In re Kempff, 15-3200

• Citation: 847 F.3d 444
• Decision Date: 30 January 2017
• Docket Number: No. 15-3200,15-3200
• Parties: IN RE: Margaret KEMPFF, Debtor–Appellee. Appeal of: Brian K. Farley.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

847 F.3d 444

IN RE: Margaret KEMPFF, Debtor–Appellee.

Appeal of: Brian K. Farley.

No. 15-3200

United States Court of Appeals, Seventh Circuit.

Argued February 23, 2016

Decided January 30, 2017

Edward J. Lesniak, Attorney, Burke, Warren, MacKay & Serritella, P.C., Chicago, IL, for Debtor–Appellee.

Jeffrey W. Finke, Attorney, Law Office of Jeffrey W. Finke, Chicago, IL, for Appellant.

Before Wood, Chief Judge, and Sykes and Hamilton, Circuit Judges.

Sykes, Circuit Judge.

Margaret Kempff's ex-husband Bart embezzled more than $1 million from his employer while the two were still married. To evade detection, he attempted to replenish the stolen funds, borrowing $400,000 from his friend Brian Farley on the ruse that the money would be used for a real-estate development. As security for the loan, Bart gave Farley a third-priority lien on the couple's home, forging Margaret's signature on the note and mortgage.

Bart's effort to cover his tracks did not succeed. His employer discovered the embezzlement and reported it to police; he was eventually convicted of felony theft. In the meantime, Margaret divorced him and the couple's home went into foreclosure. Farley filed a cross-claim in the foreclosure action seeking to enforce his lien, but the sale of the home did not yield nearly enough to cover even the first mortgage. Margaret filed for bankruptcy while the foreclosure was pending, which stayed Farley's claim.

Farley then filed an adversary complaint challenging Margaret's eligibility for a Chapter 7 discharge. He claimed that she made a fraudulent transfer after filing her bankruptcy petition and made multiple false statements in her bankruptcy schedules. Margaret testified at trial that these were innocent mistakes. The bankruptcy judge credited her testimony and rejected each of Farley's contentions, and the district court affirmed that decision. We do the same. Farley's arguments for overturning the bankruptcy judge's ruling are most charitably described as ill-considered. The decision rests on the judge's acceptance of Margaret's testimony as credible. Credibility determinations are almost never disturbed on appeal. Farley gives us no good reason to do so here.

I. Background

Bart Kempff, an attorney, was general counsel for a luxury home builder in suburban Chicago. Over time he embezzled approximately $1.2 million from his employer. In early August 2007, he launched a desperate scheme to avoid detection by surreptitiously replenishing the stolen money. To that end he asked Brian Farley, also an attorney, to lend him $400,000, ostensibly for a real-estate development. In exchange Bart offered Farley a security interest on the real-estate project and a second mortgage on the home he and Margaret owned. Farley agreed.

On August 8 Bart signed a note and mortgage, and Farley wrote him a check for $400,000. Bart had concealed his fraudulent activity from his wife, so Margaret wasn't present for this transaction. Bart assured Farley that she was willing to sign and promised to obtain her signature on the loan documents. He then used the money to partially restore the stolen funds. On August 21 Bart and Margaret closed on a bank loan secured by a second mortgage on their home. Two days later, Bart forged Margaret's signature on the Farley loan documents and sent them back to Farley, clearing the way for him to record the mortgage. Farley did so, but by then it was third in order of priority.

While all this was unfolding, Bart's employer learned of the embezzlement. On August 21—the same day he and Margaret closed on the bank loan—Bart was fired. Things unraveled quickly after that. Several of Margaret's relatives loaned the couple sizable sums in the hope that Bart could repay his employer and avoid prosecution. To no avail; the State's Attorney charged him with felony theft, and he was eventually convicted and disbarred. Meanwhile, the lender holding the first mortgage on the couple's home initiated foreclosure proceedings. Farley filed a cross-claim against Bart and Margaret in the foreclosure action, but the proceeds of the home sale were insufficient to cover even the first mortgage. The nonpriority lienholders received nothing.¹

While the foreclosure action was pending, Margaret filed a petition for bankruptcy, which automatically stayed Farley's claim against her. Farley turned to the bankruptcy court for relief, filing an adversary action challenging Margaret's eligibility for a Chapter 7 discharge. He raised many grounds; only two remain relevant here. Farley accused Margaret of transferring property "with intent to hinder, delay, or defraud a creditor" after the date of her bankruptcy petition. 11 U.S.C. § 727(a)(2). He also alleged that she "knowingly and fraudulently" made false statements in her bankruptcy filings. Id. § 727(a)(4).

The bankruptcy judge held a three-day bench trial on Farley's claims. Margaret testified that she did not authorize the postpetition transfer and that the inaccurate statements in her bankruptcy filings were innocent mistakes or misunderstandings. The judge credited her testimony, found that she lacked fraudulent intent, and rejected Farley's claims. The district court upheld this ruling, and Farley has appealed.

II. Discussion

Discharge under Chapter 7 of the Bankruptcy Code "is reserved for the ‘honest but unfortunate debtor.’ " Stamat v. Neary , 635 F.3d 974, 978 (7th Cir. 2011) (quoting Grogan v. Garner , 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). Section 727(a) enforces this reservation by "deny[ing] the privilege of discharge to dishonest debtors." Id. The statute lists 12 grounds for denying a discharge. 11 U.S.C. § 727(a)(1)–(12). The challenger must establish the debtor's ineligibility by a preponderance of the evidence. Stamat , 635 F.3d at 978.

On appeal from a district court's review of a bankruptcy judge's ruling, "we apply the same standard as the district court, reviewing the bankruptcy court's factual findings for clear error and the legal conclusions of both the bankruptcy court and the district court de novo." In re Marcus–Rehtmeyer , 784 F.3d 430, 436 (7th Cir. 2015). A factual finding is clearly erroneous if "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Kovacs v. United States , 614 F.3d 666, 672 (7th Cir. 2010) (quotation marks omitted).

A. Fraudulent Transfer

A bankruptcy judge may deny a discharge if, after the date of the bankruptcy petition, the debtor transferred or permitted to be transferred any property of the bankruptcy estate "with intent to hinder, delay, or defraud a creditor." § 727(a)(2). Farley alleged that Margaret fraudulently permitted her accountant to transfer funds to the Illinois Department of Revenue for unpaid taxes.

The tax payment concerned shares Margaret owned in Steel Investment Company, a closely held company controlled primarily by relatives on her mother's side. Prior to her bankruptcy filing, the Illinois Department of Revenue issued a $7,288.22 levy for unpaid taxes on income from these shares. By the time of the levy, Margaret had pledged the shares to her uncle as security for a loan; she had also ceded control over any income generated by the shares to her father in return for the financial support her parents were providing to her and her children. After she filed her Chapter 7 petition, her bankruptcy attorney prepared a letter informing interested parties that the automatic stay prevented the Department of Revenue from enforcing the levy. The letter was sent to the Department and to Richard Schoon, Margaret's accountant, who was also the accountant for Steel Investment Company. When Steel Investment later approved a distribution to stockholders, Schoon consulted with the company's attorney and, despite the contrary instructions from Margaret's attorney, transferred a $7,200 distribution on Margaret's stock to the Illinois Department of Revenue.

The bankruptcy judge accepted Margaret's testimony that this transfer occurred without her knowledge, input, or approval. Because § 727(a)(2) requires a knowing fraudulent transfer, the judge held that this payment did not disqualify Margaret from receiving a discharge.

Farley doesn't challenge the judge's factual findings; he argues instead that § 727(a)(2) contains no requirement that the complaining creditor actually suffer harm. In re Krehl , 86 F.3d 737, 744 n.4 (7th Cir. 1996) (A "discharge may be denied even if creditors did not suffer any harm."). That's true, but irrelevant. Discharge is not denied unless the complaining creditor "demonstrates by a preponderance of the evidence that the debtor actually intended to hinder, delay, or defraud a creditor, ... [and] intent to defraud must be actual and cannot be constructive." Village of San Jose v. McWilliams , 284 F.3d 785, 790 (7th Cir. 2002) (citations omitted). Farley has not argued that Margaret purposely kept herself in the dark while suspecting that her accountant would transfer assets to a favored creditor. Nor could he; the uncontested facts tell a different story. Margaret notified Schoon of the bankruptcy stay and informed him that the Department of Revenue could not enforce the levy. After she did so, she had no reason to think that he would transfer assets to pay the tax debt. Farley has given us no reason to upset the judge's ruling.

B. Fraudulent Filings

Farley's other challenges fall under the rubric of § 727(a)(4), which withdraws discharge eligibility if the debtor "knowingly and fraudulently" makes "a false oath or account" in connection with the bankruptcy proceeding. A party who opposes discharge under this provision must prove the following: "(1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case."...