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Victor Kearney v. Unsecured Creditors Committee

Summarizing by Amir Shachmurove

Cox v. Villani

Citation:
Cox v. Villani (In re Villani), --- B.R. ----, 2012 WL 3755525 (1st Cir. B.A.P. Aug. 28, 2012)
Tag(s):
Ruling:
The U.S. Bankruptcy Appellate Panel for the First Circuit REVERSED the U.S. Bankruptcy Court for the District of Massachusetts. The BAP ruled the Bankruptcy Court erred when it ruled in favor of the Debtor in an adversary proceeding brought by the Creditor objecting to the Debtor's discharge pursuant to Section 727(a)(2)(A). The case was REMANDED with instructions to enter judgment denying the Debtor's discharge.
Procedural context:
The Debtor filed for relief under Chapter 7 in January 2009. In April 2010, the Creditor brought an adversary proceeding objecting to the Debtor's discharge pursuant to Section 727(a)(2)(A) (transfer or concealment of property that belonged to the debtor less than a year before the bankruptcy petition with actual intent to hinder, delay, or defraud a creditor). A trial was held in December 2011; the only issue that remained to be tried was whether the Debtor made the transfers with intent to hinder, delay, or defraud a creditor. The Bankruptcy Court ruled in favor of the Debtor. The Creditor appealed to the BAP. Reviewing the Bankruptcy Court's findings of fact for clear error and conclusions of law de novo, the BAP determined the Bankruptcy Court erred in its findings, reversed the judgment, and remanded the matter to the Bankruptcy Court for entry of a judgment denying the Debtor's discharge. The BAP concluded that "it is implausible that [the Debtor] lacked the intent to hinder, delay, or defraud his creditors when he transferred significant assets less than a year before filing a petition for chapter 7 relief."
Facts:
Pre-petition (October 2007), Donald Cox (the "Creditor") brought a state court action against, inter alia, Richard A. Villani (the "Debtor") for defaulting on a promissory note in the principal amount of $300,000. The Creditor obtained pre-judgment attachments of certain bank accounts and a preliminary injunction requiring all monies due, or that became due, to the Debtor to be paid into an escrow account as prejudgment security. Following entry of the preliminary injunction and prior to filing for relief under Chapter 7, the Debtor made three transactions: the Debtor sold his boat for $85,500, through his long-time girlfriend ("Sullivan") he caused the proceeds to be deposited into the payroll account for one of his companies, and directed Sullivan to use the funds to reduce the principal balance owed on a mortgage loan that was in foreclosure; the Debtor received insurance proceeds of $21,719.86 from an automobile accident resulting in a total loss of the vehicle, caused the proceeds to be deposited into the same payroll account, and again used the funds to satisfy a portion of the mortgage indebtedness; and the Debtor withdraw $18,257.36 from his retirement account, directed Sullivan to deposit the funds into her personal account, and directed her to use the funds for personal and business expenses. The Debtor filed for relief under Chapter 7 in January 2009. The Creditor filed a proof of claim in the amount of $379,378.74 and later initiated an adversary proceeding objecting to the Debtor's discharge. The Creditor argued the Debtor made the previously described transfers with intent to hinder, delay, or defraud a creditor for purposes of Section 727(a)(2)(A). Ultimately, the Debtor admitted to transferring his property within a year of filing the bankruptcy petition and the only issue to be tried was the Debtor's intent. At trial, the Debtor testified that in making the transfers he was aware that the Creditor had sued him and that his home was in foreclosure. The Debtor claimed to have limited understanding of legal and financial matters. He testified that he relied heavily on Sullivan in financial matters. Sullivan's testimony demonstrated that she handled, if not controlled, the disposition of the boat sale proceeds, the insurance proceeds, and the retirement fund withdrawal. Sullivan testified she deposited the boat sale proceeds and the insurance proceeds into a payroll account because she was aware of the Creditor's bank account attachments and a woman at the bank advised her that payroll accounts could not be attached. She deposited the retirement funds into her personal account to also avoid the Creditor's bank account attachment. The BAP found that the Debtor demonstrated every "objective indicia" of fraudulent intent outlined in In re Marrama and further engaged in a series or pattern of transfers that, viewed together, firmly established that the Debtor possessed the requisite improper intent. The BAP rejected the Debtor's exculpatory arguments (e.g. lack of financial sophistication, limited education, relied on attorney's advice) as they had previously been rejected by the BAP or the First Circuit. The BAP further found that in using funds to satisfy the mortgage indebtedness, the Debtor acted to prefer one creditor with the specific intent to delay impermissibly another creditor. Also, the Debtor's multiple businesses and real estate interest reflected he was experienced in financial matters. The Debtor's surrender of control over his finances to Sullivan demonstrated not a benign inattention to detail, but the type of extreme carelessness or reckless indifference that equates to fraud and a bar to discharge. Finally, the BAP found the Debtor's lack of candor in completing his Statement of Financial Affairs to be probative. The Debtor failed to identify any of the pre-petition transfers although they were squarely within the two-year period proceeding commencement of the case.
Judge(s):
Haines, Deasy, Tester

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