In the recent case Wylie v. Miller, 22-10952 (S.D. Mich. March 29, 2024) [1] , a bankruptcy court’s decision to deny a couple’s discharge under Section 727(a)(2)(B) for making a post-petition transfer with the intent to hinder the Chapter 7 Trustee was reversed and remanded for entry of a discharge by the United States District Court Eastern District of Michigan, Southern Division.
Debtors, a married couple, filed for a joint Chapter 11 bankruptcy petition in August of 2020. Defendant, Chapter 7 Trustee, filed an adversary proceeding asking to deny both Debtors a discharge under §727(a)(2)(A), §727(a)(2)(B), and §727(a)(4)(A). Following a bench trial, both Debtors were denied discharge under §727(a)(2)(B). The bankruptcy court opined that the couple transferred property of the estate with the intention to hinder the Trustee following the filing of the petition. Prior to the bankruptcy petition, the couple filed their 2019 state and federal tax returns. During that time, the couple elected to apply their tax overpayment to their tax liabilities for the next year. The Trustee argued that the couples’ decision warranted denial of discharge under §727(a)(2)(A) because the property was transferred to their tax creditors within one year of filing the bankruptcy petition. The couple proceeded in a similar way with their 2019 tax returns. They filed their returns two weeks after filing their bankruptcy petition and applied an overpayment to their 2020 tax liabilities. The Trustee contended the couple should be denied discharge under §727(a)(2)(B) because they transferred property of the estate to their tax creditors post-petition. The bankruptcy court found that only the 2019 tax return was made with the intent to hinder the Trustee. The couple appealed the decision and District Judge Mark A. Goldsmith of Detroit agreed with the couples’ contention that the bankruptcy court erred.
First, Judge Goldsmith articulated the role of the district court in this instance. He illustrated how the district court’s findings are reviewed under a clear and erroneous standard, and its legal conclusion was examined de novo. In the instant case, a debtor’s requisite intent is a question of fact reviewed for clear error. Secondly, Judge Goldsmith explained that even though acting with intent to hinder is sufficient under §727(a)(2)(B) due to the phrase “intent to hinder, delay, or defraud” is disjunctive; “proof of any one is sufficient,” the bankruptcy court did not have adequate support to reinforce its determinations. The couple testified that the reasoning behind their decision was to ensure that their 2020 taxes would be paid. The bankruptcy court misconstrued their reasoning and deemed that the couple’s only intent was to hinder the trustee. According to Judge Goldsmith, the bankruptcy court found that “the Debtors’ actual subjective intent…was, in substance, an intent to ‘hinder’ the Trustee.” Further, Judge Goldsmith noted that there is no evidence showing that the debtors were aware of the potential effects of their decisions. Lastly, Judge Goldsmith called attention to the fact that “courts have repeatedly held that a total bar to discharge is an ‘extreme step’ and that §727 is to be ‘construed liberally in favor of the debtor.’
Ultimately, Judge Goldsmith revered the bankruptcy’s court decision and remanded the mater for entry of a discharge.
[1] Full Case in Article: https://www.abi.org/newsroom/daily-wire/a-refinanced-consumer-loan-might-not-be-a-%E2%80%98consumer-debt%E2%80%99-ninth-circuit-says
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