A judgment creditor (the creditor) filed an adversary complaint objecting to a debtor’s discharge in a Chapter 7 Bankruptcy. The creditor initially sued the debtor in state court to collect on a loan guaranty and then moved for summary judgment in that matter. The debtor had signed a continuing guaranty for repayment on all loans made to a company in which he served as president. After leaving the company (which eventually closed), the debtor moved from his original property and sold it for $172,000 (the sale proceeds). Following the commencement of the state court case but before the state court granted summary judgment, the debtor made a series of transfers and transactions, including: (1) transferred, by quit-claim deed, his Milwaukee property from his limited liability company (the LLC), to which he was the only member, to himself; (2) loaned money to a company, whose only members were two of the debtor’s relatives; (3) sold his Wisconsin property to a “stranger” company that granted the debtor’s relatives, who were renting the home prior to the sale, the option to purchase (the relatives remained on the property during and after the sale); and (4) purchased an annuity from an insurance company with the proceeds from various sales and money from an account held by the LLC and a personal account. The state court granted the creditor’s motion, entering a judgment amount for the creditor. The debtor then voluntarily filed for Chapter 7 bankruptcy, with several of its debts discharged as a result.
The court held a bench trial on objections to discharge and ordered the creditor to file an opening post-trial brief “explaining why the court should enter judgment in its favor on one or more of its claims based on an application of the law to the facts shown by evidence presented.” The parties also filed responsive post-trial briefs. The creditor primarily argued the debtor had engaged in transactions with the intent to avoid payment of debts.
In WiscTex, LLC v. Galesky (In Re Galesky), 648 B.R. 643 (Bankr. E.D. Wis. 2022), the court, after reviewing the parties’ post-trial briefs, overruled the creditor’s objection to the debtor’s discharge. In evaluating which of the creditor’s post-trial brief arguments were properly raised (not waived), the court applied the following principles: (1) only facts in evidence may support arguments raised; (2) arguments are limited to those raised in an opening brief; (3) nonresponse to arguments results in a waiver; and (4) conclusory, unsupported, and undeveloped arguments result in a waiver. The court found the creditor waived almost all the arguments it made or attempted to make due to its failure to comply with the court’s post-trial brief orders. The court explained that the post-trial brief failed to apply law to the stated facts or show how it met its burden of proof. In addition, the brief was disorganized, flawed, relied on materials not presented in trial or admitted into evidence, included conclusory statements rather than facts, and contained citations to non-binding citations. However, the court found four properly raised arguments on which it could address the merits; these arguments objected under various provisions of 11 U.S.C § 727(a) to the debtor’s discharge. The court noted that the creditor had to show by a preponderance of the evidence that the debtor’s discharge was ineligible.
First, the court found the creditor failed to prove the debtor’s discharge should be denied under § 727(a)(2)(A). The bankruptcy provision prevents discharge when a debtor has concealed or disposed of property within a year of filing for bankruptcy or after filing for bankruptcy. The court explained that this provision requires a showing of an act and improper intent. A debtor has the kind of improper intent required by § 727(a)(2), and a court should deny a discharge under that statute, “only where the debtor has committed some act extrinsic to the conversion [of property] which hinders, delays or defrauds.” Smiley v. First Nat’l Bank of Belleville (In re Smiley), 864 F.2d 562, 566–567 (7th Cir. 1989). Parties may use extrinsic signs of fraud, referred to as ‘badges of fraud,’ as circumstantial evidence for a debtor’s improper intent. Most of the debtor’s transfers that the creditor claimed had been fraudulent were outside of the year period and the court therefore could not deny discharge. The court then considered whether these transfers could serve as circumstantial evidence that the debtor made the sale of the Wisconsin property with improper intent. The court found, despite the plain benefits the debtor received from the sale and the circumstantial evidence, that the debtor had acted within his legal rights with respect to his property and no evidence existed that the debtor sold the property with improper intent.
Also, the court differentiated between a debtor using all exemptions available to him and a debtor acting with improper intent. The court considered the creditor’s primary argument that the debtor engaged in settlement talks with the creditor to stall the state case from proceeding while he diverted his assets into exempt assets and “planned for bankruptcy.” The debtor's actions appeared on the surface to allow a reasonable inference that he improperly intended to hinder, delay, and defraud the creditor. However, “Smiley [made] clear that a debtor's general knowledge and efforts to avail himself of exemptions under applicable law are not evidence of improper intent under § 727(a)(2)(A)”. The court explained it was not surprising that the debtor considered bankruptcy while being sued by the creditor for a significant amount; the planning did not amount to fraud. The creditor then argued the debtor’s behavior, which resulted in delays, during the state court proceeding entitled it to denial of the discharge. However, the court considered the entirety of the state case and found that the debtor acted in an ordinary and permissible manner with no evidence of improper intent. Finding the creditor did not meet its burden in proving the debtor acted with improper intent, the court refused its denial of discharge under § 727(a)(2)(A).
Second, the court found that creditor had waived its argument for denial of discharge under § 727(a)(3) because of the conclusory, undeveloped, and unsupported nature of the arguments. However, the court further found it would have failed on its merits regardless. Section 727(a)(3) allows for denial of discharge if a debtor has “concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information … from which the debtor’s financial condition or business transactions might be ascertained.” The court found the creditor failed to show that the records provided were materially deficient; instead, it noted the “voluminous records” provided by the debtor appeared complete and accurate.
Next, the court found the creditor failed to prove it was entitled to denial of the discharge under § 727(a)(4)(A), which provides for denial if a debtor “knowingly and fraudulently, in or in connection with the case … made a false oath or account.” The creditor must prove that the debtor knowingly and fraudulently (acting with intent to deceive or with “reckless regard for the truth”) made a false material statement. The creditor argued the debtor (1) made false statements regarding the sale of his Wisconsin property to a “stranger” company, who was indebted to him, and the reason for purchasing the annuity; (2) falsely omitted from his statements the transfer of his Milwaukee property from the LLC to himself; and (3) inflated his post-petition expenses. The court found no evidence of “false statements,” stating that the creditor failed to point to statements that the debtor made that differed from the court’s finding of fact. Specifically, the court found the company he sold his Wisconsin property to was in fact a “stranger” to the debtor because no evidence provided indicated a different relationship between the two. The court then found no evidence that the debtor falsely omitted the transfer from his statement because he was asked to disclose only any transfers by him on the statement, not transfers made to him. Under Wisconsin law, even as a member of the LLC, the debtor did not transfer that property to himself, the LLC had made the transfer. In addition, the court found that while the debtor knowingly provided false, inflated expenses in his bankruptcy schedules, the creditor failed to show that the false statements had been material. The court stated, “[a] fact is material if it bears a relationship to the debtor’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor’s property.” Lardas v. Grcic, 847 F.3d. 561, 570 (7th Cir. 2017). The court explained in a Chapter 7 bankruptcy, a debtor’s expenses at the time of filing and after ordinarily do not matter because a “debtor’s post-petition income is usually not property of the bankruptcy estate.”
Finally, the court found the creditor’s discharge objection under § 727(a)(5) did not meet the burden required to entitle it to denial of discharge. The creditor argued the debtor’s “bankruptcy planning had all the badges of fraud and crossed the line from permissible planning to acting with intent to deceive.” However, the court pointed out that fraud is not an element of this provision. Section 727(a)(5) provides for denial of discharge if a “debtor has failed to explain satisfactorily … any loss of assets or deficiency of assets to meet the debtor’s liabilities.” The creditor argued the debtor did not adequately explain what he did with the sale proceeds from the original house. The court found the debtor’s explanation and documentation sufficient to erase any speculation of what happened to the money.
By Kristin Meurer [email protected]
Edited By Melissa Hightower [email protected]
Edited By Ashley Boyce [email protected]