Opinion
Case No. 00-70850, Adversary No. 00-7083
March 6, 2001
O P I N I O N
The issue before the Court is whether the Debtors should be denied a discharge pursuant to 11 U.S.C. § 727(a)(2) because of four uncompleted transfers of real property to their grandchildren six months before the filing of their bankruptcy petition.
The Plaintiff, the Village of San Jose, and the Defendants, Daniel and Ida Mae McWilliams, were involved in bitter litigation over certain real estate that the Defendants owned in San Jose, Illinois. The Farmer's Inn restaurant, a two-story masonry and timber structure built in the late 1800s, was located on the property. A portion of the roof had collapsed, and most of the timber in the building was saturated with water. The building was uninhabitable. The Plaintiff wanted the building repaired or demolished. The Defendants could not afford the necessary repairs.
In January, 1999, the Plaintiff served the Defendants with a Notice of Abatement and Report of the Health Officer. The Notice advised the Defendants that the building was dangerous and unsafe and should be demolished.
On March 26, 1999, the Plaintiff filed a Petition to Demolish Building. The Petition alleged that the building was dangerous and unsafe, that the Defendants had failed to make the building safe or to demolish it, and that the Plaintiff had the authority to demolish the building pursuant to 65 ILCS § 5/11-31-1.
On May 4, 1999, the Defendants obtained a rough estimate of the structural repairs necessary to make the building safe. The estimate of $48,000 did not include interior finishes, plumbing, heating, air-conditioning, or electrical work.
On June 22, 1999, the Circuit Court entered an Order authorizing the Plaintiff to demolish the building and recover the costs of the demolition.
On July 26, 1999, the Debtors satisfied the mortgage on the property, and the lien was released.
On August 24 and 25, 1999, the building was demolished by the Plaintiff. The Defendants were aware of and given written notice of the demolition.
On September 2 and 3, 1999, the Defendants quit claimed the property to their four grandchildren for one dollar and love. Each of the grantee grandchildren was under the age of ten. The Defendants never delivered the deeds to the grandchildren.
On February 24, 2000, the Plaintiff sought leave to file a supplemental complaint pursuant to the Uniform Fraudulent Conveyance Act. The Plaintiff was allowed to file its supplemental complaint pursuant to an order entered March 15, 2000.
On March 17, 2000, the Defendants filed a petition pursuant to Chapter 7 of the Bankruptcy Code. The Defendants disclosed the transfers to their four grandchildren in paragraph 10 of their Statement of Financial Affairs.
A meeting of creditors was held on April 10, 2000, at which time the following colloquy took place between the Trustee ("T"), Mr. McWilliams ("D"), and Mrs. McWilliams ("I"):
T: Didn't you give some lots to your grandchildren?
I. Yes.
T: When did you do that?
D: It was in September 2 and 3, 1999.
T: What was the value of the lots?
D: $2,000 apiece, and it was six months before we got a bill from San Jose lawyer on what we owed them that was the reason we had to file bankruptcy.
T: What you owe them, what do you mean?
D: Well, they tore down a building of mine and said it wasn't safe and [unintelligible].
T: When was that?
D: They tore it down August 24 and 25.
T: Was it on these lots that you gave to your grandchildren?
D: One of them was. They only was supposed to tore down lot four and they tore down lot four and two. Six months later after they tore it down, they went in and got it amended for two, so at the time I gave it to my granddaughters, it was still in our, it wasn't part of it. It wasn't supposed to be. [unintelligible] The court action was six months later [unintelligible] something like that, they [unintelligible].
I: They amended the court order and added lot two to that.
T: And these were the lots that you gave to your grandchildren?
I: One of them, lot two. And then there was two other lots.
T: You are going to need to tell me, send me copies of the deeds that you deeded to your grandchildren, giving the name and address of each of your grandchildren.
D: [informed Trustee he would provide deeds/information.]
In response to questions from the Plaintiff's attorney, the Defendants testified that they were aware that they would owe the Plaintiff for the demolition of the building, and they intended to borrow the money from the bank to pay the bill when they received it. However, they did not receive a bill until January, 2000. The Plaintiff has filed a claim for almost $30,000. The Defendants testified in their deposition that they expected the bill to be around $10,000 to $15,000.
On April 28, 2000, the Plaintiff filed an Objection to
Discharge pursuant to 11 U.S.C. § 727(a)(2).
On May 5, 2000, the disputed property was reconveyed to the Defendants.
Section 727(a)(2)(A) denies a debtor from receiving a discharge if, within one year of filing his bankruptcy petition, the debtor transfers or conceals property with the intent to hinder, delay or defraud a creditor. The objecting party has the burden of proving each of these elements by a preponderance of the evidence. In re Bailey, 145 B.R. 919, 925 (Bankr. N.D. Ill. 1992).
Section 727(a)(2)(A) provides as follows:
(a) The court shall grant the debtor a discharge, unless —
(2) the debtor, with the intent to hinder, delay or defraud a creditor or an officer of the estate charged with custody or 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.11 U.S.C. § 727(a)(2)(A).
In order to prevail in a § 727(a)(2)(A) action, the party seeking denial of the discharge must prove that the debtor acted with the actual intent to harm his creditors. Matter of Krehl, 86 F.3d 737, 743 (7th Cir. 1996); Matter of Smiley, 864 F.2d 562, 566 (7th Cir. 1989). Constructive intent is insufficient. Matter of Chastant, 873 F.2d 89, 91 (5th Cir. 1989); Tastee Donuts, Inc. v. Bruno, 169 B.R. 588 (E.D. La. 1994). However, because direct evidence of actual intent is often unavailable (presumably because a debtor is unlikely to admit that he intended to defraud his creditors), the plaintiff may rely on circumstantial evidence or on inferences drawn from the debtor's course of conduct in order to prove the requisite intent. Matter of Agnew, 818 F.2d 1284 (7th Cir. 1987); First National Bank of Belleville v. Smiley (In re Smiley), Ch. 7 Case No. 84-30747, Adv. No. 85-0064, slip op. at 10 (Bankr. S.D. Ill. March 17, 1987), aff'd Case No. 87-5172 (S.D. Ill. Dec. 14, 1987), aff'd 864 F.2d 562 (7th Cir. 1989).
In order to determine whether a debtor transferred property with an improper intent pursuant to § 727(a)(2)(A), courts look for several factors which tend to indicate "actual fraud" under § 727(a)(2)(A). These factors, known as "badges of fraud" include:
(1) the lack of inadequacy of consideration received for the transfer;
(2) the familiar, friendship or close association between the parties;
(3) the retention of possession, benefit, or use of the property in question;
(4) the financial condition of the party sought to be charged both before and after the transaction in question;
(5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suit by creditors; and
(6) the general chronology of the events and the transactions under inquiry.
Chastant, supra, 873 F.2d at 91; In re Kablaoui, 196 B.R. 705, 709-710 (Bankr. S.D. N.Y. 1996). See also In re Gipe, 157 B.R. 171 (Bankr. M.D. Fla. 1993); In re Schroff, 156 B.R. 250 (Bankr. W.D. Mo. 1993). Any one of these factors alone is sufficient to create a presumption that the debtor acted with the requisite intent to deny a discharge pursuant to § 727(a)(2)(A), particularly where property is transferred gratuitously or to relatives. Chastant, supra, 873 F.2d at 91; Kablaoui, supra, 196 B.R. at 710; In re Volpert, 175 B.R. 247, 264 (Bankr. N.D. Ill. 1994); Schroff, supra, 156 B.R. at 254. Once such a transaction has been shown by the plaintiff, the burden shifts to the debtor to show that his intent was not to hinder, delay, or defraud. Id. at 254.
Although the Defendants transferred property to their grandchildren for no consideration within one year of filing bankruptcy, the Court does not believe that the Defendants made the transfer with the intent to hinder, delay, or defraud creditors. Based on their demeanor, what they said, how they said it, and how their testimony related to the documentary evidence, the Court found the Defendants to be credible witnesses. The Defendants have been honest and straightforward in their dealings with the Court. They disclosed the transfer in their bankruptcy petition, gave the Trustee the details of the transfer at their meeting of creditors, and reversed the transfer at the Trustee's request.
The Defendants were not in serious financial distress when they transferred the property to their grandchildren. The Debtors' bankruptcy schedules show only $6,500 in unsecured debt, and of those debts, only $2,500 of claims have been filed. The Defendants were aware of their liability for the demolition costs at the time of the transfer, and they thought that they could handle those costs. It was only five months later that they learned how high those costs were. It was the surprisingly high costs of the demolition that forced the Defendants into bankruptcy.
Moreover, the transfer did not prejudice any creditors. The Plaintiff valued the property at $6,000 in its Proof of Claim; the Trustee estimated the net value of the property at $8,000 in his Individual Estate Property Record and Report. In light of the Plaintiff's $29,000 demolition lien on the property, it is clear that there was no equity in this property available to unsecured creditors. See In re Mereshian, 200 B.R. 342 (9th Cir. BAP 1996) (Court may properly consider low value of assets in question as one factor when determining whether debtor had intent to defraud under § 727(a)(2)).
Finally, under Illinois law, delivery of a deed is essential to render it operative as a conveyance. In re Neiderer, 196 B.R. 417, 419 (Bankr. C.D. Ill. 1996); In re Strotheide, 142 B.R. 850, 853 (Bankr. S.D. Ill. 1992). In this case, the Defendants never delivered the deeds to the grantees. Therefore, there was not a valid transfer.
For the foregoing reasons, the Complaint Objecting to Discharge be and is hereby denied.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
O R D E R
For the reasons set forth in an Opinion entered this day,
IT IS HEREBY ORDERED that the Complaint Objecting to Discharge be and is hereby denied.