Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: January 22, 2009
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. LA 05-30583-TD, Adv. No. LA 05-02644-TD. Honorable Thomas B. Donovan, Bankruptcy Judge, Presiding.
Before: MONTALI, PAPPAS and DUNN, Bankruptcy Judges.
MEMORANDUM
Appellant-Creditor, Richard B. Sachs (" Sachs") appeals a judgment dismissing his denial of discharge claims under sections 727(a)(2)(A) and 727(a)(4)(A) against Appellee-Debtor, Katayone Adeli (" Adeli"). Because the bankruptcy court erred by misapplying applicable Ninth Circuit case law and relying on irrelevant factors to conclude that Adeli lacked the requisite intent to hinder, delay, or defraud Sachs under section 727(a)(2)(A), we REVERSE and REMAND.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.
FACTS
Most facts are derived from the bankruptcy court's Findings of Fact and Conclusions of Law (" FFCL"), the admitted facts from the Joint Pretrial Order (" Joint PTO"), and the trial transcript.
A. Prepetition Facts.
Adeli and Sachs are former business partners in Klothes, LLC, a clothing design business located in New York. Adeli is a clothing designer. She is also the 100% shareholder of a consulting business, Kader, Inc., a New York corporation.
On or about December 17, 2003, Sachs filed suit against Adeli and other defendants in the Supreme Court of New York (" Supreme Court"). One claim involved Sachs's attempt to recover approximately $700,000 from Adeli for his purchase of a bank debt owed by Klothes, LLC, which Sachs and Adeli both guaranteed. On or about July 15, 2004, the Supreme Court denied Sachs's motion for partial summary judgment. He appealed. On March 10, 2005, the New York Appellate Court (" Appellate Court") reversed the Supreme Court decision, instructing it to enter partial summary judgment in favor of Sachs. Just prior to this, on or about February 14, 2005, Adeli was approved for an equity credit line (" Equity Line") authorizing her to draw up to approximately $193,000 against her Beverly Hills, CA condo (" Condo").
On or about April 7, 2005, the Supreme Court entered a partial judgment in favor of Sachs for $727,358.52, exclusive of interest and attorneys fees (the " April 7 Judgment"), rendering Adeli insolvent. Adeli's New York counsel believed the decision to be in error, and on April 11, 2005, Adeli filed a motion seeking leave to appeal the March 10 decision and April 7 Judgment. On April 11, 2005, the Appellate Court granted an interim stay of execution on the April 7 Judgment. Also on April 11, 2005, Adeli began making the first of the transfers that are the subject of Sachs's denial of discharge action under section 727(a)(2)(A). For sake of clarity, we adopt the bankruptcy court's characterization of the transfers as follows: those executed prior to Adeli's retention of California bankruptcy and other prepetition planning counsel in or around May 2005 (the " First 2005 Transfers"), and those executed thereafter (the " Second 2005 Transfers")(collectively the " Subject Transfers").
1. First 2005 Transfers.
Sometime around the entry of the April 7 Judgment, but prior to April 11, 2005, Adeli's New York counsel, consisting of four attorneys, advised Adeli to temporarily move her money and Kader's money in various New York accounts into the name of a trusted friend or family member in California in order to protect Adeli's assets from any " improper" or " unreasonable and unlawful conduct" by Sachs in attempting to enforce his April 7 Judgment, including levying on her assets and the assets of Kader. By this time, Adeli had relocated to California. Apparently, Adeli's New York counsel considered Sachs's attorneys to be " very aggressive" and " very well connected, " and their fear was that the interim stay would be ignored. All four attorneys deny that they advised Adeli to move such funds.
Prior to the April 7 Judgment, Adeli maintained a checking account in her name at Valley National Bank (" Adeli Valley Account"), and an investment account in her name at Bear Sterns (" Bear Sterns Account"), and as manager of Kader, Adeli controlled a checking account in the name of " Kader, Inc." at Valley National Bank (" Kader Valley Account").
Adeli followed the advice of her New York counsel and made the First 2005 Transfers:
There were other transfers by Adeli but Sachs did not raise them at trial and they are not at issue on this appeal.
o On April 11, 2005, Adeli transferred $33,000 from the Adeli Valley Account to the Kader Valley Account (the " $33,000 Valley Transfer");
o On April 11, 2005, Adeli drew $150,000 in Equity Line funds (" Equity Line Funds");
o On April 12, 2005, Adeli and her friend, Roxanne Modjallal (" Modjallal"), opened a checking account in Modjallal's name at Bank of America, on which Adeli had check writing ability (the " Shared Modjallal Account");
o On April 12, 2005, Adeli deposited the Equity Line Funds into the Shared Modjallal Account (the " Equity Line Deposit");
o On April 14, 2005, Adeli sold her securities in the Bear Sterns Account and on April 19, Adeli withdrew the sale proceeds of $15,406.36 (the " Bear Sterns Withdrawal"). These funds were deposited into the Kader Valley Account, and then transferred to an account of Modjallal (the " Personal Modjallal Account")(collectively with the Shared Modjallal Account, the " Modjallal Accounts");
o On April 19, 2005, Adeli wired $58,000 (the " $58,000 Wire Transfer") from the Kader Valley Account to the Personal Modjallal Account.
On May 12, 2005, the Appellate Court denied Adeli's motion for leave to appeal. On or about May 16, 2005, Sachs filed a motion in the Appellate Court seeking to vacate and/or modify the April 11, 2005 stay based upon the May 12 decision. On June 23, 2005, the Appellate Court denied Sachs's stay motion as " unnecessary, " referencing the May 12 decision which denied Adeli's motion. Therefore, the interim stay was in effect from April 11, 2005, until at least May 12, 2005, or maybe longer.
Although not at issue on appeal, there appears to be a dispute about service on Adeli and whether she knew exactly when the stay was lifted. See also Sachs Op. Br. at page 4 where he states that the stay was in effect until June 23, 2005.
Meanwhile, in or around May, 2005, Adeli retained California bankruptcy counsel Paul Brent (" Brent") to advise her regarding bankruptcy issues and to represent her in any bankruptcy case that she might file. At their first meeting, Adeli disclosed all of the First 2005 Transfers to Brent and further informed him that she made the transfers upon the advice of her New York counsel. She also told Brent that she was worried about the First 2005 Transfers and knew that Sachs and his counsel would scrutinize and attack them if there were any apparent or actual improprieties. The facts are somewhat in dispute as to the early discussions between Adeli and Brent, but there is no dispute that Brent advised Adeli not to undo the First 2005 Transfers.
Since Adeli's mother resided with her at the Condo, Adeli also told Brent that one of her goals was to protect her mother's residence in the Condo by selling her a fractional interest in it, and further informed Brent that she did not want any such sale to jeopardize her right to a bankruptcy discharge.
2. Second 2005 Transfers.
For the Condo sale, Adeli retained California attorney Paul Samuels (" Samuels") to represent her, and retained separate counsel to represent her mother. On or about June 1, 2005, Adeli and her mother entered into a Purchase Agreement, providing for Adeli to transfer a 25% interest in her Condo to her mother in exchange for $30,000. Adeli and her counsel believed that the $30,000 price fairly approximated the market value.
In further prepetition planning, Brent advised Adeli to consider setting up a pension plan through Kader, and referred her to California attorney Carl Waldman (" Waldman"). On or about May 28, 2005, Adeli retained Waldman. Since Kader's 2004 tax returns had not yet been filed, Waldman advised Adeli that she could make the pension plan effective as of 2004, and contribute $80,000, the maximum allowed contribution for 2004 and 2005. On or about June 8, 2005, Adeli executed the " Kader, Inc. Defined Benefit Pension Plan and Trust" drafted by Waldman, which included a certification that it was adopted on December 31, 2004. Waldman then advised Adeli to open two Kader checking accounts, one for general business and one for the pension fund.
During this time, Sachs domesticated his judgment in California and filed suit against Adeli and others on or about August 11, 2005. Adeli was served with a summons from that action on August 22, 2005.
The above actions lead to the following Second 2005 Transfers:
o On June 27, 2005, Adeli opened a business checking account for general business in Kader's name at Gilmore Bank (the " First Gilmore Account");
o On June 27, 2005, Adeli opened a business checking account for the pension fund in Kader's name at Gilmore Bank (the " Second Gilmore Account");
o On June 27, 2005, Adeli wrote a $100,000 check drawn on the Shared Modjallal Account, payable to Kader, Inc. and deposited it into the First Gilmore Account (the " $100,000 Kader Deposit");
o On June 27, 2005, Adeli wrote an $80,000 check, drawn on the First Gilmore Account and deposited it into the Second Gilmore Account (the " Gilmore Deposit");
o On July 28, 2005, Adeli deposited $4,589.21 into the Shared Modjallal Account (the " July 28 Deposit");
o On August 12, 2005, Adeli transferred $40,000 from the Second Gilmore Account to the First Gilmore Account via two checks for $20,000 each in order to pay " normal" expenses (the " $40,000 Gilmore Transfer");
o On August 25, 2005, Adeli executed a grant deed transferring a 25% interest in her Condo to her mother (the " Condo Interest Transfer"). The $30,000 payment came in the form of two checks, one for $20,000 from Adeli's brother and one for $10,000 from Adeli's sister (the " $30,000 Payment");
o On August 25, 2005, Adeli transferred the $30,000 Payment to Samuels for payment of legal services regarding Sachs's efforts to domesticate his judgment and for other related matters (the " $30,000 Payment Transfer").
B. Postpetition Facts
Adeli filed a voluntary petition for relief under chapter 11 on September 8, 2005 (" Petition Date"). Her case was converted to chapter 7 on May 9, 2006.
As of the Petition Date, the balance in the Shared Modjallal Account was $356.19, the amount remaining from the Equity Line Funds. In order to recover some assets for the estate, on November 18, 2005, Brent sent a letter to Modjallal making an informal demand that she turn over all monies belonging to Adeli. On December 8, 2005, Modjallal wrote two checks, one on the Shared Modjallal Account for $356.19, and one for $37,000 on the Personal Modjallal Account. She sent them to Brent, who subsequently turned them over to Adeli's chapter 7 trustee.
The FFCL and trial testimony indicates that Brent requested these funds orally prior to the written request on November 18, 2005, but that he lost the checks. Therefore, the written request was a second request. However, no date is provided as to when the oral request was made.
On December 22, 2005, Sachs filed an adversary proceeding seeking: (1) denial of Adeli's discharge pursuant to sections 727(a)(2)(A) and 727(a)(4)(A) , and (2) nondischargeability of Sachs's claims pursuant to section 523(a). To support his claim under section 727(a)(2)(A), Sachs alleged, inter alia, that Adeli intentionally hindered or delayed Sachs by engaging in the Subject Transfers. As to the section 727(a)(4)(A) claim, Sachs alleged that Adeli knowingly and fraudulently made false oaths in connection with her bankruptcy case, viz. contradictory statements that she used the transferred funds for " ordinary" expenses, later characterizing the expenditures as " regular money" expenses, then referring to them as " personal" expenses, in addition to other false statements regarding the Equity Line Funds, the $58,000 Wire Transfer, and Question 10 of Statement of Financial Affairs (" SOFA") (collectively the " Subject Statements").
Sachs also brought claims under section 727(a)(3) and (a)(5), but later waived these claims by way of the Joint PTO.
The bankruptcy court subsequently bifurcated Sachs's section 727 claims from his claims under section 523. The adversary proceeding is still pending on the section 523 claims. Only the section 727 claims are on appeal. See Jurisdiction section explaining our jurisdiction over this appeal.
On July 26, 2006, Sachs moved for summary judgment on the section 727(a)(2)(A) action. It was denied because a genuine issue of material fact existed as to Adeli's intent.
A trial on the section 727 claims was held on October 25, 2007. On March 27, 2008, the bankruptcy court entered its judgment in favor of Adeli, thereby dismissing Sachs's 727 claims. Regarding the section 727(a)(2)(A) claim, in its findings the court stated:
" There is no evidence that any Adeli act from April 2005 until her bankruptcy filing in September 2005 was intended to, or did, deprive Sachs of any remedy that he was entitled to and properly sought through any legal process."
....
" Sachs has failed to prove by a preponderance of the evidence that Adeli is guilty of any wrongdoing. Adeli never placed anything beyond Sachs' reach; she never hindered, delayed, or defrauded Sachs."
In its conclusions, the court stated:
Based upon my Findings of Fact, and after balancing all the possible inferences from the evidence, I conclude that Sachs did not meet his burden and that no basis exists to deny Adeli's discharge under § 727(a)(2)(A). None of the Subject Transfers was intended to hinder, delay, or defraud Sachs or any other Adeli creditor. Each was, or led directly to, an ordinary and proper expenditure by Adeli, was made with the knowledge and advice of counsel, or was properly accounted for, and recovered, to the extent necessary to exonerate Adeli.
As to the section 727(a)(4)(A) claim, the bankruptcy court found that Adeli's bankruptcy papers truthfully accounted for all of her assets, liabilities, and financial transactions, and at no time did she make a knowing or fraudulent false oath in connection with her case. Therefore, it concluded that Sachs had failed to meet his burden of proof under section 727(a)(4)(A) that any of the Subject Statements were false, made knowingly and fraudulently, and related to a material fact. Sachs filed this timely appeal.
ISSUES
1. Did the bankruptcy court err in determining that Adeli lacked the requisite intent to hinder, delay, or defraud her creditors under section 727(a)(2)(A)?
2. Did the bankruptcy court err in determining that Adeli did not knowingly and fraudulently make false oaths in connection with her bankruptcy case under section 727(a)(4)(A)?
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(2)(J). It purported to " sever" the section 727 and 523 actions, which would render the judgment in the section 727 action final and appealable. See Fed.R.Civ.P. 58. We determined, and treated as such, that what the court did was actually a " bifurcation" of the claims since no separate order severing the claims under Fed.R.Civ.P. 58, made applicable by rule 9021, was entered, which renders the section 727 judgment interlocutory. Sachs then filed a motion for leave to appeal the interlocutory judgment, which Adeli opposed. We granted that motion, and thus have jurisdiction under 28 U.S.C. § 158(a)(3).
STANDARD OF REVIEW
We review the bankruptcy court's findings of fact for clear error, and its conclusions of law de novo. United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1110 (9th Cir. 1998). A court's finding that a debtor acted without intent to hinder, delay or defraud her creditors is reviewed for clear error. Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240 (9th Cir. 1997). A factual finding is clearly erroneous if the appellate court, after reviewing the record, has a definite conviction that a mistake has been made. Anderson v. Bessemer City, 470 U.S. 564, 573-75, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
Where " the historical facts are established; the rule of law is undisputed, ...; and the issue is whether the facts satisfy the legal rule [, ]" a mixed question of fact and law is presented which we review de novo. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997).
DISCUSSION
Sachs argues that the bankruptcy court: (1) erred by relying on irrelevant factors to determine that Adeli, who admittedly transferred funds into bank accounts in the name of a friend for the express purpose of shielding her assets from Sachs, did not act with the intent to hinder, delay, or defraud a creditor under section 727(a)(2); (2) erred in finding that the transfers were not made with intent to hinder, delay, or defraud a creditor under section 727(a)(2); (3) misapplied the " disclose and recover" exception set forth in Adeeb; (4) misapplied the " advice of counsel" defense available under section 727(a)(2); (5) erred in finding that Adeli did not knowingly and fraudulently make false oaths under section 727(a)(4); and (6) erred in holding that a denial of discharge under section 727(a)(4) requires reliance by, or damage to, a party.
As to the section 727(a)(2)(A) claim, Adeli admits that the First 2005 Transfers and Second 2005 Transfers were made within one year before the Petition Date, and that at least most of them were of her property. Therefore, the only alleged factual dispute before the bankruptcy court and on appeal as to that claim is the fourth element - whether Adeli had the requisite actual intent to hinder, delay or defraud Sachs. No dispute exists that Adeli, at all times, had unfettered access to all accounts and funds at issue.
The parties dispute whether Kader's property (especially the $100,000 Adeli transferred to Kader's First Gilmore Account) was Adeli's. If not, there could be no " transfer" under section 727(a)(2)(A). However, they do agree that all other assets were property of Adeli.
I. The Bankruptcy Court Clearly Erred By Misapplying Controlling Ninth Circuit Case Law To Conclude That Adeli Lacked The Requisite Intent To Hinder, Delay, Or Defraud Sachs Under Section 727(a)(2)(A).
A. Prima Facie Case Under Section 727(a)(2)(A).
The court must deny a discharge if " the debtor, with intent to hinder, delay, or defraud a creditor ... has transferred ... property of the debtor, within one year before the date of the filing of the petition...." 11 U.S.C. § 727(a)(2)(A). The burden of proof is on the creditor to show by a preponderance of the evidence that: (1) the debtor transferred or concealed property; (2) the property belonged to the debtor; (3) the transfer occurred within one year of the bankruptcy filing; and (4) the debtor executed the transfer with the intent to hinder, delay or defraud a creditor. Aubrey v. Thomas (In re Aubrey), 111 B.R. 268, 273 (9th Cir. BAP 1990); Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see Rule 4005. As the intent requirement is stated in the disjunctive, it suffices to demonstrate any of the three alternatives, either intent to hinder or to delay or to defraud creditors, and proof of mere intent to hinder or delay may lead to denial of discharge. Beauchamp v. Hoose (In re Beauchamp), 236 B.R. 727, 731-32 (9th Cir. BAP 1999), aff'd 5 Fed.Appx. 743 (9th Cir. 2001) (adopting the Panel's opinion). See Adeeb, 787 F.2d at 1343. A claim for denial of a discharge under section 727 is construed liberally in favor of the discharge and strictly against the objector. Id . at 1342.
Both Adeli's direct admissions and the circumstantial evidence establish a prima facie case for denial of discharge under section 727(a)(2)(A). At trial, Adeli repeatedly admitted she intended to move nearly all of her available funds into Modjallal's name with the express purpose of keeping her assets out of Sachs's reach, fully understanding that by putting her money under someone else's name it would be protected. There was no other purpose for the transfers. Camacho v. Martin (In re Martin), 88 B.R. 319, 322-23 (D. Colo. 1988), a decision cited by and relied upon by the Panel in Aubrey, held that debtor's admission that the property was transferred to avoid further garnishment by a judgment creditor established a prima facie case under section 727(a)(2)(A). Aubrey, 111 B.R. at 273.
The dialogue at trial went as follows:
Even without Adeli's admissions, her fraudulent intent may be established by circumstantial evidence or by inferences drawn from her course of conduct. Roberts v. Erhard (In re Roberts), 331 B.R. 876, 884-85 (9th Cir. BAP 2005)(citing Devers v. Bank of Sheridan (In re Devers), 759 F.2d 751, 753-54 (9th Cir. 1985)(noting that a debtor is unlikely to testify directly that his intent was fraudulent), aff'd 241 Fed.Appx. 420 (9th Cir. 2007). The requisite intent may be found from the surrounding circumstances. In examining the circumstances, the court may find " badges of fraud" including: (1) there was a close relationship between the transferor and the transferee; (2) the transfer was in anticipation of a pending suit; (3) the transferor debtor was insolvent or in poor financial condition at the time of the transfer; (4) all or substantially all of the debtor's property was transferred; (5) the transfer so completely depleted the debtor's assets that the creditor has been hindered or delayed in recovering any part of the judgment; and (6) the debtor received inadequate consideration for the transfer. Id . These factors need not all be present in order to find that a debtor acted with the requisite intent. Id.
Here: (1) Adeli transferred her funds to her close friend Modjallal; (2) the First 2005 Transfers were made within days of Sachs's April 7 Judgment, and some of the Second 2005 Transfers were made during a pending suit; (3) Adeli was rendered insolvent as a result of Sachs's April 7 Judgment; (4) she transferred approximately $233,000 out of the $242,000 she possessed in cash; (5) which so completely depleted her assets that Sachs was hindered or delayed in recovering any part of the judgment (in fact, he was able to levy on only $4,000, which Adeli acknowledged in her SOFA, Question 4b); and (6) other than the Condo Interest Transfer, she received no consideration whatsoever for the other transfers. Consequently, all six factors of the " badges of fraud" test are met, establishing Adeli's actual intent. On this record, Sachs made out a prima facie case against Adeli under section 727(a)(2)(A).
B. Adeli's Asserted Defenses.
Adeli defends her wrongful conduct in three ways, any of which, she argues, negates her actual intent to hinder, delay, or defraud Sachs: (1) she needed to protect her assets from wrongful or unlawful and unreasonable conduct by Sachs and his attorneys; (2) she was relying in good faith on the advice of her New York counsel who told her to make the First 2005 Transfers; and (3) she disclosed most of the transfers and recovered some of the funds for her estate within a reasonable time postpetition, and manifested her intent to do so prepetition, therefore complying with the " disclose and recover" exception under Adeeb.
1. Protecting Her Assets From Sachs's Wrongful Conduct.
At trial, Adeli testified that she made the transfers, in particular, the First 2005 Transfers, in order to protect her assets from being wrongfully taken by Sachs. According to Adeli, her New York attorneys were " uncomfortable" with Sachs's " very aggressive" and " very well connected" attorneys, and Adeli believed that making the transfers would protect her assets from " wrongfully being taken away" and protect her from " attorneys who were not listening to the judge at the time."
This same defense was offered by the debtor and rejected by the Panel in Beauchamp, 236 B.R. at 730. There, the debtor admitted that he intended to conceal his assets from his former wife and her father, but argued that he only did so to thwart what he perceived to be a " pattern of improper harassment" by them, thus negating his intent to hinder or delay. Besides rejecting debtor's argument for failing to cite any authority for the premise that concealment of assets is justifiable where creditors engage in harassing behavior, the Panel stated:
The many aspersions Beauchamp directs at his former spouse and her father do not negate the bankruptcy court's finding of his actual intent. That he sought haven from untoward behavior, and that he intended to hinder or delay, are not mutually exclusive.
Id . at 731.
Although Adeli made numerous statements that she was only protecting her assets from what she perceived to be " improper" or " wrongful" behavior by Sachs or his attorneys, thus justifying her transfers, there is nothing in the record to support her contention. She provides no evidence that Sachs did, or would, take any improper actions to obtain satisfaction of his April 7 Judgment, or that he ever threatened to do so. She, like the debtor in Beauchamp, cites no authority for the premise that transferring assets is justifiable where creditors engage in harassing behavior, or, even more importantly as in this case, where they do not. Further, although Adeli testified at her deposition that she was " concerned" about Sachs illegally taking money from her, a moment later she stated that since there was a stay in place at the time, she " wasn't concerned, " then subsequently stated she " was and [she] wasn't [concerned]." Nevertheless, the bankruptcy court found that Adeli reasonably and in good faith believed that at the time she made the First 2005 Transfers and the Second 2005 Transfers she was protecting herself from Sachs's improper collection efforts, therefore justifying the transfers and negating her intent under section 727(a)(2)(A). There is no safe harbor in that section that authorizes a debtor to hinder, delay, or defraud even a creditor the debtor believes to be acting improperly.
In light of Beauchamp, and the fact that Adeli offered no evidence in support of her contentions about Sachs's " improper" or " wrongful" behavior even if such evidence could be considered, the bankruptcy court clearly erred in finding that Adeli's unsupported fear of improper collection efforts by Sachs justified her intent to hinder or delay a creditor under section 727(a)(2)(A).
2. Advice Of Counsel Defense.
Adeli has asserted throughout this case and testified at trial that her New York counsel advised her to transfer her funds into either a trusted friend's or family member's name, and that she in good faith relied on their advice, thus negating her intent under section 727(a)(2)(A). Adeli does not recall which of her four New York attorneys gave her this advice.
" Generally, a debtor who acts in reliance on the advice of his attorney lacks the intent required to deny him a discharge of his debts." Adeeb, 787 F.2d at 1343 (citing Hultman v. Tevis, 82 F.2d 940, 941 (9th Cir. 1936)). However, the debtor's reliance must be in good faith. Id . See Hultman, 82 F.2d at 941.
In Adeeb, the debtor claimed that he lacked actual intent to hinder or delay his creditors because he relied on the advice of his attorney, a non-bankruptcy lawyer, who advised him to transfer title to some of his real property to third parties who could be trusted. Id . at 1341. The Ninth Circuit rejected Adeeb's defense, stating that since both Adeeb's counsel and Adeeb knew that the purpose of the transfers was to hinder or delay Adeeb's creditors, such knowledge precludes the defense of good faith reliance on the advice of counsel, even if the client is otherwise innocent of any improper purpose. Id . at 1343 (emphasis added). " A debtor who knowingly acts to hinder or delay his creditors acts with the very intent penalized by section 727(a)(2)(A)." Id .
In the instant case, all four of Adeli's New York attorneys denied under oath that they ever advised her to make any of the transfers. After considering all of the evidence and testimony before it, the bankruptcy court stated:
There was a great deal of disagreement in the trial and deposition testimony and legal argument about Adeli's New York Lawyer's advice. In the end, I find Adeli's trial and deposition testimony highly credible and persuasive. Samuels' trial testimony corroborates Adeli's trial and deposition testimony regarding the advice Adeli received from her New York Lawyers shortly after the April 7, 2005 New York Judgment. I find her New York Lawyers' deposition testimony self-serving and not persuasive; it is not consistent with my view of the totality of the evidence.
Consequently, since the bankruptcy court found Adeli's version of the facts to be more credible, and therefore that Adeli's New York counsel did advise her to make the First 2005 Transfers and the Second 2005 Transfers, it decided that Adeli in good faith acted in reliance on their advice, thus precluding a finding she intended to hinder, delay, or defraud Sachs. This was in error.
Findings of fact based on credibility are given particular deference by reviewing courts. Anderson, 470 U.S. at 573-575. However, the error committed here is not the bankruptcy court's credibility determination on this record, but rather the court's misapplication of the " good faith" test set forth in Adeeb. Since the court found Adeli's version of the facts to be true, then, by her own admissions both she and her New York counsel knew that the purpose of the transfers was to hinder or delay Sachs's collection efforts. Under Adeeb, such knowledge precludes the defense of good faith reliance on the advice of counsel as to intent under section 727(a)(2)(A).
In further support of its finding of Adeli's good faith, the bankruptcy court focused on the fact that she is an artist, that she has no formal legal or business training, and that she is unsophisticated in legal matters. However, the good faith test in Adeeb does not turn on the debtor's sophistication or whether she knows the law or the propriety of her conduct; as long as both the attorney and the debtor knew that the purpose of the transfers was to hinder or delay creditors, the debtor cannot assert the advice of counsel defense to negate intent.
Even if a court could properly consider a debtor's legal knowledge or sophistication as a factor for good faith, when asked at trial which New York attorney advised Adeli to put her money in a friend or family member's name, she stated:
" I don't know who told me. I spoke to at least four people in their office, but I do remember someone telling me that if something - you know, 'I don't want - I shouldn't be telling you this, but this is what you should do to protect yourself.'" (Emphasis added).
When an attorney regretfully prefaces advice to a client with the words, " I shouldn't be telling you this, " such a statement is sufficient to put any reasonable person on notice that the advice about to follow could not be relied upon in good faith.
On the other hand, had the bankruptcy court found Adeli's New York counsel more credible, i.e., that they never advised Adeli to transfer her funds into the name of a trusted friend or family member, then the advice of counsel defense obviously would not be available to her.
Therefore, the bankruptcy court erred by incorrectly applying the good faith test set forth in Adeeb, and because Adeli admitted that both she and her New York counsel knew the purpose of the transfers was to protect her assets from Sachs and hinder or delay his collection efforts, she cannot assert the advice of counsel defense to negate her intent under section 727(a)(2)(A).
3. " Disclose And Recover" Exception Defense.
Adeli argues that she is entitled to the " disclose and recover" exception set forth in Adeeb because she always intended to make all assets available to creditors, and she manifested such intent by disclosing the First 2005 Transfers to Brent and asked what she should do about them. Not knowing about Adeeb, Brent advised her to leave the First 2005 Transfers undisturbed. Brent testified that had he known about Adeeb, he would have advised Adeli to put the funds in the Modjallal Accounts into her own name, and Adeli would have complied. In further support, Adeli notes that she disclosed the " gross amount of the transfers" in her SOFA at Question 10a, " and all such funds, less deductions for funds that were used for lawful purposes, were turned over to the estate about one month after the Petition Date." Thus, she asserts, that as long as she disclosed the First 2005 Transfers to Brent, who incorrectly advised her to not undo them, even if they were made with the intent to hide assets, and she recovered the funds promptly postpetition, there is no basis for Sachs's section 727(a)(2)(A) claim.
As noted above, Adeeb involved a debtor who, upon the advice of a non-bankruptcy attorney, transferred property to friends for no consideration in order to hinder collection efforts of one particular creditor. Later, Adeeb consulted bankruptcy counsel who advised him, prior to filing his petition, to reverse the transfers and disclose them to his creditors. Adeeb immediately began to reverse the transfers and called a meeting of his creditors, informing them of the reversals. Before he recovered all of the transferred property, an involuntary bankruptcy petition was filed against him, therefore thwarting his efforts to complete the recovery. Adeeb, 787 F.2d at 1341-42. The bankruptcy court denied Adeeb's discharge, and the district court affirmed.
On appeal, Adeeb argued that a debtor who is able to recover improperly transferred property prior to filing bankruptcy should not be denied a discharge of his debts under 727(a)(2)(A). Id . at 1343-44. The Ninth Circuit held that:
... [A] debtor who transfers property within one year of bankruptcy with the intent penalized by section 727(a)(2)(A) may not be denied discharge of his debts if he reveals the transfers to his creditors, recovers substantially all of the property before he files his bankruptcy petition, and is otherwise qualified for a discharge.
Id . at 1345 (emphasis added). The Adeeb court reasoned that such a rule encourages, (1) honest debtors to recover transferred property, which facilitates the equitable distribution of assets among creditors by ensuring that the trustee has possession of all of debtor's assets, and (2) honest debtors to undo their mistakes and receive their discharge. Id . Although Adeeb involved an involuntary case and held that recovery must occur within a reasonable time after the petition is filed, in cases of voluntary petitions both disclosure and substantial recovery must occur prior to filing. Id . at 1346. But see Beauchamp, 236 B.R. at 733 (in cases of voluntary petitions, both " disclosure and recovery" must occur by the filing)(no mention of " substantial" recovery).
Adeli never recovered most of the Subject Transfers pre- or postpetition, and her counsel did not turn over to the trustee the property that was recovered until more than eight months after her bankruptcy filing. Further, the " recovery" requirement means " recovery for the benefit of creditors, not recovery of cash which the debtor conceals from his creditors and spends, or purports to spend, prior to filing bankruptcy." Pac. W. Bank v. Johnson (In re Johnson), 68 B.R. 193, 199-200 (Bankr. D. Or. 1986).
Despite the temporal limitations imposed by Adeeb and Beauchamp and the fact that, unlike Adeeb, Adeli neither recovered nor disclosed to Sachs any of the Subject Transfers prior to the Petition Date, the bankruptcy court concluded " the principles of Adeeb and § 727 should be interpreted broadly enough to include Adeli's exculpatory pre- and postpetition conduct, " (citing Bank of Marin v. England, 385 U.S. 99, 103, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966)) and thus Adeli could properly invoke the disclose and recover exception. The court's decision to expand the express temporal limitation set forth in Adeeb was in error.
The disclose and recover exception is a narrow one, and Adeeb does not appear to hold that disclosing prepetition transfers to your bankruptcy counsel prior to filing bankruptcy, or revealing such information on your SOFA, satisfies the " disclose" requirement. The disclosure of prepetition transfers must be made to the creditors, and prior to filing. Moreover, in a voluntary case such as Adeli's, the recovery must be completed prior to the petition filing, not one or eight months later.
II. The Bankruptcy Court Erred When It Relied On Irrelevant Factors To Conclude That Adeli Should Not Be Denied Her Discharge Under Section 727(a)(2)(A).
Although we believe the errors discussed above support our decision to reverse, we briefly address Sachs's arguments that the bankruptcy court considered irrelevant factors in its determination that Adeli should not be denied her discharge under section 727(a)(2)(A).
First, Sachs argues that the bankruptcy court improperly relied upon an erroneous perception that since Adeli did not detrimentally affect his ability to obtain satisfaction of his April 7 Judgment, then his " lack of injury" somehow negates her acts under section 727(a)(2)(A). In other words, the court took a " no harm, no foul" approach. Sachs is correct.
This same " lack of injury" defense was raised and rejected in Adeeb, in which the court noted that the Ninth Circuit has long held that a creditor's lack of injury is irrelevant for purposes of denying a discharge in bankruptcy. See Adeeb, 787 F.2d at 1343, and Duggins v. Heffron, 128 F.2d 546, 549 (9th Cir. 1942). Here, the bankruptcy court found the following to negate Adeli's acts:
" In managing her accounts, Adeli did not interfere with or deprive Sachs of any legal right he had; "
" Adeli did not act with fraudulent intent. She did not materially impede any proper Sachs collection effort; "
" None of the transfers between Adeli and Kader actually hindered, delayed, or defrauded Sachs or any other Adeli creditor. No Adeli or Kader transfer hindered, delayed, or defrauded Sachs, or in any way cheated him out of any lawful process that he properly asserted against Adeli prepetition."
In light of Adeeb and other controlling Ninth Circuit case law which holds that injury to creditors is irrelevant for purposes of denying a discharge, the bankruptcy court erred by utilizing an " injury" analysis to determine erroneously that Adeli should not be denied her discharge under section 727(a)(2)(A).
Second, Sachs argues the bankruptcy court improperly imposed and erroneously applied a " materiality" standard. In its findings, the court stated:
" Any transfers between Adeli and Kader had no material effect on Sachs' efforts to collect on his judgment or on the value of Adeli's bankruptcy estate; "
" None of Adeli's transfers was material."
Again, Sachs is correct.
Although materiality is a factor to consider in false oath actions under section 727(a)(4)(A), section 727(a)(2)(A) does not contain a " materiality" element. Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 65 (9th Cir. BAP 1999). Therefore, the bankruptcy court erred in considering a materiality element in determining Adeli's intent.
Finally, Sachs argues that the bankruptcy court improperly relied on several other factors such as deceit, the court's approval of Adeli's settlement of the trustee's avoidance action, and the propriety of how Adeli spent her transferred funds, all of which are irrelevant to " intent" under section 727(a)(2)(A). Here too, Sachs is correct.
The critical facts in this case are that Adeli transferred her money with the intent to hinder or delay Sachs, she admitted this fact, and she offered no legitimate defenses for doing so. This is a clear case for denial of discharge under section 727(a)(2)(A). It is irrelevant how Adeli spent the money, which actions were settled and with whom, or whether she intended to deceive Sachs. Although deceit can be implied in Adeli's actual intent, and thus consideration of this fact by the court was harmless error, the other facts are irrelevant and do not negate nor can ever undo Adeli's wrongful acts.
III. Did The Bankruptcy Court Err In Determining That Adeli Did Not knowingly And Fraudulently Make False Oaths In Connection With Her Bankruptcy Case Under Section 727(a)(4)(A)?
Because we have concluded that Adeli's discharge should have been denied by the bankruptcy court under section 727(a)(2)(A), we need not address Sachs's request to deny discharge under section 727(a)(4)(A).
CONCLUSION
Because the bankruptcy court clearly erred by misapplying Adeeb and other controlling Ninth Circuit case law and relied on irrelevant factors to conclude that Adeli lacked actual intent to hinder, delay, or defraud Sachs, it erred when it denied Sachs's section 727(a)(2)(A) claim and we REVERSE and REMAND with instructions to the bankruptcy court to enter a judgment denying Adeli's discharge.
The Joint PTO and FFCL indicate that after Brent received the second set of checks he turned them over to Adeli's chapter 7 trustee. Considering that Adeli's case was not converted to chapter 7 until May 9, 2006, it is unclear when these checks were actually turned over. We assume it was sometime after May 9, 2006. This conflicts with Adeli's assertion that she recovered the funds within a month of the Petition Date, and would have recovered them sooner had Brent not lost the first set of checks.
The bankruptcy court stressed that even though Adeli did not recover some of the transfers until after the Petition Date, since she did recover what would have been available to creditors as of the Petition Date " promptly and in a business-like manner" she therefore complied with the " essence" of Consumers Oil Co. v. Adeeb (In re Adeeb), 787 F.2d 1339 (9th Cir. 1986). We do not consider eight months later " promptly, " and furthermore the record reflects that the funds were only turned over as a result of the chapter 7 trustee's demands.
Section 727(a) provides in relevant part:
(a) The court shall grant the debtor a discharge, unless (2) the debtor, with intent to hinder, delay, or defraud a creditor ... has transferred, removed, ... or concealed ... -(A) property of the debtor, within one year before the date of the filing of the petition..... (4) the debtor knowingly and fraudulently, in or in connection with the case-(A) made a false oath or account.
Q: So you put the Equity Line money in the Shared Modjallal Account to protect it from Mr. Sachs and the judgment? .... Adeli: The answer was I put it - I pulled the money to pay my expenses, to possibly start a business, pay my attorney fees, and I put it under [Modjallal's] name to protect it from being wrongfully taken away. Q: And you wanted to make sure that Mr. Sachs couldn't get hold of that money? .... Adeli: Wrongfully, yes. .... Q: I'll ask it again. Was it your understanding that, by putting the money in Ms. Modjallal's name, that Mr. Sachs could not take the money in the Shared Modjallal Account on account of his judgment? Adeli: It was protected from wrongfully being taken. Q: Was your understanding that Mr. Sachs could not get hold of it because it was in Ms. Modjallal's name? Adeli: His attorneys wrongfully taking the money, yes, that it would be protected if it was under someone else's name.