Opinion
CIVIL ACTION NO. 01-120 SECTION "N"
July 2, 2001
ORDER AND REASONS
Before the Court is Barry Lee Moore, II's appeal from the Bankruptcy Court's order granting a Complaint to Deny Discharge pursuant to 11 U.S.C. § 727(a)(2)(A). After reviewing the parties' appellate briefs, the Court does not find that oral argument is necessary. For the following reasons, the Bankruptcy Court's order is AFFIRMED.
A. Background
Debtor Barry Lee Moore, II ("Moore") filed for bankruptcy protection on April 24, 1998. At the time of the filing, Moore was liable on a personal guaranty for approximately $2.5 million in loans advanced by Whitney National Bank ("Whitney") to his company, BB Dredging, Inc. ("BB"). Whitney filed a complaint objecting to the discharge of Moore's debt under 11 U.S.C. § 727(a)(1)(A), alleging that Moore had improperly transferred property to his wife within one year prior to filing the bankruptcy proceeding.
On April 16, 1998, eight days before he filed for bankruptcy protection, Moore transferred various properties to his wife under a Matrimonial Agreement ("Agreement") that terminated their marital community. Under the Agreement, Moore forfeited his one-half interest in his wife's bank accounts, investment funds and retirement funds, as well as in "[a]ll furniture, appliances, and miscellaneous personal effects" in their household and "[a]ll of [Mrs. Moore's] jewelry, clothing and personal effects." Appellee Ex. 13. In return, Mrs. Moore forfeited her one-half interest in Mr. Moore's bank accounts, investment funds, and life insurance policy, as well as in five vacant lots and the stock of BB Dredging, Inc. In addition, Mr. Moore assumed all liability to Whitney; and Mrs. Moore assumed all liability to Visa, MasterCard and Maison Blanche. Finally, the termination of the community eliminated Mr. Moore's right to any part of his wife's $46,057 annual salary. The Moores did not enter into this agreement for the purpose of terminating their marriage, and they remain married.
B. Statement of Issues Presented and Standard of Review
Moore argues that the Bankruptcy Court erred in finding:
(1) that he was not entitled to a Chapter 7 discharge pursuant to 11 U.S.C. § 727;
(2) that his separation of property agreement with his wife was made with the intent to hinder or delay Whitney as a creditor; and
(3) that the transfer of property from Moore to his wife did in fact delay and hinder Whitney as a creditor.
This Court reviews the Bankruptcy Court's findings of fact under the clearly erroneous standard, see Matter of Consol. Bancshares, Inc., 785 F.2d 1249, 1252 (5th Cir. 1986), and its Conclusions of law de novo.Id. (citing Richmond Leasing Co. v. Capital Bank. N.A., 762 F.2d 1303, 1308 (5th Cir. 1985)).
C. Law and Analysis
The Bankruptcy Code provides that:
(a) The court shall grant the debtor a discharge, unless —
(2) 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. . . .11 U.S.C. § 727(a)(2)(A). In order to deny discharge, the statute requires that four elements be proven: (1) a transfer of property; (2) belonging to the debtor; (3) within one year of the filing of the petition; (4) with intent to hinder, delay, or defraud a creditor or officer of the estate. See, In re Chastant, 873 F.2d 89, 90 (5th Cir. 1989) (citing In re Reed, 18 B.R. 462 (Bankr.E.D.Tenn. 1982)). Moore does not dispute that the first three factors are satisfied with respect to his separation of property agreement. However, he claims that the Bankruptcy Court erred in determining that he had the intent to hinder, delay or defraud Whitney when he executed the matrimonial agreement.
It is well-settled that the creditor bears the burden of proving that a transfer occurred with the intent to hinder, delay or defraud. Chastant, 873 F.2d at 90-91 (citing In re O'Connor, 32 B.R. 626 (Bankr.E.D.Penn. 1983)). The Fifth Circuit considers six factors, or "badges of fraud," to determine whether extrinsic evidence of actual intent exists under § 727(a)(2)(A):
(1) the lack or inadequacy of consideration;
(2) the family, friendship or close associate relationship 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 suits by creditors; and
(6) the general chronology of the events and transactions under inquiry.Chastant at 91 (citing In re Schmit, 71 B.R. 587, 590 (Bankr.D.Minn. 1987)).
Moore argues that the Bankruptcy Court failed to make sufficient factual findings on these factors and that its ultimate determination that he had actual intent to hinder, delay or defraud Whitney is unsupported by the evidence.
1. Lack or inadequacy of Consideration
With respect to the first Chastant factor, Whitney argues that the transfer was gratuitous because the Moores' Agreement simply divided community assets and neither side received consideration. In other words, Whitney asserts that, because the $2.5 million loan guaranty was a community obligation, the termination of the marital community removed one-half of Moore's liable assets from Whitney's reach. However, the Bankruptcy Court did not find the Agreement to be a gratuitous transfer. The Court does not find this conclusion to be clearly erroneous because the Agreement makes clear that Moore received several assets from his wife and because Whitney can still recover the former community assets from Mrs. Moore.
Despite the fact that Moore received consideration for his transfer, the Court finds the consideration was grossly inadequate. Although the record does not reflect precisely how much Moore received in return for transferring certain assets to his wife, it is clear that Moore assumed his wife's share of liability for the $2.5 million Whitney debt, which Moore agrees was a community obligation. See Moore's Memo. in Support of Mot. for Summary Judgment at 9; Krielow v. Krielow, 635 So.2d 180 (La. 1994) (holding that when a community property regime exists between two spouses, one spouse's guaranty of a debt is a community obligation). In return, Mrs. Moore only assumed her husband's share of liability for less than $3,000 in credit card debt. These assumptions of debt were introduced into evidence in the Bankruptcy Court, and there is no evidence that Moore received enough assets to offset the debt he assumed. Although the Bankruptcy Court did not make an explicit finding that the consideration was inadequate, the Court finds that the disparity is obvious from the record.
2. Family, Friendship or Close Associate Relationship Between the Parties
Moore submits that the second Chastant factor is irrelevant because the community property transferred to his wife remains liable to Whitney. However, the Bankruptcy Court correctly found that, to pursue its rights to the transferred property, Whitney must file a separate adversary proceeding against Mrs. Moore. See Findings of Fact and Conclusions of Law at 6. Because a second suit would create additional expenses and delays for Whitney, the Court finds that this factor is highly relevant to the issue of Moore's intent to hinder or delay his creditors.
3. Retention of Possession, Benefit or Use of the Property in Question
The third Chastant factor is the retention of possession, benefit, or use of the property in question. Moore claims that this factor was not addressed by the Bankruptcy Court. However, the record reflects that Moore transferred his interest in "[a]ll furniture, appliances, and miscellaneous personal effects presently in [Mrs. Moore's] possession and currently located within 2117 Laurel Lakes Avenue, Baton Rouge, Louisiana." Matrimonial Agreement at 2. In his petition for bankruptcy, which was introduced as evidence in the Bankruptcy Court, Moore indicates that he continues to live at 2117 Laurel Lakes Avenue. Accordingly, the Court finds that Moore continues to benefit from at least a portion of the transferred items. Although the Bankruptcy Court did not explicitly state that Moore retained the use and benefit of the furniture and appliances in his residence, the Court finds that this conclusion is implicit in the Bankruptcy Court's finding that "[t]he Debtor and his wife are still married and not separated." Findings of Fact and Conclusions of Law at 6.
4. Financial Condition of the Party Sought to be Charged both Before and After the Transaction in Question
Moore argues that the fourth Chastant factor was not addressed because there was no determination of the value of the property transferred. He further contends that, had the issue been addressed, the Bankruptcy Court would have determined that Moore was in a better financial condition after the transfer than before. The Court agrees that there is a dearth of evidence comparing Moore's specific financial condition before and after the transfer. However, it is clear that, although Moore was insolvent both before and after the Agreement, after the transfer he had taken on Mrs. Moore's share of the $2.5 million Whitney debt.
5. Cumulative Effect of the Transactions
The fifth Chastant factor is 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 suits by creditors." Chastant, 873 F.2d at 91. The Court finds that the Bankruptcy Court clearly addressed the cumulative effects of Moore's actions. Before Moore transferred his interest in several community assets to his wife, Whitney could have sued him on the guaranty and executed a judgment against all the community assets. See Krielow, 635 So.2d at 180. Now, although the former community assets remain liable, Whitney must file a separate suit against Mrs. Moore to pursue whatever has been transferred. The Bankruptcy Court explicitly addressed this circumstance in its opinion. See Findings of Fact and Conclusions of Law at 6.
6. General Chronology of the Events
Finally. Moore argues that the Bankruptcy Court failed to consider the general chronology of the events and transactions under inquiry. However, the Bankruptcy Court set out the history of Moore's financial dealings with Whitney and his bankruptcy proceedings; and it specifically stated that the "Debtor transferred property to his wife only eight days before filing for bankruptcy and while he was clearly insolvent." Findings of Fact and Conclusions of Law at 5.
Although the Bankruptcy Court did not explicitly discuss each of the six Chastant factors in its Findings of Fact and Conclusions of Law, the Court finds that, in light of the totality of the circumstances, the Bankruptcy Court was correct in holding that Moore entered into the separation of property agreement with the intent to hinder, delay or defraud Whitney. Eight days before filing for bankruptcy protection, Moore transferred substantial assets to his wife and assumed her share of the $2.5 million Whitney debt. After entering into the separation of property agreement, Moore continues to live at the marital residence, in which a significant number of the transferred assets are located. Finally, the effect of the Agreement is to force Whitney to incur additional expenses and delays in filing a second suit against Mrs. Moore to recover the former community property now in her possession.
Moore contends that the Bankruptcy Court applied the wrong burden of proof because it stated that the "Debtor has not, in any case, offered any legitimate reason at all for the separation of community property." Findings of Fact and Conclusions of Law at 6. Reading this statement alone, the Court would agree. However, the Court finds that adequate extrinsic evidence exists to support the Bankruptcy Court's conclusion.
Despite the Bankruptcy Court's finding on intent, Moore argues that the denial of discharge should be reversed because he did not in fact hinder, delay or defraud Whitney. In particular, Moore argues that a majority of the property he transferred to his wife is exempt from creditors. He claims (1) that Mrs. Moore's two investment funds are exempt from creditors because they are IRA accounts, (2) that her Louisiana State Employee's Deferred Compensation Plan is exempt under Sections 20:33 and 11:405 of the Louisiana Revised Statutes, and (3) that the furniture, personal effects and jewelry are exempt under Section 13:3881(A)(4)(a).
The Bankruptcy Code provides a specific mechanism to declare exemptions, and a debtor is required to declare the exemption before he may be entitled to it. 11 U.S.C. § 522; Bankruptcy Rule 4003. Moore raises the exemption issue for the first time in his appellate briefs. Up to this point, Moore has not declared an exemption, argued for an exemption in the bankruptcy proceedings, or designated exemption as an issue on appeal. Furthermore, there is no evidence in the record to establish that the allegedly exempt items qualify. Therefore, Moore's exemption arguments are not properly before this Court on appeal.
For example, Moore claims that the furniture and personal effects in his residence are exempt, but guest room furniture, artwork and decorative items, and sterling silverware do not qualify. See In re Mmahat, 110 B.R. 236, 240-42 (Bkrtcy. E.D.La. 1990).
D. Conclusion
The Bankruptcy Court's determination that Moore entered into a separation of property agreement with the intent to hinder, delay or defraud his creditors is adequately supported by the record and by consideration of the Chastant factors. Accordingly, the Bankruptcy Court's denial of discharge is AFFIRMED.