Opinion
Case No. 98-13090-SSM, Adversary Proceeding No. 98-1370
December 2, 1999
Richard G. Hall, Esquire, Annandale, VA, of Counsel for the plaintiff
Mr. William A. Mattern, Alexandria, VA, for Defendant pro se
MEMORANDUM OPINION
This is an action to deny a chapter 7 debtor a discharge. The plaintiff, Prosperity Bank, is a judgment creditor of the defendant-debtor, William A. Mattern ("the debtor"). A trial was held on October 7, 1999, at which Prosperity Bank was represented by counsel and the debtor appeared pro se. The sole issue at trial was whether the debtor had transferred a boat into his wife's name within one year prior to the bankruptcy filing with intent to hinder, delay, or defraud creditors. At the conclusion of the trial, the court took the matter under advisement in order to review the evidence and the applicable law. This opinion constitutes the court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.
Facts
The debtor filed a voluntary chapter 7 petition in this court on April 20, 1998, and has not yet been granted a discharge. In the two years leading up to the filing, several creditors had obtained judgments against the debtor. Specifically, on April 18, 1996, Cumis Insurance Society ("Cumis") obtained a default judgment against the debtor in the Circuit Court of Fairfax County in the principal amount of $520,282.58. Approximately one year later, Young Chin Kim, Pan Dong Kim, and Eng Sun Kim obtained a default judgment against the debtor in the amount of $96,605.50. Finally, Prosperity Bank was awarded a default judgment on May 22, 1997, in the total amount of $148,752.90. It was Prosperity Bank's aggressiveness in collecting its judgment that apparently prompted the debtor to seek bankruptcy relief. Several months before the petition date, an interrogatory summons was issued, at the request of Prosperity Bank, by the Fairfax County Circuit Court requiring the debtor to appear on March 10, 1998, to answer questions related to his assets. At the debtor's request, the hearing was continued to March 31, 1998. After counsel for Prosperity Bank learned of the debtor's intention to file for bankruptcy, no further attempt was made to go forward with the hearing.
The debtor was represented by counsel in connection with the filing of the petition. The debtor subsequently brought a motion to dismiss his case on the ground that he was not mentally competent at the time he filed. An evidentiary hearing was held, and while it appeared uncontradicted that the debtor suffers from a mental illness for which he has been hospitalized on several occasions, the court found he had sufficient mental capacity at the time he filed the petition to understand what he was doing. Since it appeared that there were assets that could be used to pay creditors, and since the chapter 7 trustee opposed dismissal, the court denied the motion to dismiss.
On July 20, 1998, Prosperity Bank filed a proof of claim asserting an unsecured claim in the amount of $81,004.51.
Plaintiff filed this adversary proceeding on September 11, 1998, to deny the debtor a discharge. The complaint alleges that the debtor transferred assets within one year before the date of the bankruptcy petition with intent to delay, defraud, or hinder creditors. The sole focus of the trial was on the debtor's transfer of a 24-foot Regal motorboat to his spouse, Mary A. Mattern. The boat, which had been purchased in July 1995 for $1,200.00, had been titled in their joint names. On or about April 19, 1997, they signed an assignment conveying the boat to Mrs. Mattern. The Commonwealth of Virginia Department of Game and Inland Fisheries ("the Department") received the application for a new certificate of title on April 22, 1997. The certificate was issued to Mrs. Mattern on April 24, 1997.
The debtor's position at trial was that his spouse provided adequate consideration for the transfer of the boat. Mrs. Mattern testified that she received the boat to satisfy numerous outstanding obligations owed to her by the debtor. According to her testimony, she paid on the debtor's behalf from her own funds $23,000 to American Express and $90,000 to Prosperity Bank on a line of credit, and in addition had paid all the household bills in 1996. She testified that it was her understanding that the debtor would be liable to her for any payments she made to pay his other debts. Mrs. Mattern did not recall how the subject of transferring of the boat arose between her and the debtor, but she unequivocally stated that she obtained ownership of the boat as a form of payment from the debtor to reduce the debt owed to her. The court notes that Mrs. Mattern filed a proof of claim on August 27, 1998, in the bankruptcy case in the amount of $178,186.34. As to the whereabouts of the boat, the debtor's spouse testified that she sold the boat in 1997, possibly in April of that year, for approximately $20,000, and used the proceeds to pay Prosperity Bank.
Conclusions of Law I.
This court has subject matter jurisdiction under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b)(2)(I) and (J), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge. Venue is proper in this district under 28 U.S.C. § 1409(a). The defendant has been properly served and has appeared generally.
II.
At trial, the plaintiff relied exclusively on 11 U.S.C. § 727(a)(2), which provides that a chapter 7 debtor will be denied a discharge if, among other things,
The complaint, which is pleaded in a single count, also referenced 11 U.S.C. § 727(a)(4), which permits denial of discharge where a debtor knowingly and fraudulently makes a false oath or account in connection with his bankruptcy case. Prosperity Bank submitted no evidence in support of this ground.
the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be, transferred, removed, destroyed, mutilated, or concealed —
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition[.]
In a complaint objecting to the debtor's discharge under § 727, the burden of proof is on the objecting party, and the standard of proof is preponderance of the evidence. Farouki v. Emirates Bank int'l, Ltd., 14 F.3d 244 (4th Cir. 1994); Harmon v. McGee (In reMcGee), 157 B.R. 966, 973 (Bankr. E.D. Va. 1993); 6 COLLIER on Bankruptcy f 727.02[3][e], at 727-19 (Lawrence P. King, ed., 15th ed. Rev. 1999). Once the creditor has established a prima facie case, the burden shifts to the debtor to provide satisfactory explanatory evidence to rebut the allegations. Farouki, 14 F.3d at 249 n. 16. "While the burden of persuasion rests at all times on the creditor objecting to discharge, it is axiomatic that the debtor cannot prevail if he fails to offer credible evidence after the creditor makes a prima facie case." Id. at 250, quoting In re Reed, 700 F.2d 986, 992-93 (5th Cir. 1983).
The necessary elements of § 727(a)(2) are straightforward. The objecting party must prove:
(1) that the act complained of was done within one year before the date of the filing of the bankruptcy petition; (2) that the act was done with actual intent to hinder, delay, or defraud creditors . . .; (3) that the act was that of the debtor . . .; and (4) that the act consisted of transferring, removing, destroying or concealing any of the debtor's property, or permitting any of these to be done.
6 COLLIER ON BANKRUPTCY ¶¶ 727.02[a], at 727-13 (Lawrence P. King, ed., 15th ed. Rev. 1999); Baltic Linen Co., Inc. v. Rubin (In re Rubin), 12 B.R. 436, 441 (Bankr. S.D. N.Y. 1981). Only the first two elements are at issue in this case.
A.
The determinative question before the court is whether the transfer of the boar occurred "within one year before the filing of the petition." As discussed, the evidence shows that the debtor signed the certificate of title on April 19, 1997, one day beyond the one-year period set forth under § 727(a)(2). However, it is Prosperity Bank's position that under Virginia law the transfer of ownership of the boat did not occur until April 24, 1997, the date when the new certificate of title was issued to Mrs. Mattern. Although Prosperity Bank was unable to cite any case law directly addressing water craft, it asks the court to look to the analogous automobile registration laws, where the case law is more developed. The plaintiff relies specifically on United States Fidelity Guaranty Co. v. Trussell, 208 F. Supp. 154 (W.D. Va. 1962) as supporting its argument.
Title 29.1 of the Code of Virginia governs the registration and certification of boat titles. In particular, Va. Code Ann. § 29.1-717(c) provides as follows:
To sell, assign, or transfer a water craft title in the Commonwealth, the certificate of title must be delivered to the purchaser or transferee with an assignment on the certificate showing title in the name of the purchaser or transferee. To purchase or otherwise acquire a water craft required to be titled in the Commonwealth, any purchaser or transferee other than a licensed dealer must obtain a certificate of title for it in his name.
(emphasis added). A fair reading of this section leads to the conclusion that once a purchaser or transferee obtains a properly delivered and assigned certificate of title, he or she is the owner of the boat. It is true that the new owner of a boat must apply for a certificate of title before the water craft can be operated. Va. Code Ann. § 29.1-717(a), 29.1-713(a). However, the court's own research has not found any authority that supports Prosperity Bank's argument that the transferee of a boat does not acquire ownership until the certificate of title, reflecting the new name of owner, is issued by the Department. This conclusion is further supported by Va. Code Ann. § 29. l-717(b), which reads in part: "A certificate of title is prima facie evidence of the ownership of a water craft." The operative language is "prima facie evidence." Prima facie evidence is "[e]vidence which, if unexplained or uncontradicted, is sufficient to sustain a judgment in favor of the issue which it supports, but which may be contradicted by other evidence." BLACK'S LAW DICTIONARY 1190 (6th ed. 1990) (emphasis added). Had the General Assembly intended the issuance of a certificate of title to be determinative of ownership, it would not have used the phrase "prima facia evidence."
At Prosperity Bank's urging, the court has reviewed the analogous Motor Vehicle Title Registration Acts for guidance. The comparable code section is Va. Code Ann. § 46.2-628, which requires the transferor to fully and correctly endorse the assignment on the certificate of title and to deliver it to the transferee at the time of delivering the motor vehicle. The transferee in turn must forward the certificate to the Department of Motor Vehicles with an application for a new certificate of title. See Va. Code Ann. § 46.2-630. Nevertheless, just as under Title 29.1, there is no statutory provision under the motor vehicle laws suggesting that ownership does not vest in the transferee until the new certificate of title is issued.
Unlike the boating laws, there are numerous judicial decisions interpreting the provisions of the motor vehicle laws. In this connection the court concludes that Prosperity Bank's reliance on Trussell is misplaced. Trussell was a declaratory judgment action to determine which of several insurance companies was liable for an automobile accident, an issue which turned on who was the owner of the vehicle at the time of the accident. The facts in Trussell are, to say the least, convoluted. For the purpose of this opinion, however, it is sufficient to note that the vehicle had been repossessed by a finance company, which delivered it to an automobile dealership for resale. The finance company did not, however, assign the title, and when the dealership sold the vehicle, it likewise did not assign the title to the purchaser. The accident occurred two weeks later while the purchaser was driving the vehicle. The court concluded that the finance company had obtained title by operation of law when it repossessed the vehicle. 208 F. Supp at 160. Since there was no assignment of the title from the finance company to the dealership, or from the dealership to the purchaser, the court held that the sale "had not been consummated at the time of the accident," and thus the finance company remained the owner of the car, notwithstanding that possession of the vehicle had been given to the purchaser. 208 F. Supp. at 161. While Trussell is clear that mere delivery of a motor vehicle is not sufficient to transfer legal ownership, nowhere does it hold that the issuance of a new title is required. Rather, the opinion consistently refers to the necessity for an "assignment and delivery of the certificate of title." 208 F. Supp. at 159. Moreover, other case law does not appear to support the plaintiffs contention. See In re Lawson, 201 F. Supp. 710, 714 (W.D. Va. 1962); In re Law, 1 B.R. 557 (Bankr. W.D. VA. 1979); Nationwide Ins. Co. v. Storm, 200 Va. 526, 528, 106 S.E.2d 588, 589 (1959); Thomas v. Mullins, 153 Va. 383, 149 S.E. 494 (1929) (holding that in order to complete the sale of an automobile, it is essential that the seller delivers to the purchaser a proper assignment of title); 2B Michie's Jurisprudence of Virginia and West Virginia, Automobiles § 129 (1999).
The closest case on point is the Fourth Circuit decision in Wicker v. National Surety Corp., 330 F.2d 1009 (4th Cir. 1964). The issue in that case was whether the automobile dealer's insurance policy covered the damages caused by the automobile in the hands of the purchaser, since the insurance coverage was predicated on who owned the vehicle. In Wicker, the dealership sold a station wagon to a buyer on December 20, 1961. The certificate of title was not assigned and physically delivered to the buyer on that date, which was when he drove away with the vehicle. It was understood by the parties that the dealer would assign the certificate of title the next day and send the appropriate documents to the Division (now Department) of Motor Vehicles. Because the Division was closed for the holidays, the new certificate of title was not issued until December 27, 1961. The purchaser, in the meantime, was involved in an accident with the vehicle on December 24, 1961, injuring the plaintiff of the lawsuit. The plaintiff argued that, because the assigned certificate of title was never delivered to the buyer, the dealership remained the owner of the automobile until December 27, when the Division issued the new certificate. The Fourth Circuit disagreed, finding that the assigned certificate of title was constructively delivered to the buyer on December 21, thus divesting the dealership's ownership interest, based on an agency relationship that existed between the purchaser and the dealership. 330 F.2d at 1012-13. Although Wicker centered on the delivery of the assigned certificate, the court noted:
[I]t is clear that if the seller delivers the title certificate to the purchaser, the assignment on the back of the certificate having been properly executed, the seller has divested himself of all interest in the vehicle whether or not the purchaser thereafter complies with his statutory duty of filing the assigned certificate with the Division of Motor Vehicles.
Id. at 1012. This court is mindful that the cases cited to in the above discussion were decided under former versions of the motor vehicle laws, but after reviewing the present and former statutes, there is no reason to doubt the precedential value of these cases.
What Prosperity Bank fails to appreciate is that the Department's role in issuing certificates of title serves as a recording system, designed for the benefit of creditors and future purchasers. Cf. Toyota Motor Credit Corp. v. Hyman Auto Wholesale, Inc., 256 Va. 243, 246, 506 S.E.2d 14, 15 (1998) ("The motor vehicle titling statutes . . . were enacted to protect the public by providing for the issuance of certificates of title as evidence of ownership of motor vehicles . . ."). This purpose is reflected, for example, under Va. Code Ann. § 29.1-725, which provides that the issuance of a certificate of title by the Department serves as adequate notice to all parties that the boat is subject to a security interest. In the case at hand, the debtor's assignment of the certificate of title on April 19, 1997, was uncontradicted by the evidence. Consequently, the court concludes that Mrs. Mattern became of the owner of the boat as of that date.
B.
Although not specifically raised at trial, there remains an issue of whether the recording of a transfer (i.e. the issuance of a certificate of title) independently constitutes a "transfer" for purposes of § 727(a)(2). In other words, if the transfer of ownership occurred outside the one-year period, there is a split of authority over whether the debtor should be denied a discharge if the transfer was later recorded within the one-year period. As discussed, the transfer of the boat was not perfected against creditors until April 24, 1997, which was plainly within one year before the date of the bankruptcy petition. The majority of the courts hold that a transfer is deemed made under § 727(a)(2) when the transaction is recorded. See, e.g., In re MacQuown, 717 F.2d 859 (3d Cir. 1983); Ingersoll v. Kriseman (In re Ingersoll), 124 B.R. 116 (Bankr. M.D. Fla. 1991); In re Gonzalez, 92 B.R. 960 (Bankr. S.D. Fla. 1988); In re Ford, 53 B.R. 444 (W.D. Va. 1984), aff'd on other grounds, 773 F.2d 52 (4th Cir. 1985). The minority position, adopted by COLLIER, takes the opposite view. See Finalco, Inc. v. Roosevelt (In re Roosevelt), 87 F.3d 311 (9th Cir. 1996); First Nat 7 Bank v. Shreves (In re Kock), 20 B.R. 453 (Bankr. D. Neb. 1982); 6 COLLIER ON BANKRUPTCY ¶ 727.02[2][c], at 727-13 (Lawrence P. King, ed., 15th ed. Rev. 1999).
A careful reading of these cases reveals that each view is premised on a different sets of facts. The cases making up the majority position involve situations in which it was the debtor-grantor who recorded the transfer. In contrast, the minority line of cases dealt with non-debtor transferees who recorded their deeds. The Ninth Circuit in Roosevelt reasoned that focusing on the transfer of property between parties, rather than the recording date, would be more consistent with § 727(a)(2)'s emphasis on the debtor's wrongful conduct. 87 F.3d at 318. Upon review of cases, the court believes the minority view is better reasoned regardless of the circumstances surrounding the recording of a transfer.
Section 727(a)(2) does not define when a transfer is made, nor does the legislative history provide any clarification. Roosevelt, 87 F.3d at 316. Instead, the court must look to 11 U.S.C. § 101(54):
In this title —
(54) "transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption[.]
Congress intended the definition of transfer to be as broad as possible. 6 COLLIER ("[A]ny transfer of an interest in property is a transfer, including a transfer of possession, custody, or control . . ."). The court agrees that any disposition with respect to property or an interest in property constitutes a transfer, but the mere recording of a transaction that has already occurred is not such a disposition. Once a party properly transfers property to a purchaser, for instance, there is nothing left more for the seller to dispose of or with which to part. The perfection of a transfer only goes to the validity of the transfer as against the rest of the world.
Such a reading of § 101(54), in conjunction with § 727(a)(2), is also consistent with the fraudulent conveyance provisions under 11 U.S.C. § 548. Section 548 states that a "transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor . . . cannot acquire an interest in property that is superior to the interest in such property of the transferee . . ." 11 U.S.C. § 548(d)(1). The goals served by § 548 and § 727 are distinct, but it is telling that Congress chose, by adding § 548(d)(1), to elaborate the definition of "transfer," knowing that § 548 was already subject to the definitions under § 101 ("In this title . . ."). If the definition of transfer in § 101(54) were meant to incorporate acts of recording, there would have been no need for § 548(d)(1). Accordingly, the court concludes that the issuance of a certificate of title does not independently equate to a transfer under § 727(a)(2).
C.
Prosperity Bank's final argument is imaginative to say the least. The plaintiff contends that the one-year period in § 727(a)(2) is measured starting one day before the date of the bankruptcy petition. Under the plaintiffs theory, the cutoff date is the calendar date one year prior to the day prior to the bankruptcy filing. In the present case, that would be April 19, 1997, meaning that the debtor's assignment of the certificate of title on that date would fall within the statutory period for the barring of discharge. Prosperity Bank stresses that the use of the preposition "before," after the phrase "within one year," in § 727(a)(2) means that the triggering date is the day before the petition date rather than the petition date itself. The court finds this argument to be without merit. Because the court has been unable to find any authority, state or federal, that interprets the phrase "within one year before" under any context, the court is left to determine the normal, everyday meaning of the word "within" and how that interplays with "before."
Federal Rule of Bankruptcy Procedure 9006(a), determining how time periods are computed unde the Bankruptcy Code, provides that "the day of the act, event, or default from which the designated time period of time begins to run shall not be included." Furthermore, when computing a yearly period, courts have held that the time period runs from numerical date to numerical date (e.g. April 20, 1996 to April 20, 1997). See, e.g., Ford, 53 B.R. at 447.
When referring to time, "within" is commonly defined as "any time before; at or before; at the end of; before the expiration of; not beyond; not exceeding; not later than." Black's Law Dictionary 1602 (6th ed. 1990). To illustrate, if an invitation requires guests to arrive "Within" 10 minutes of 5:00 p.m., guests may arrive anytime between 4:50 p.m. and 5:10 p.m. The plain meaning of the term "Vithin" refers to any time period not longer than before the end or since the beginning of. See United States v. Smith, 900 F.2d 1442, 1447 (10th Cir. 1990). In light of this definition, the purpose of "before" under § 727(a)(2) is to limit the scope of "within," in that the only applicable acts are those that occurred prior to the bankruptcy filing. Without the use of "before," § 727(a)(2) would equally apply to post-petition transfers which followed one year after the petition date.
D.
Because the court concludes that the transfer of the boat took place more than one year prior to the bankruptcy filing, the court need not reach the issue of the debtor's intent. Nevertheless, to avoid an unnecessary remand on that issue if the court's ruling is appealed, the court will make appropriate findings.
Subsection § 727(a)(2) is intended to prevent the discharge of a debtor who has attempted to fraudulently dispose of his or her assets. T.R. Press, Inc. v. Whitcomb (In re Whitcomb), 140 B.R. 396, 398 (Bankr. E.D. Va. 1992) (Bostetter, C.J.). In order to establish fraud, a specific intent to defraud creditors must be shown; a mere constructive intent is insufficient. Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 306-07 (11th Cir. 1994); Johnston Memorial Hospital v. Hess (In re Hess), 21 B.R. 465, 467 (Bankr. W.D. Va. 1982); 6 COLLIER ON BANKRUPTCY ¶ 727.02[3][a], at 727-16. A finding of actual intent may be based on inferences that may be drawn and from circumstantial evidence, since a debtor is very unlikely to testify to an "actual intent" to defraud creditors. Whitcomb, 140 B.R. at 398; Union Bank of the Middle East, LTD. v. Farouki (In re Farouki), 133 B.R. 769 (Bankr. E.D. Va. 1991) (Bostetter, C.J.), aff'd sub. nom. Farouki v. Emirates Bank Int 7, LTD., 14 F.3d 244 (4th Cir. 1994); see also Smiley v. First Nat 7 Bk. of Belleville (In re Smiley), 864 F.2d 562, 566 (7th Cir. 1989); First Beverly Bk. v. Adeeb (In re Adeeb), 787 F.2d 1339, 1342-43 (9th Cir. 1986). Finally, and most important, the issue of whether the debtor possessed actual intent to defraud is a question of fact. Miller, 39 F.3d at 307; Smiley, 864 F.2d at 566; Hess, 21 B.R. at 467.
In the case at bar, the court would be compelled to find that the debtor transferred his half interest in the boat to his wife with intent to hinder, delay and defraud creditors notwithstanding that his wife appears to have had valid monetary claims against him at the time the transfer was made. This case exemplifies many of the "badges of frauds" that have been adopted by the courts when deciphering an individual's state of mind. See, e.g., In re Kaiser, 722 F.2d 1574 (2d Cir. 1983); In re Woodfield, 978 F.2d 516 (9th Cir. 1992). First, the transfer was not between strangers, but between husband and wife living together. Second, although the mere preference of one creditor over another is not necessarily fraudulent as to other creditors, there is no evidence in the present case of any agreement that the boat would constitute a specific dollar credit against the sums Mrs. Mattern had paid on the debtor's behalf. Moreover, Mrs. Mattern could not recall any of the specifics of the transaction, such as whose idea it was to transfer the title. What makes the transfer even more troublesome is the fact that it occurred only 11 days after the second of the three default judgments were entered against the debtor. Applying a preponderance of the evidence standard, the court would have to find that the circumstances are wholly consistent with an effort to prevent creditors from being able to levy on the boat to satisfy their judgments. Nevertheless, as discussed above, since the property was transferred outside the statutory period under § 727, the transfer, even though intended to hinder creditors, does not bar the debtor's discharge.
III.
A separate order will be entered dismissing the complaint and directing the clerk to issue the debtor a discharge.
There is pending a separate adversary proceeding by Cumis Insurance Society to determine that its claim is nondischargeable. The issuance of a discharge does not affect that adversary proceeding.