In re Laughlin

• Decision Date: 29 March 2010
• Docket Number: No. 09-10622.,09-10622.
• Citation: 602 F.3d 417
• Parties: In the Matter of: Thomas James LAUGHLIN, Debtor. Thomas J. Laughlin, Plaintiff-Appellant, v. Nouveau Body and Tan, L.L.C.; Marie C. Ralston; Terri J. Ouellette, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

602 F.3d 417

In the Matter of: Thomas James LAUGHLIN, Debtor Thomas J. Laughlin, Plaintiff-Appellant, v. Nouveau Body and Tan, L.L.C.; Marie C. Ralston; Terri J. Ouellette, Defendants-Appellees.

No. 09-10622.

United States Court of Appeals, Fifth Circuit.

March 29, 2010.

Behrooz P. Vida (argued), Vida Law Firm, P.L.L.C., Bedford, TX, for Laughlin.

Jeffrey W. Steidley (argued), The Steidley Law Firm, Barnet Bernard Skelton, Jr., Houston, TX, for Defendants-Appellees.

Before KING, JOLLY and STEWART, Circuit Judges.

KING, Circuit Judge:

Thomas J. Laughlin appeals the district court's order affirming the bankruptcy court's judgment denying discharge pursuant to 11 U.S.C. § 727(a)(2). The bankruptcy court determined that Laughlin fraudulently transferred property under § 727(a)(2) by renouncing his interest in his father's estate before filing his Chapter 7 petition, and the district court affirmed. For the following reasons, we REVERSE the bankruptcy court's judgment and REMAND for further proceedings.

I. FACTUAL AND PROCEDURAL BACKGROUND

Laughlin is involved in the spray tan business and has invented and implemented several technologies used in spray tan machines. He was the president of a company called Mist-On Systems, Inc. ("Mist-On"), which produced and sold spray tanning machines to tanning salons, and he also was the secretary and treasurer and a board member of Laughlin Products, Inc. ("LPI"), which was also engaged in the spray tan business.

In August 2003, Mist-On and Laughlin brought suit against one of its customers, Nouveau Body & Tan, L.L.C. ("Nouveau"), alleging, inter alia, claims of defamation and trade disparagement based on statements made by Nouveau regarding Mist-On and Laughlin's products. Nouveau answered this complaint, denied all of Mist-On and Laughlin's claims, and counterclaimed for damages arising from alleged defects in Mist-On's tanning machines, which it claimed caused a substantial loss of business. Nouveau also requested attorneys' fees for defending against Mist-On and Laughlin's allegedly baseless defamation claims. After a trial and jury verdict, a joint and several judgment for $629,000 was entered against Mist-On and Laughlin on February 15, 2007, and on May 17, 2007, the district court awarded $393,588.75 in attorneys' fees to Nouveau. Laughlin admits that neither he nor Mist-On could pay the judgments entered against them and that he began exploring options to manage his financial situation.

Also on February 15, 2007, Laughlin's father, a Louisiana resident, died intestate in Acadia Parish, Louisiana. Under Louisiana intestacy rules, Laughlin was to receive a quarter of his father's estate; Laughlin's father's estate was valued at about $155,000. Included in this estate were 40,000 shares of LPI, which were later valued by Laughlin, in his Chapter 7 statement of assets, at $4,000; these 40,000 shares constituted 33.5% of LPI's outstanding stock. Laughlin claims that everyone in his family knew that his father's intent was to give the entire estate to Laughlin's mother, who was still married to and living with Laughlin's father at the time of his death.

Following his father's death, Laughlin and his family considered ways to ensure that his mother received the full value of his father's estate. To this end, Laughlin renounced any interest in his father's estate on June 4, 2007. Under Louisiana succession rules, Laughlin's share of his father's estate then passed to his daughter, who ultimately transferred this interest to Laughlin's mother.

On July 21, 2007, Laughlin filed a Chapter 7 bankruptcy petition, in which he disclosed the renunciation of his interest in his father's estate. Nouveau filed an adversary action against Laughlin and objected to Laughlin's discharge of debt, pursuant to 11 U.S.C. § 727(a)(2), arguing that Laughlin's renunciation of his interest in his father's estate was a transfer of property made within one year of the bankruptcy petition that was made with the intent to delay, hinder, or defraud his creditors.¹

In an oral ruling, the bankruptcy court determined that, following Drye v. United States, 528 U.S. 49, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999), Laughlin's renunciation of his interest in his father's estate was a fraudulent transfer under § 727(a)(2). Specifically, the bankruptcy court concluded that Laughlin "had the power to channel his inheritance interest" and he thus transferred that interest by renouncing his inheritance; that Laughlin had the intent to delay, hinder, or defraud his creditors when he made the transfer; and that Laughlin's intent in transferring this interest was sufficient to deny discharge under § 727(a)(2).²

Laughlin appealed the denial of his discharge under § 727(a)(2). The district court determined that the bankruptcy court had not erred in making its factual findings, agreed with the bankruptcy court that "federal law applies in defining `transfer' and `property'" under § 727(a)(2), and concluded that the bankruptcy court appropriately denied discharge under § 727(a)(2). Laughlin timely appealed to this court.

II. DISCUSSION

A. Standard of Review

"We apply the same standard of review as the district court, reviewing the bankruptcy court's findings of fact for clear error and conclusions of law de novo." Cadle Co. v. Duncan (In re Duncan), 562 F.3d 688, 694 (5th Cir.2009) (per curiam).

B. The Bankruptcy Code, Transfer, and Interest in Property

1. Section 727(a)(2)

Section 727 provides, in relevant part:

(a) The court shall grant the debtor a discharge, unless—

...

(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—

(A) property of the debtor, within one year before the date of the filing of the petition; or

(B) property of the estate, after the date of the filing of the petition.

11 U.S.C. § 727(a)(2). "A bankrupt's violation of the provisions of 11 U.S.C. § 727 entirely bars discharge...." Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550, 552 (5th Cir.1987). "The debtor's entitlement to a discharge must ... be determined by federal, not state, law." First Tex. Sav. Ass'n v. Reed (In re Reed), 700 F.2d 986, 991 (5th Cir.1983).

The creditor "bears the burden of establishing the elements that would prevent discharge." Cadle Co. v. Pratt (In re Pratt), 411 F.3d 561, 565 (5th Cir.2005). "The exceptions to discharge are construed strictly against the creditor and liberally in favor of the debtor." Duncan, 562 F.3d at 695.

To establish that discharge should be denied under § 727(a)(2)(A), a creditor must show four elements: "(1) a transfer or concealment of property; (2) belonging to the debtor; (3) within one year of the filing of the petition; and (4) with intent to hinder, delay, or defraud a creditor or officer of the estate."

Pratt, 411 F.3d at 565 (alterations in original) (quoting Pavy v. Chastant (In re Chastant), 873 F.2d 89, 90 (5th Cir.1989)). Here, the parties dispute whether the pre-petition renunciation of Laughlin's succession rights constituted a "transfer" of property for the purposes of § 727(a)(2) and, if a transfer of property did occur, whether the transfer was done with intent to hinder, delay, or defraud creditors.

2. Transfer and Interest in Property

The bankruptcy code defines "transfer" to include "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property; or (ii) an interest in property." 11 U.S.C. § 101(54)(D). "`What constitutes a transfer and when it is complete' is a matter of federal law ... since ... the statute itself provides a definition of `transfer.'" Barnhill v. Johnson, 503 U.S. 393, 397, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) (quoting McKenzie v. Irving Trust Co., 323 U.S. 365, 369, 65 S.Ct. 405, 89 L.Ed. 305 (1945)). However, "property" and "interest in property" are not defined in the code. "In the absence of any controlling federal law, property and interests in property are creatures of state law." Simpson v. Penner (In re Simpson), 36 F.3d 450, 452 (5th Cir.1994) (per curiam) (citing Barnhill, 503 U.S. at 398, 112 S.Ct. 1386).

Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving a windfall merely by reason of the happenstance of bankruptcy.

Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (internal quotation marks omitted).

3. Interests in Property under Simpson, Drye, and Costas

i. Simpson

We have previously looked to state law to determine whether a disclaimer of an interest in an estate constituted a transfer of "property" under the bankruptcy code. In Simpson, we considered whether, "under Texas law, a valid disclaimer or renunciation of an inheritance is ... a fraudulent transfer under 11 U.S.C. § 548."³ 36 F.3d at 451. There, the debtor's father passed away, leaving a testamentary disposition to the debtor. Id. The debtor disclaimed this inheritance, which then passed to the debtor's children under Texas law. Id. The next day, the debtor filed a voluntary petition under Chapter 7. Id. The trustee appointed to oversee the debtor's estate filed a petition to set aside the disclaimer as a "fraudulent transfer" under 11 U.S.C. § 548(a). Id. The bankruptcy court granted the trustee's petition, but the district court reversed, holding that a pre-petition disclaimer of inheritance is not a fraudulent transfer. Id.

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