This Court has conducted a de novo review of the Bankruptcy Court's conclusion that Marian Davidson should be denied a discharge pursuant to 11 U.S.C. § 727(a)(2). Federal bankruptcy law governs entitlement to a discharge under 11 U.S.C. § 727(a)(2), (4), and (5). See, In re Levine, 139 B.R. 551, 554 (Bankr.M.D.Fla. 1992) (a debtor's right to a discharge, unlike the right to an exemption, is determined by federal law, not state law). In particular, § 727(a)(2) provides in relevant part:
The bankruptcy court initially dismissed the complaint on the ground that, in defining the parameters of a "transfer" of funds, both the Bankruptcy Code and Florida law contemplated that the transferor and the transferee necessarily be two distinct, identifiable parties; as a result, according to the bankruptcy court's reasoning, there had been no transfer of funds that could be set aside as fraudulent in this instance. More specifically, the bankruptcy court determined that a transfer had not occurred "because the Debtors still retain control and ownership of the assets acquired with funds they obtained from disposition of their nonexempt assets, and the fact that this conversion effectively removed the former assets from the reach of the creditors is of no consequence." In re Levine, 139 B.R. 551, 553 (Bankr. M.D. Fla. 1992). The district court, however, reversed the bankruptcy court's order dismissing the case and concluded not only that there had been a transfer but, in addition, that the trustee had stated a cause of action for fraudulent transfer of funds.
Page 334 139 B.R. 551, 553 (Bankr.M.D.Fla.1992) (in most states, including Florida, the exemptions to which a debtor is entitled are governed by state law, since under § 522(b) of the Bankruptcy Code, a state can choose to "opt out" of the exemptions provided by federal law and choose instead to set their own allowable exemptions). In overruling Trustee's objection to Debtors' claimed Annuity exemption, the Bankruptcy Court cited to and relied upon its decision in In re Davidson, 164 B.R. 782 (Bankr.S.D.Fla.1994).
Again, the mere act of parting with property is enough "to dispose of" it. In addition, the debtor neglected to check subsequent authority on In re Levine, 139 B.R. 551 (Bankr. M.D. Fla. 1992), a case noted in her brief. In that adversary proceeding, the trustee sought to avoid a fraudulent transfer after the debtor converted non-exempt assets into exempt assets under Florida law.
However, discharge is only available to honest debtors, and should only be applied liberally where there was no intent to violate the provisions of the law pertaining to discharge. Island Bank v. Gill (In re Gill), 159 B.R. 348 (Bankr.M.D.Fla. 1993); Weissing v. Levine (In re Levine), 139 B.R. 551 (Bankr.M.D.Fla. 1992); Barnett Bank v. Muscatell (In re Muscatell), 113 B.R. 72 (Bankr.M.D.Fla. 1990). Accordingly, to justify the denial of discharge under either section, the plaintiff has the burden of proving each element by a preponderance of the evidence.
However, discharge is only available to honest debtors, and should only be applied liberally where there was no intent to violate the provisions of the law pertaining to discharge. Island Bank v. Gill (In re Gill), 159 B.R. 348 (Bankr.M.D.Fla. 1993); Weissing v. Levine (In re Levine), 139 B.R. 551 (Bankr.M.D.Fla. 1992); Barnett Bank v. Muscatell (In re Muscatell), 113 B.R. 72 (Bankr.M.D.Fla. 1990). In order to prevail on the question of dischargeability under section 727(a)(2)(A) of the Code, plaintiff must prove that a transfer/concealment of property occurred within one year of the petition date and that debtor undertook such conduct with the intent to hinder, delay or defraud his creditors.
When the Debtors' exemption claim was challenged initially, this Court ruled that based on prior case law and the legislative history of § 522, H.R. Rep. No. 595, 95th Cong., 1st Sess. 361 (1977) and S.Rep. No. 989, 95th Cong., 2d Sess. 76 (1978) that conversion of nonexempt assets into exempt assets is permissible and would not operate as a forfeiture of the Debtors' right to exemptions. In re Levine, 139 B.R. 551 (Bankr. M.D.Fla. 1992). However, the Court also noted that in allowing the claimed exemptions the Court did not intend to indicate that "pre-bankruptcy planning" or the conversion of nonexempt assets into exempt assets may not be grounds to bar the debtor's discharge.
Cases dealing with this subject generally have concluded that conversion of non-exempt property into exempt property is permitted. In re Levine, 139 B.R. 551 (Bankr.M.D.Fla. 1992); In re Decker, 105 B.R. 79 (Bankr.M.D.Fla. 1989). In so holding, these cases have relied on the Legislative History of § 522; S.Rep. 95-989 and H.Rep. 95-595, U.S. Code Cong. Admin.News 1978, p. 5787, respectively, both of which include a statement to the effect that the Debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition.
E.g., In re Levine, 139 B.R. 551, 554 (Bankr.M.D.Fla. 1992). See also, Norwest Bank Nebraska, N.A. v. Tveten, 848 F.2d 871, 874 (8th Cir. 1988).
Cases dealing with this subject generally have concluded that conversion of non-exempt property into exempt property is permitted. In re Levine, 139 B.R. 551 (Bankr.M.D.Fla. 1992); In re Decker, 105 B.R. 79 (Bankr.M.D.Fla. 1989). When the Debtors' right to exemption is challenged on the grounds that the Debtor converted non-exempt property to exempt property, it is appropriate to inquire into the circumstances surrounding the transfer, as there is substantial and respectable authority to support the denial of the Debtors' right to exemptions upon a showing by extrinsic evidence that the Debtors converted non-exempt property into exempt property with the specific intent to defraud his or her creditors.