Two creditors filed separate adversary proceedings to challenge debtor's right to a discharge. The bankruptcy court consolidated the adversary proceedings and conducted a four-day trial on the issues raised in the adversary complaints. Ultimately, the bankruptcy court determined that the debtor was not entitled to a discharge solely on the basis that he intended to hinder or delay his largest creditor when, within a year prior to filing bankruptcy, he placed approximately $120,000 in cash in a safety deposit box with the admitted purpose of keeping it from the creditor, whom he believed was engaging in improper collection activities. The debtor appealed.
On July 27, 2009, Northwestern Bank ("NWB") obtained a judgment ("Judgment") against Roger Thomas Haag in the Circuit Court for the County of Leelanau, Michigan in the approximate amount of $1.7 million. The Judgment was based on Mr. Haag's personal guaranty of the debts of his failed business, HTI, Inc. ("HTI"). NWB domesticated the Judgment in Arizona on February 1, 2010.
The domestication of the Judgment in Arizona prompted Mr. Haag to file a voluntary chapter 7
NWB filed an adversary complaint seeking alternatively to have its debt excepted from the application of Mr. Haag's discharge, or to deny Mr. Haag his discharge altogether. After four days of trial, the bankruptcy court denied Mr. Haag a discharge, based solely on its finding that Mr. Haag intended to hinder or delay NWB in its efforts to collect on the Judgment.
Mr. Haag is an engineer with expertise in biosolids applications and in the construction of biosolids storage tanks. Mr. Haag was the sole owner of HTI, which built and installed precast concrete tanks for use in wastewater treatment plants.
Beginning in 2003, Mr. Haag and HTI began their banking relationship with NWB. By June 2007, HTI's line of credit with NWB had increased to $1.3 million. Mr. Haag and HTI had two options available to repay the NWB debt: generating funds through performance on HTI's contracts or the sale of HTI as a going concern. Following the 2007 collapse of the housing market, HTI was unable to obtain sufficient new business to support its debt payments to NWB. Mr. Haag thereafter obtained a buyer for HTI; however, the attempted sale ultimately failed in November 2008.
By email dated November 29, 2008, Mr. Haag advised NWB that he had retained counsel with the intent to file a personal chapter 7 case and to live on social security benefits and the IRAs held by Mr. Haag and his wife, Carol. Mr. Haag left HTI's office and everything in it, including HTI's books and records, in December 2008. Also in December 2008, Mr. Haag surrendered his residence to NWB and moved to Arizona.
In January 2009, NWB took possession of all HTI assets. Mr. Haag testified he fully cooperated with NWB in turning over HTI's equipment. By letter dated January 17, 2009 ("January 2009 Letter"), Ms. Haag advised NWB that "[Mr. Haag's] only income is unemployment, social security, and IRAs." At the end of the January 2009 Letter is a statement by Mr. Haag that he had read and approved the January 2009 Letter.
Beginning in February of 2009,
On July 11, 2009, less than three weeks before NWB obtained the Judgment, Mr. Haag withdrew $120,000 in cash from the Bank of Tucson account and placed it in a safety deposit box he and Ms. Haag rented jointly at Wachovia Bank. When asked at trial why he had converted $120,000 from his Bank of Tucson account to cash, Mr. Haag responded: "I guess the reason was that I felt at some point in time [NWB] had taken —gotten into stuff that I didn't think they should get into, so I took it out in cash." In subsequent testimony, he stated: "I didn't feel comfortable with leaving it in a bank. If I had the cash in my hand and if something — somebody decided that they wanted to take it from me if it was in a bank, I'd have to get a lawyer to try to get it back. And it was much easier for me to take it as cash because I knew I needed it to live on." Ms. Haag also testified at trial that the process of taking $120,000 of the tax refunds proceeds from Mr. Haag's Bank of Tucson account in cash, putting it in the safety deposit box at Wachovia Bank, and then depositing some of the cash into her bank accounts was done "[b]ecause we were nervous because we felt our opinion that [NWB] had been quite aggressive with us, and I just felt that this was an appropriate way to manage the tax returns." Mr. Haag asserts that in moving the cash to the safety deposit box he merely was acting to protect himself from improper conduct by NWB. Specifically, he was protecting his right to privacy and his financial information from improper inquiries by NWB.
By the Petition Date, some eight months after Mr. Haag put the $120,000 cash into the safety deposit box, the cash was, in Mr. Haag's words, "long gone."
The bankruptcy court ultimately found that within one year prior to the Petition Date, Mr. Haag withdrew $120,00 in cash from his account at the Bank of Tucson and placed it in a safety deposit box he jointly owned with Ms. Haag; that he converted the funds in his bank account to cash because he was concerned about collection action by NWB; that between July and November of 2009, at least $36,000 of the cash from the safety deposit box was deposited by Ms. Haag into her personal checking account; and that Ms. Haag used the cash received from Mr. Haag to pay family and business expenses. The bankruptcy court concluded that the transfer of money from the Bank of Tucson account to a safety deposit box jointly owned with Ms. Haag was a transfer of property by Mr. Haag, that the removal of cash from the safety deposit box into Ms. Haag's individual account was a transfer, and that Mr. Haag transferred the money with a subjective intent to hinder or delay. Finally, while the bankruptcy court determined that Mr. Haag's admission that he intended to hinder or delay NWB in its collection activities was sufficient to deny Mr. Haag his discharge, the bankruptcy court noted that, even without his admission, there were sufficient badges of fraud to support a finding of intent: the close relationship between Mr. Haag and Ms. Haag, Mr. Haag's poor financial condition at the time of the transfers, and the lack of any consideration for the transfers.
After his motion for reconsideration was denied, Mr. Haag filed a timely notice of appeal asking that we determine that the bankruptcy court erred in finding that his actions constituted an intent to hinder sufficient to deny his discharge pursuant to § 727(a)(2).
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(J). We have jurisdiction under 28 U.S.C. § 158.
Whether the bankruptcy court erred when it found that Mr. Haag intended to hinder or delay NWB in its efforts to collect on the Judgment when he withdrew $120,000 from his Bank of Tucson account and placed it in a safety deposit box to which he and Ms. Haag had access.
Whether the bankruptcy court erred when it denied Mr. Haag a discharge.
A factual finding is clearly erroneous if the appellate court, after reviewing the record, has a firm and definite conviction that a mistake has been made.
"De novo means review is independent, with no deference given to the trial court's conclusion.
We may affirm the bankruptcy court's ruling on any basis supported by the record.
Many debtors seek a fresh start, available to them by virtue of the discharge provisions of the Bankruptcy Code, when they have become unable to meet their financial obligations. The bankruptcy court denied Mr. Haag a discharge, and in this appeal, we are asked to determine whether the bankruptcy court erred when it did so.
In our review of the bankruptcy court's findings of fact and conclusions of law, we are guided by certain general principles governing denial of discharge claims. Most important is the admonition that "[a] denial of a discharge is an act of mammoth proportions, and must not be taken lightly. In light of this gravity . . . Section 727 must be construed liberally in favor of the debtor and against the objector."
Finally, a party objecting to the debtor's discharge has the burden of proving, by a preponderance of the evidence, that the debtor's actions or conduct fall within one of the exceptions to discharge set forth in § 727.
With these guidelines in mind, we turn to our review of the specific issues in this appeal.
As relevant to this appeal, § 727(a)(2) provides:
(Emphasis added.)
To prevail on its claim for relief under § 727(a)(2)(A), NWB was required to prove two things: "(1) a disposition of property, such as transfer or concealment, and (2) a subjective intent on the debtor's part to hinder, delay or defraud a creditor through the act [of] disposing of the property."
The term "transfer" is defined by the Bankruptcy Code to mean:
Section 101(54).
A withdrawal from a bank account is a transfer.
Here, in addition to transferring $120,000 in cash from his Bank of Tucson account, Mr. Haag took the further step of placing the $120,000 cash into a safety deposit box at Wachovia Bank to which only he and Ms. Haag had access, thereby concealing it from his creditors, including NWB.
Mr. Haag asserts on appeal that the bankruptcy court erred in finding he held an actual intent to hinder or delay NWB. Mr. Haag faults the bankruptcy court for relying only on his "admission" that he placed cash into the safety deposit box out of concern about NWB's collection efforts. He asserts that the bankruptcy court failed to consider all of the circumstantial evidence and inferences from his conduct.
We note that "[w]hen a debtor admits that he acted with the intent penalized by section 727(a)(2)(A), there is no need for the court to rely on circumstantial evidence or inferences in determining whether the debtor had the requisite intent."
In Mr. Haag's view, the "admission" itself needed to be considered within the circumstances as they existed. In particular, Mr. Haag points out that both he and his wife testified that he withdrew cash and placed it in a safety deposit box because "(1) they needed cash for their expenses in Mexico and (2) to protect against improper conduct of NWB including privacy violations." Appellant's Opening Brief at 13:3-4. He further asserts (1) that it is "uncontested" that all funds in the safety deposit box were used for the payment of his reasonable business, medical, legal, and living expenses, (2) that his course of conduct demonstrated "an ongoing intent to cooperate with all lawful collection actions against him," and (3) that there was no evidence that he "misled or deflected creditors."
We find these assertions troubling based on the record before us. The bankruptcy court made no finding as to the reasonableness of the expenses for which the $120,000 cash was used. We would not characterize a complete remodeling and redecorating of a second residence in a foreign country as an "ordinary" expense for anyone, most especially for an insolvent debtor, so we find it difficult to determine how the expense could be found to be reasonable. Neither do we see in the record the "ongoing intent to cooperate" with NWB. The record in fact suggests a longer-term plan to conceal the existence of the tax refunds from NWB. Specifically, Mr. Haag twice communicated with NWB to volunteer to them the information that his
Finally, Mr. Haag asserts that seeking haven from untoward creditor behavior and intending to hinder or delay are "not mutually exclusive."
The bankruptcy court did not err when it denied Mr. Haag his discharge.
The bankruptcy court's findings that Mr. Haag placed $120,000 in cash into a safety deposit box, which funds subsequently were spent by Mr. Haag and his wife, with the intent to hinder or delay NWB in its efforts to collect its Judgment are more than adequately supported by the record. We AFFIRM.
As his record on appeal, Appellant submitted five volumes of excerpts, the majority of which are the complete trial transcripts and the transcripts of closing arguments and the hearing on Appellant's motion for reconsideration, most of which are not relevant to the limited issue before the Panel. The factual record important in this appeal relates to evidence of the receipt of five tax refunds and various banking transactions through which the disposition of the proceeds of those refunds was traced. Yet Appellant did not provide the actual trial exhibits, which would have made that evidentiary record easily accessible. Instead, to put together the facts, it was necessary to read the entire transcript, and then go back to locate the factual information that actually relates to this appeal. The parties provided some assistance in their briefs, but the actual evidence would have made the exercise much easier.
The Haags maintained separate bank accounts and separate assets.
In August 2009, the Haags participated in a Mexican marriage ceremony, likely as a renewal of their vows as their 40th anniversary approached. In September 2009, they signed the separation agreement. A short time thereafter they took an overseas trip together which they referred to as their "anniversary" vacation. Mr. Haag's explanation as to why they took the trip was that it already had been paid for. They still travel together for family visits.
At the time of trial in 2011, the Haags still had not told all of their children they were legally separated. Ms. Haag frequently stays at the Arizona condo Mr. Haag claims as his residence. Mr. Haag explained that the separation agreement "awarded" her the use of a room there.
