In re Kempff (Appeal of Farley)

Case Type:
Case Status:
15-3200 (7th Circuit, Jan 30,2017) Published
To prevail on a fraudulent transfer claim under § 727(a)(2), the plaintiff must demonstrate by a preponderance of the evidence that the defendant actually intended to hinder, delay, or defraud a creditor and the intent must be actual and not constructive. To prevail on a claim under § 727(a)(4), the plaintiff must demonstrate that the misstatements were made with the intent to deceive or were made with reckless disregard for the truth and that they were material misstatements.
Procedural context:
Brian Farley brought an adversary proceeding against Margaret Kempff challenging her eligibility for discharge because of a postpetition transfer and false statements in her bankruptcy schedules. After a three day bench trial, the bankruptcy court found Margaret’s testimony to be credible and found that she acted without actual intent since the transfer to the taxing authority was made by her accountant after he had been told that the automatic stay prevented enforcement of the tax levy. The bankruptcy court also found that any misstatements in her schedules resulted from either a misunderstanding or the utter incompetence of Margaret’s attorney, not any fraudulent intent on her part. The district court affirmed as did the 6th Circuit. Findings of fact were reviewed for clear error and legal conclusions were reviewed de novo.
Margaret’s now ex-husband, Bart, was general counsel for a luxury home builder in suburban Chicago. Over time, Bart embezzled approximately $1.2 million. In a desperate scheme to avoid detection by surreptitiously replenishing the stolen money, Bart borrowed $400,000 from Farly, a lawyer, which loan was secured by a 3rd lien on Bart’s and Margaret’s house. Margaret did not know about this loan and Bart forged her signature on the deed. Bart’s crime was discovered and he was prosecuted, convicted and disbarred. The first mortgage holder commenced a foreclosure and Margaret filed chapter 7. After the petition date, Margaret’s accountant transferred about $7,200 to the Illinois Department of Revenue to cover unpaid taxes. One mistake on her schedules was the failure to list $300,000 she was owed by Bart pursuant to a divorce settlement. Margaret testified that she didn’t include it because she never expected to be paid that money. The bankruptcy court found this testimony credible given that Bart was a disbarred, felonious, fraudster who had not paid her a penny under the settlement to date and it was essentially worthless.
Wood, Sykes, Hamilton (Sykes)

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