541 F.2d 999 (2nd Cir. 1976), 936, In re Adlman

Docket Nº:936, Docket 76-5003.
Citation:541 F.2d 999
Party Name:In re Lois ADLMAN, Bankrupt. BANK OF PENNSYLVANIA, Plaintiff, v. Lois ADLMAN, Defendant-Appellant.
Case Date:September 14, 1976
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 999

541 F.2d 999 (2nd Cir. 1976)

In re Lois ADLMAN, Bankrupt.

BANK OF PENNSYLVANIA, Plaintiff,

v.

Lois ADLMAN, Defendant-Appellant.

No. 936, Docket 76-5003.

United States Court of Appeals, Second Circuit

September 14, 1976

Argued April 23, 1976.

Page 1000

Goldman, Horowitz & Cheron, Garden City, N. Y. (Jacob M. Goldman, Garden City, N. Y., and Matthew Feinberg, Hempstead, N. Y., of counsel), for defendant-appellant.

Crowe, McCoy, Agoglia & Zweibel, P. C., Mineola, N. Y. (Morris Zweibel, Mineola, N. Y., of counsel), for plaintiff-appellee.

Before MOORE, FEINBERG and GURFEIN, Circuit Judges.

GURFEIN, Circuit Judge:

This is an appeal from an order of the United States District Court for the Eastern District of New York, Thomas C. Platt, Judge, which affirmed a judgment of the Bankruptcy Court, Boris Radoyevich, Bankruptcy Judge, denying appellant, Lois Adlman, a discharge in bankruptcy pursuant to section 14c(4) of the Bankruptcy Act, 11 U.S.C. § 32(c)(4). The discharge was denied on the ground that appellant, within twelve months preceding the filing of her petition in bankruptcy, transferred property with the intent to hinder, delay or defraud her creditors.

The evidence presented at the hearing before the Bankruptcy Judge showed that appellant's husband, Edward C. Adlman, was engaged in 1972 and 1973 in the purchase and development of real property in Pennsylvania and was a general partner in

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the limited partnership known as Leesport Gardens Company ("Leesport").

The Bankruptcy Judge found that Lois Adlman "is a housewife and that she was not engaged in any business. Her husband had put her in as a limited partner in Leesport but she did nothing other than sign the partnership certificate and go on a guaranty of the Bank's loan."

On October 23, 1972, Leesport obtained a loan from the Bank of Pennsylvania. In connection with this loan, appellant and her husband executed and delivered to the Bank of Pennsylvania a continuing guarantee of any loans which the bank might make to Leesport. Appellant testified that she executed this instrument at the request of her husband because her husband explained that it was something needed in business and that it was important to have both their signatures under the law of Pennsylvania.

During the year 1973, the financial position of Mr. Adlman deteriorated. On October 12, 1973, appellant sold the family home in Sands Point, New York, to which she had always held the title in her own name, to an aunt and uncle of her husband for the sum of $125,000, subject to a first mortgage. She realized approximately $60,000 from the sale. A lease was entered into between the Adlmans and the new owners, and the Adlmans continued to live in the house.

Appellant owned insurance policies on the lives of her husband and her father and was beneficiary of these policies. Under Section 166 of the New York Insurance Law, these policies constituted assets exempt from creditors. 1

Shortly before and simultaneously with the closing of title, appellant drew checks on her checking account to pay $52,653.40 of loans outstanding on these insurance policies and to pay $7,663.22 in premiums on these policies. Appellant testified that she made these payments because her husband was in poor health and because she was concerned that the policies might lapse and that she would be unable to obtain other insurance. She testified, without contradiction, that her husband felt that eventually things would get better. She was not examined by the objecting creditor on whether she knew enough about her husband's affairs to know that he was insolvent or even on whether she knew the extent of his obligations, but only on whether she knew she was in "financial difficulty."

On March 22, 1974, approximately five and one-half months after the payment of these loans and premiums, appellant and her husband filed voluntary petitions in bankruptcy and were adjudicated bankrupts. Appellant's schedules showed liabilities of $4,091,725.20 and no assets other than life insurance policies having a face value of $275,000, which she claimed as exempt property under the New York Insurance Law.

On November 27, 1974, the Bank of Pennsylvania, one of appellant's creditors on a loan of $25,000, filed a complaint with the Bankruptcy Court objecting to appellant's discharge. See Bankruptcy Rule 404. The complaint alleged that appellant's husband

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had submitted to the bank, with the knowledge and consent of appellant, false financial statements misrepresenting the assets and liabilities of appellant and her husband, and that the bank had relied on these statements in extending credit to the Adlmans. The complaint also alleged that the conveyance of the Sands Point house by appellant was made "without valid consideration" and with the purpose and intent of hindering, delaying and defrauding the creditors of appellant and her husband. 2 The Bankruptcy Judge found that appellant and her husband did not intend to deceive the bank in submitting financial statements, and he therefore dismissed those portions of the complaint which requested that a discharge be denied on the ground that appellant had submitted false financial statements. Appellant's husband was granted a discharge. However, the Bankruptcy Judge denied appellant a discharge on the ground that she had sold the Sands Point house, repaid loans on her life insurance policies and prepaid the insurance premiums with the intent to hinder, delay and defraud her creditors.

The Bankruptcy Judge found that at the time appellant sold the Sands Point house, she was insolvent because of her liabilities of $4,091,725.20, which arose from her guarantees of her husband's obligations. He further found that appellant's husband, in October 1973, had little or no income, that he was under tremendous financial pressure, and that he wanted to sell the Sands Point house "because he felt it would be the wisest thing to do at that particular time." Indeed, he found specifically "(t)hat the defendant sold the Sands Point house, which she continues to occupy with her husband, to David and Dorothy Adlman, on October 12, 1973, repaid loans on various policies of life insurance, and paid premiums, some in advance of their due dates, in order to secure protection for herself and her children." 3 He found that "(t)he husband had had a history of illness." But he also found that she did these things "for the purpose of removing such assets from the reach of her creditors." He finally recorded both as a finding of fact and as a conclusion of law that the transfer of the house, the repayment of loans, and the payment of premiums were done "with the intent to hinder, delay or defraud her creditors, all as specified in Section 14c(4) of the Bankruptcy Act."

In the Bankruptcy Judge's memorandum opinion accompanying his decision, he seemed to assume that the $125,000 purchase price of the house was a fair consideration. Indeed, there was no evidence which indicated that the house was sold for less than fair consideration. He also recognized that almost $40,000 of the $60,000 paid to the insurance companies was apparently paid before receipt of money from the sale of the house and that only $20,147.12 was paid to the insurance companies on the day of the closing.

Apparently recognizing the validity of the sale of the house, standing by itself, the Bankruptcy Judge noted that appellant was under no personal obligation to repay the loans on the insurance policies, since they "are considered advancements of the sums payable under the policy and if not repaid are merely deducted from the amount payable when the policy, by its provisions, matures", and that the repayment of the loans did not enhance the bankrupt's estate available to her creditors. He made no specific finding that Mrs. Adlman was lying when she testified that she was afraid that the insurance might lapse. He concluded, nevertheless, that repayment of the policy loans was made "with actual intent to hinder, delay or defraud the bankrupt's creditors," supporting his conclusion by stating that "(i)t was plainly her intention to remove such funds from the reach of her

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creditors by placing the same in an exempt catagory." He cited as his authority In re Hirsch, 4 F.Supp. 708 (S.D.N.Y.1933). He also noted that the payments of the premiums could be set aside as fraudulent under Section 276 of the New York Debtor and Creditor Law, which makes fraudulent such conveyances as are made with actual intent to hinder, delay or defraud creditors. 4

The Bankruptcy Judge made no finding of extrinsic facts to support the conclusion that there was an actual intent to defraud her creditors. He appears to have found sufficient ground for denying a discharge in the mere fact that her intention was to place the funds in the exempt category.

The District Court affirmed simply on the ground that "(t)he Bankruptcy Judge could well have and apparently did infer the requisite intent from such facts (the house sale, repayment of insurance loans and premium payments) along with all of the other evidence in the case." Though Judge Platt did not specify what the relevant "other evidence" was, he felt that he "must" accept the Bankruptcy Judge's findings of fact unless clearly erroneous under Bankruptcy Rule 810. 5 He made no independent review of the authorities.

We think the courts below incorrectly assumed that a transfer prior to bankruptcy of non-exempt assets ipso facto compels the conclusion that there was an actual intent to "hinder, delay or defraud creditors" and that such transfer compels denial of a discharge in bankruptcy under § 14c(4) of the Act. Hence we reverse.

We begin with the well-accepted principle that the Bankruptcy Act was intended to permit the honest debtor to get a new start in life free from debt, and that section 14 of the Act must be construed...

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