In re Dennis

• Decision Date: 23 May 2003
• Docket Number: No. 02-30765.,02-30765.
• Citation: 330 F.3d 696
• Parties: In the Matter of Kelly DENNIS, Debtor. Sidney Robertson, III, Appellant, v. Kelly Dennis and Gulf South Title Corporation, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

330 F.3d 696

In the Matter of Kelly DENNIS, Debtor Sidney Robertson, III, Appellant, v. Kelly Dennis and Gulf South Title Corporation, Appellees.

No. 02-30765.

United States Court of Appeals, Fifth Circuit.

May 23, 2003.

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Raymond C. Burkart, Jr. (argued), New Orleans, LA, for Sidney Robertson, III.

A. Bowdre Banks, Jr. (argued), New Orleans, LA, for Kelly Dennis.

David Wayne Birdsong, Gulf South Title Corp., Metairie, LA, for Gulf South Title Corp.

Appeal from the United States District Court for the Eastern District of Louisiana

Before SMITH, DENNIS and CLEMENT, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Sidney Robertson sued Kelly Dennis,¹ his ex-wife and a chapter 7 debtor, in bankruptcy court over a debt of about $6,000. After a bench trial, the bankruptcy court entered judgment for Dennis and discharged her debts, including the debt owed to Robertson. The district court affirmed. Finding no clear error, we affirm.

I.

Though the marriage of Robertson and Dennis lasted for barely six years, the litigious aftermath has lasted for over a decade. The state court granted their divorce in 1992 and divided their personal property, with Dennis receiving approximately $8,200 more in value than did Robertson. The court also allowed Dennis to continue living in their marital home.

In 1997, Dennis married Clinton Smith, who eventually moved in with Dennis at the house she once had shared with Robertson. Shortly thereafter and perhaps not coincidentally, Robertson sought a revised property settlement in state court. Dennis did not appear, and the court entered a default judgment requiring her to pay Robertson monthly rent for use of the house, including accrued rent and interest from 1992.

Once they learned of this judgment, Dennis and Smith sold the house and bought their own. At about the same time, Robertson demanded that Dennis pay him roughly $63,000 to satisfy the judgment for her post-divorce use of the house. Within days, Dennis filed a petition for chapter 7 bankruptcy.

Robertson filed two adversary proceedings in bankruptcy court. First, he requested that the court lift the automatic stay so he could obtain, from escrow, the proceeds from the sale of the house. The court denied the request, and the district court affirmed.² Second, and the subject of this appeal, Robertson sought to deny Dennis a discharge under 11 U.S.C. § 727(a) or to make Dennis's debt to him non-dischargeable under 11 U.S.C. § 523(a)(15). Against the approximately $63,000 in accrued rent and interest, the court recognized an offset of about $57,000 for Dennis's mortgage payments, repairs, and improvements. Thus, the court concluded that Robertson had a valid claim against Dennis for about $6,000, which estimate neither Robertson nor Dennis disputes.

After a two-day trial, the bankruptcy court entered judgment for Dennis. First, the court found that she lacked actual intent to defraud her creditors or the bankruptcy estate by transferring savings bonds to her son in the year preceding bankruptcy. The court therefore held that § 727(a)(2)(A) does not prevent her from receiving a discharge. Second, the court found that Dennis kept and filed adequate financial records. The court therefore held that § 727(a)(3) does not prevent a discharge. Third, the court found that Dennis could not pay the debt to Robertson and that a discharge would benefit her more than it would harm Robertson. The court therefore held that the debt is dischargeable under § 523(a)(15). The district court affirmed.

II.

Robertson does not argue that the bankruptcy court misunderstood or misapplied the governing bankruptcy law, but only that the court clearly erred in its factual findings. "We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo." Gamble v. Gamble (In re Gamble), 143 F.3d 223, 225 (5th Cir.1998). A finding of fact is clearly erroneous only if "on the entire evidence, the court is left with the definite and firm conviction that a mistake has been committed." Hibernia Nat'l Bank v. Perez (In re Perez), 954 F.2d 1026, 1027 (5th Cir.1992) (quotation marks and citations omitted). "[W]e must give `due regard ... to the opportunity of the [bankruptcy] court to judge the credibility of the witnesses.'" Id. (quoting FED. R.Civ.P. 52(a)). After a review of the record, we conclude that the court did not clearly err in any of its factual findings.

A.

Robertson argues first that the bankruptcy court clearly erred by granting Dennis a discharge at all. In particular, he contends that the court should have denied Dennis a discharge under 11 U.S.C. § 727(a)(2)(A) for fraudulently transferring or concealing assets and under 11 U.S.C. § 727(a)(3) for failure to keep and file adequate financial records.

1.

Robertson reasons that the bankruptcy court clearly erred by finding that Dennis lacked actual intent to defraud under § 727(a)(2)(A). He contends that her fraudulent intent is shown by her purchase of savings bonds for her son in the year preceding bankruptcy.

Section 727(a)(2)(A) entitles individual debtors to a discharge unless "the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred . . . property of the debtor, within one year before the date of the filing of the petition." 11 U.S.C. § 727(a)(2)(A). The purpose of this section "is to deny a discharge to those debtors who, intending to defraud, transfer property which would have become property of the bankrupt estate." Pavy v. Chastant (In re Chastant), 873 F.2d 89, 90 (5th Cir.1989). Section 727(a)(2)(A) has 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. Dennis disputes only that she had actual intent to defraud.

"The finding of intent to hinder, delay, or defraud a creditor is a factual one which must be reviewed under the clear error standard." Perez, 954 F.2d at 1029 (citing Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550, 552 (5th Cir.1987)). As plaintiff, Robertson bore the burden to prove Dennis's intent to defraud. Chastant, 873 F.2d at 90-91. "Moreover, evidence of actual intent to defraud creditors is required to support a finding sufficient to deny a discharge. Constructive intent is insufficient." Id. at 91 (quotation marks and internal citation omitted).

Given the obvious problems of proof, though, "[a]ctual intent ... may be inferred from the actions of the debtor and may be shown by circumstantial evidence." Id. We have identified several factors that tend to prove actual intent to defraud:

(1) the lack or inadequacy of consideration; (2) the family, friendship or close associate relationship between the parties; (3) the retention of possession, benefit, or use of the property in question; (4) the financial condition of the party sought to be charged both before and after the transaction in question; (5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors; and (6) the general chronology of the events and transactions under inquiry.

Id.

Robertson leans heavily on the second factor, namely, Dennis's purchase of the bonds for her (and Robertson's) minor son. Robertson also notes that "a presumption of actual fraudulent intent to bar a discharge arises when property ... is transferred to relatives." Id. (quoting In re Butler, 38 B.R. 884, 888 (Bankr.D.Kan. 1984)). He therefore contends that the purchase of the bonds creates a presumption of Dennis's actual intent to defraud, which she has not rebutted.

Chastant, however, is distinguishable from this case. Most important, the court in Chastant reviewed a finding of actual intent to defraud, whereas we review a finding that Dennis lacked actual intent. Next, Dennis, unlike the debtor in Chastant, offered evidence to rebut the presumption of actual intent. Id. at 91.

Finally, the Chastant debtor transferred far more valuable property than did Dennis. Though Chastant, id. at 90, does not specify the value of the property transferred, the debtor created an income trust fund from which he expected to live, so presumably the transfer was sizable. In contrast, the limited evidence in the record suggests that the bonds were worth $300; at the very most, they could have been worth about $1,200. Had Dennis actually intended to defraud her creditors, she surely would have transferred considerably more assets to her son. This is doubly true because she believed her debt to be $63,000, not $6,000, when she filed for bankruptcy

Moreover, the fourth factor of Chastant allows the court to weigh the minimal value of the transfer against the fact of transfer to a relative. A transfer of only a small amount of property likely would not materially affect "the financial condition of the [debtor] ... before and after the transaction." Although a transfer to a relative might suggest intent, a minimal transfer just as strongly suggests a lack of intent. Other courts agree that "the low value of assets [is] one factor to be considered when determining whether the debtor had an intent to defraud," Baker v. Mereshian (In re Mereshian), 200 B.R. 342, 346 (9th Cir. BAP 1996), as does Collier on Bankruptcy.³

Given the low value of the bonds, we conclude that the bankruptcy court did not clearly err by finding that Dennis lacked actual intent to defraud. Moreover, other factors from Chastant also support the court's finding: The record reveals no sinister or calculating pattern of transactions to place assets outside her bankruptcy estate, and the general chronology is similarly benign. Indeed, Dennis began to purchase the bonds months before she considered filing for bankruptcy, i.e., months before Robertson began to hector her for...