EDWARD ELLINGTON, Bankruptcy Judge.
C & C Investment Properties, LLC (C & C) entered into various promissory notes and deeds of trust with Heritage Bank of Carthage, Mississippi (Heritage Bank).
In 2010, C & C and Mr. Collins (Plaintiffs) filed suit against Heritage Bank (C & C Lawsuit) in the Circuit Court of the First Judicial District of Hinds County, Mississippi. In 2012, the Federal Deposit Insurance Corporation, as Receiver for the Heritage Banking Group, removed the lawsuit from the Circuit Court of the First Judicial District of Hinds County, Mississippi to the United States District Court for the Southern District of Mississippi. In the C & C Lawsuit, the Plaintiffs asserted claims against Heritage Bank and/or defenses to the promissory notes.
Subsequent to C & C entering into the promissory notes and deeds of trust, Heritage Bank failed.
Once Trustmark owned the promissory notes and deeds of trust, Trustmark was substituted as the defendant in the C & C Lawsuit. Trustmark filed a counterclaim against the Collins and C & C.
On February 22, 2016, a Final Judgment
On July 12, 2016, a Petition to Enroll a Foreign Judgment
In 2016, the Collins had a joint checking account with Regions Bank (Regions Account).
According to the bank statement introduced at trial (Trial Exhibit P4), on July 7, 2016, the Regions Account had a balance of $78,964.57. Beginning on July 12, 2016, the following withdrawals
(Trial Exhibit P4). Mr. Collins testified that he withdrew these funds in order to repay his brother, Trence Collins, for money his brother had loaned Mr. Collins or had loaned his business. (Trial Tr. at 27-29).
On January 27, 2017, Mr. and Mrs. Collins (Debtors) filed a joint petition for relief under Chapter 7 of the United States Bankruptcy Code. Stephen Smith was appointed the Chapter 7 Trustee. Also on January 27, 2017, the Debtors filed their Summary of Your Assets and Liabilities and Certain Statistical Information (Schedules) and Statement of Financial Affairs for Individuals Filing for Bankruptcy
In answer to question number 7 and question number 8 on their SOFA (on page 37 of 54), the Debtors answered No to the questions regarding payments to an insider within one year of filing bankruptcy. Question number 18 on the SOFA (on page 39 of 54) asks: "[w]ithin 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or financial affairs?"
In answer to question number 20 on their SOFA (on page 39 of 54), the Debtors stated that in June of 2016, they had closed or transferred funds from the Regions Account. The answer to question number 20 states:
On April 25, 2017, the Debtors filed Amended Summary of Your Assets and Liabilities and Certain Statistical Information (First Amended Schedules) (Dkt. #57). In their First Amended Schedules, the Debtors added several unsecured creditors and changed the value of Mr. Collins' NFL Concussion Lawsuit from $0.00 to unknown.
On June 29, 2017, Trustmark commenced the above-styled adversary proceeding with the filing of its Complaint (Complaint) (Adv. Dkt. #1). In its Complaint, Trustmark alleges that the Debtors withdrew at least $75,700.00 out of the Regions Account and transferred the funds to an insider, Mr. Collins' brother, Trence Collins. Trustmark alleges that these transfers were within one year of the petition and that the transfers were not disclosed in the Debtors' original Schedules and SOFA, and that as a result, the Debtors were intending to hinder, delay, or defraud Trustmark and their other creditors. Therefore, Trustmark alleges that the Debtors are not entitled to a discharge pursuant to 11 U.S.C. § 727(a)(2)(A).
In their Response to Complaint Objecting to Discharge or to Determine the Dischargeability of Debt (Response) (Adv. Dkt. #11) filed on August 9, 2017, the Debtors deny that Trustmark is entitled to any relief requested in its Complaint.
On September 7, 2017, subsequent to the filing of the adversary proceeding, the Debtors filed a second amendment to their Summary of Your Assets and Liabilities and Certain Statistical Information (Second Amended Schedules) and an amended Statement of Financial Affairs for Individuals Filing for Bankruptcy
On October 23, 2017, the Debtors filed another amendment to their Summary of Your Assets and Liabilities and Certain Statistical Information (Dkt. # 111) (Third Amended Schedules).
After the adversary was filed, Mr. Collins received information regarding the settlement of his NFL Concussion Lawsuit. Mr. Collins' attorneys believed that once settled, Mr. Collins would receive enough money to pay Trustmark and his other creditors in full. Trustmark, however, was not inclined to wait on the settlement, so the adversary was set for trial. The trial on the adversary was held on September 13, 2018. When the last brief was filed on October 22, 2018, the Court took the matter under advisement.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1) and (2)(I) and (J).
Under 727(a), a court must grant a debtor a discharge unless one of the enumerated exceptions for denying a debtor a discharge under § 727(a) is proven. "The exceptions are construed strictly against the creditor and liberally in favor of the debtor." The Cadle Co. v. Duncan (In re Duncan), 562 F.3d 688, 695 (5th Cir. 2009) (citation omitted). The burden of proof is on the creditor and "must be proven by a preponderance of the evidence. See Grogan v. Garner, [498] U.S. [279], 111 S.Ct. 654, 660, 112 L. Ed. 2d 755 (1991)." Beaufouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992).
Trustmark alleges that the Debtors should be denied a discharge pursuant to § 727(a)(2)(A). Section 727(a)(2)(A) prohibits a debtor from receiving a discharge if "the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred . . . (A) property of the debtor, within one year before the date of the filing of the petition."
The Court finds that Trustmark has not met its burden under § 727(a)(2)(A) as to Charlotte Collins. Other than proving that Mrs. Collins was a joint account holder on the Regions Account, Trustmark has not met the first element and proven that Mrs. Collins transferred any property.
Mr. Collins testified that the Regions Account was created as a personal account, but it was not used as a personal account by the Debtors. Instead, he used the Regions Account to run his business, C & C. (Trial Tr. at 22). Mrs. Collins testified that she had no control over the Regions Account, never looked at the bank statements for the Regions Account, and did not sign any of the withdrawals/checks drawn on the Regions Account.
As for the preparation of the Schedules and SOFA,
Trial Tr. at 56-57.
The Court finds no reason to doubt Mrs. Collins' testimony regarding the preparation of the Schedules and SOFA. No proof was presented to show that Mrs. Collins was aware of the transfers out of the Regions Account, therefore, she could not have known that the transfers should have been disclosed on their Schedules and SOFA.
The Court finds that Trustmark has not proven that Mrs. Collins transferred any property or that she had any intent to hinder, defraud, or delay her creditors. Even if Trustmark proves intent on the part of Mr. Collins, "the Code does not allow attribution of intent from spouse to spouse." First Tex. Sav. Assoc. v. Reed (In re Reed), 700 F.2d 986, 993 (5th Cir. 1983) (citation omitted). Consequently, the Court finds no basis exists under § 727(a)(2)(A) to deny Mrs. Collins a discharge.
There is no dispute that Mr. Collins transferred property within one year of the filing of the petition, consequently, Trustmark has met the first and third elements of its discharge claim. The dispute arises over the second and fourth elements that is, whether the funds transferred in the Regions Account belonged to Mr. Collins and whether he had an intent to hinder, delay, or defraud their creditors when the transfers were made.
On their SOFA, the Debtors list the Regions Account and state that 85% of the funds in the account belonged to Mr. Collins' brother. At trial, Mr. Collins testified that whenever he needed money, his brother would loan it to him, and he used the money in his business. Mr. Collins believed the loans started in 2008 and continued over three or four years, and that his brother loaned him about $50,000.00. Further, Mr. Collins testified that there were no loan documents to evidence the loans by his brother.
Mr. Collins did not introduce copies of checks from his brother or produce any other evidence to support his assertion that his brother had loaned him money. Even if he had, such evidence would support only the existence of a debt and not that the money in the Regions Account belonged to his brother. Consequently, the Court finds that the funds in the Regions Account belonged to Mr. Collins. Therefore, Trustmark has met the second element.
In order to have Mr. Collins' discharge denied, Trustmark has the burden to prove that Mr. Collins had actual intent to defraud his creditors.
In re Dennis, 330 F.3d at 701-02.
At trial, Mr. Collins testified that he had no intent to defraud his creditors. Therefore, the Court must examine the six (6) badges of fraud that tend to prove actual intent to defraud as established by the Court of Appeals for the Fifth Circuit.
Mr. Collins testified that he believed his brother had loaned him approximately $50,000.00, but he had no physical documents to back up these loans. Further, Mr. Collins could not recall the date the loans were made or the specific amounts of the loans. Without any proof, the Court cannot find that Mr. Collins received adequate consideration.
"`[A] presumption of actual fraudulent intent necessary to bar a discharge arises when property is . . . transferred to relatives.' In re Butler, 38 B.R. 884, 888 (Bankr.D.Kan.1984)."
Other than Mr. Collins' testimony that he withdrew the funds from the Regions Account in order to repay his brother, there was no evidence presented as to what Mr. Collins did with the money. Therefore, this badge of fraud is neutral.
At trial, Mr. Collins testified as to his financial condition when he began withdrawing the funds from the Regions Account in July of 2016:
Therefore, the Court finds that transferring $75,700.00 from the Regions Account in July of 2016 to his brother worsened Mr. Collins' financial condition. This factor also tends to prove Mr. Collins' actual intent to defraud his creditors.
At the time Mr. Collins began withdrawing funds from the Regions Account, Trustmark had begun collection efforts on its Judgment. The first withdrawal from the Regions Account occurred on July 12, 2016. Trustmark states several times in its arguments that it "served the [Enrollment] Petition on the Debtors on July 11, 2016, to their home address,"
The Court agrees with Trustmark that the Enrollment Petition was placed in the mail on Monday, July 11, 2016, but it does not agree with Trustmark that the Debtors were aware of and had received the Enrollment Petition on July 11, 2016. Nor is there proof that when Mr. Collins made the first withdrawal on July 12, 2016, Mr. Collins was aware of or had received the Enrollment Petition in the mail. Mr. Collins testified when he made the first withdrawal on July 12, 2016, that he had not received the Enrollment Petition and was unaware of the Enrollment Petition. (Trial Tr. at 24-25).
Mr. Collins verified that his home address and C & C's address were listed correctly on the Certificate of Service on the Enrollment Petition.
As stated by the Fifth Circuit, actual intent to defraud creditors "may be inferred from the actions of the debtor and may be shown by circumstantial evidence." In re Dennis, 330 F.3d at 701 (citation omitted). Applying the factors that tend to prove actual intent to the facts of this case, the Court finds that Mr. Collins' actions prove an actual intent to defraud his creditors. The burden then shifted to Mr. Collins to prove that he lacked the fraudulent intent to defraud his creditors, which he failed to rebut. Therefore, the Court finds that in withdrawing the funds from the Regions Account, Mr. Collins had an actual intent to defraud his creditors.
In order to prevail under § 727(a)(2)(A), Trustmark had to prove that Mr. Collins made a transfer of his property within one year of the filing of his petition with the intent to hinder, delay, or defraud his creditors.
Trustmark alleges that the withdrawal of the funds from the Regions Account constituted fraudulent transfers, and therefore, Trustmark is entitled to a judgment in its favor for the amount of the fraudulent transfers pursuant to § 523(a)(2)(A). Since the Court found that Mr. Collins is not entitled to a discharge under § 727(a), Trustmark's § 523(a)(2)(A) claim is moot.
As to Mrs. Collins, the Court found that Trustmark failed to prove that Mrs. Collins made any transfers from the Regions Account, therefore, Mrs. Collins could not have made any fraudulent transfers. Consequently, Trustmark's § 523(a)(2)(A) claim against Mrs. Collins should be denied.
Discharges are favored under the Code. Stanley v. Trinchard (In re Hale), 500 F.3d 411, 426 (5th Cir. 2007). In order to succeed in denying the Debtors a discharge under the exceptions found under § 727(a), Trustmark has the burden of proving by a preponderance of the evidence that the Debtors' case falls under one of the enumerated exceptions. If Trustmark meets this burden, the Debtors must present evidence in rebuttal.
Trustmark alleges that the Debtors' conduct falls under the exception to discharge found in § 727(a)(2)(A). In order to prevail under § 727(a)(2)(A), Trustmark must prove the following four elements: "`(1) a transfer of property; (2) belonging to the debtor; (3) within one year of the filing of the petition; (4) with intent to hinder, delay, or defraud a creditor. . . . Id.'"
As to Mrs. Collins, the Court finds that Trustmark failed to prove that she transferred property within one year of the filing of her bankruptcy petition with the intent to hinder, delay, or defraud her creditors. Consequently, Mrs. Collins is entitled to a discharge under § 727(a). Moreover, the Court denies Trustmark's § 523(a)(2)(A) claim against Mrs. Collins.
Turning to Mr. Collins, the Court finds that Trustmark proved that he transferred property to his brother within one year of the filing of his bankruptcy petition with the intent to hinder, delay, or defraud his creditors. Consequently, Mr. Collins is denied a discharge under § 727(a)(2)(A). The denial of his discharge under § 727(a)(2)(A) renders Trustmark's claim under § 523(a)(2)(A) moot.
To the extent the Court has not addressed any of the parties' other arguments or positions, it has considered them and determined that they would not alter the result.
A separate judgment consistent with this Opinion will be entered in accordance with Rule 7054 of the Federal Rules of Bankruptcy Procedure.
