal property amounted to $937.50. The Trustee and Bankruptcy Administrator then sought denial of the Youngs’ discharge pursuant to 11 U.S.C. § 727(a)(2).
While recognizing that this was “no small request”, the bankruptcy court proceeded to analyze the Young’ actions for an actual intent to ‘hinder, delay, or defraud’, as “constructive intent is not sufficient.” In re Bowen, 498 B.R. 584, 588 (Bankr. W.D. Va. 2013) (citing In re Smoot, 265 B.R. 128, 142 (Bankr. E.D. Va. 1999), subsequently aff’d sub nom. Tavenner v. Smoot, 257 F.3d 401 (4th Cir. 2001); Zanderman, Inc. v. Sandoval (In re Sandoval), 153 F.3d 722, 1998 WL 497475, *2 (4th Cir. 1998) (unpublished)). This requires more than “insignificant or trivial delay or impairment.” In re McGalliard, 183 B.R. 726, 732 (Bankr. M.D.N.C. 1995), with factors (consolidated from several opinions) including:
1. Whether the transaction:
a. Was conducted at arm’s length, examining the relationship between the Debtor and the Transferee;
b. Lacked consideration for the conveyance;
c. Liquidated the assets into cash;
d. Transferred the Debtor’s entire estate;
e. Reserved for the Debtor benefits, control, or dominion of the assets.
2. The timing of the transfer relative to:
a. The Debtor’s insolvency, indebtedness, or filing of the bankruptcy petition;
b. The Pendency or threat of litigation;
c. Whether the debtor was aware of the existence of a significant judgment or overdue debt;
d. Whether the debtor is aware that a creditor is in hot pursuit of its judgment/claim.
3. Secrecy or concealment of the transaction.
Here the bankruptcy court found that the actions by the Youngs satisfied many of these factors, including unauthorized sale of the personal property and retention of cash themselves, immediately before the property was to be sold by the Trustee. Accordingly, the bankruptcy court denied their discharge.
Additionally, the bankruptcy court found that the estate had been damaged by the Youngs’ illicit sale of the personal property, finding that the request by the Trustee either for turnover of the property or the proceeds from the sale. Finding that “present possession” of property was not necessary, but that the Trustee could “recover from an entity that had possession of estate property at any time during the case and allows the trustee to recover the value of such property.” In re Price, No. 06-62721-MGD, 2006 WL 6589883, at *2 (Bankr. N.D. Ga. Sept. 20, 2006). Additionally, the bankruptcy court held that its contempt power would support a money judgment for the proceeds.
The money judgment/turnover is a partial solution for a Trustee stymied by the holding by the Supreme Court in Law v. Siegel, which held that a debtor’s exemptions could not be surcharged, even in the face of fraudulent behavior. Here the Youngs will not lose their exemption, but in addition to losing their discharge will have additional debt of $937.50 to the estate following this case.
It would likely have been better if the auctioneer had compiled an itemized list of personal property that the Youngs were to retain and those they would be turning over for auction. Even better if possession had been taken immediately. Either would have minimized or eliminated the risk of the illicit sale occurring. Additionally, the costs of itemizing and storing these assets would have perhaps induced a Trustee to be less interested in administering personal property assets worth less than $1,000.00.
While this would not likely have had an affect on their behavior in this case, it is not clear, either from this opinion or the settlement, why the Youngs agreed to split the net proceeds from the sale of the house equally, but still capped at their exemptions, with the Trustee rather than insisting that their exemption be paid first. That question was ultimately moot, as the Trustee was unable to find any buyers for the homestead and abandoned it to the secured creditors.
Lastly, there is still another pending adversary proceeding, where the Trustee is seeking to avoid an alleged fraudulent conveyance of a different piece of real property from the Youngs to Mrs. Young’s brother and nephew.
For a copy of the opinion, please see: