Village of San Jose v. McWilliams

• Decision Date: 27 March 2002
• Docket Number: No. 01-3881.,01-3881.
• Parties: VILLAGE OF SAN JOSE, a Municipal Corporation, Plaintiff-Appellant, v. Daniel L. McWILLIAMS and Ida M. McWilliams, Debtors-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

284 F.3d 785

VILLAGE OF SAN JOSE, a Municipal Corporation, Plaintiff-Appellant, v. Daniel L. McWILLIAMS and Ida M. McWilliams, Debtors-Appellees.

No. 01-3881.

United States Court of Appeals, Seventh Circuit.

Argued March 1, 2002.

Decided March 27, 2002.

COPYRIGHT MATERIAL OMITTED

Donald K. Birner (argued), Pekin, IL, for appellant.

Daniel L. McWilliams, Ida M. McWilliams (argued), San Jose, IL, for debtor-appellee.

Before FLAUM, Chief Judge, and BAUER and HARLINGTON WOOD, JR., Circuit Judges.

BAUER, Circuit Judge.

The debtors filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code. The Village of San Jose, a lien creditor, opposed the discharge on the ground that within one year of filing the petition the debtors hindered, delayed, or defrauded the Village by transferring or concealing property. 11 U.S.C. § 727(a)(2). The bankruptcy judge granted the discharge, finding the debtors' subsequent remedial conduct of disclosing and recovering the properties negated the pre-petition conduct. The Village then appealed to the district court, which affirmed the bankruptcy judge's ruling. Though the Village stated that the debtors have no discernable method to pay the amount owed, bankruptcy or not, the Village nevertheless seeks its "pound of flesh"¹ in this court. After a thorough review, we find that the bankruptcy court erred, and reverse and remand for further proceedings not inconsistent with this opinion.

BACKGROUND

The Village of San Jose, Mason County, Illinois, is a small enclave of some 696 people, located approximately twenty miles south of Pekin, Illinois.² Daniel and Ida McWilliams owned a number of properties and buildings in the Village of San Jose. The main property at issue was a two-story brick building built in the late 1800s, which housed a restaurant at one time. The building, located at 120 West Vine, was fairly large, approximately 70 by 100 feet, occupying 10,000 square feet.

In a letter dated January 4, 1999, Daniel McWilliams was notified that the building was condemned after inspection by a Village health officer. According to the health officer, the roof was sagging, there was a hole in it, and contents were falling into the structure. In a March 4, 1999 letter, the Village notified the McWilliamses that they must either repair or demolish the building, and if they failed to act, the Village would demolish it and charge the costs to them. The McWilliamses obtained an estimate that it would cost approximately $48,000 to repair the building. The McWilliamses neither repaired nor demolished the building, stating they were unable to pay for either action. On March 26, 1999, the Village moved to demolish the building and recover the costs of the demolition and attorney's fees incurred pursuant to 65 ILCS 5/11-31-1 (West 2001). An order was entered in state court on July 2, 1999, permitting the Village to demolish the building, effective July 22, 1999.³ The court also granted the Village a lien on the property to satisfy the costs of demolition.

On September 3, 1999, Daniel and Ida McWilliams conveyed several lots, by quit-claim deed, to their four grandchildren for "One ($1.00) Dollar and Love." Prior to transferring the properties, the McWilliamses satisfied the outstanding mortgages with the San Jose Tri-County Bank. The deeds were recorded as transferred to the grandchildren with the proper government officials, but the deeds were not physically delivered to the grandchildren.

In February 2000, the Village filed a supplemental motion in state court to set aside the transfers under the Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/5 (West 2001). The McWilliamses voluntarily filed for bankruptcy protection on March 15, 2000. The Bankruptcy Trustee held the first meeting of the creditors on April 10, 2000. The McWilliamses have some 28 creditors and the Village is the largest.

The following assets were disclosed in the creditors' meeting: Ida McWilliams was employed making roughly $600 per month at one job, and $500 per week at a second job. Daniel McWilliams is disabled and receives only $937 a month in Social Security Disability benefits, but he did receive a $40,000 worker's compensation settlement at the time of injury. He has been disabled since a 1984 accident at work. The McWilliamses own a home at 400 W. Vine, and two adjoining lots at 402 and 404 W. Vine. There is a house on 402 W. Vine, which the McWilliamses rent out for $300 per month. The properties at 400, 402, and 404 W. Vine have a combined value of approximately $51,000. All three properties have mortgages on them. The McWilliamses also own a commercial building on 320 S. Second, and are two years into a four year installment sales contract for $200 per month for the property. The 320 S. Second property is unencumbered. They also own a 1998 Ford Taurus and a 1988 Ford Ranger, both of which have liens on them.

During the creditors' meeting, the Trustee inquired if the McWilliamses had sold, exchanged, or given away anything of value recently. Ida McWilliams responded "no." The Trustee then specifically asked about the lots conveyed to the grandchildren. Daniel McWilliams stated that they did convey the lots in September 1999, and that their value was $2,000 each. Daniel McWilliams added that they conveyed the lots "six months before we got a bill from San Jose lawyer on what we owed them that was the reason we had to file bankruptcy."

The Village filed an objection to the McWilliamses bankruptcy petition and discharge on April 10, 2000. On May 10, 2000, the grandchildren reconveyed the lots at issue back to Daniel and Ida McWilliams. A hearing was held on February 6, 2001, before the bankruptcy judge. The McWilliamses appeared pro se at the hearing, stating they could no longer afford an attorney.⁴ During the first few minutes of the hearing, the bankruptcy judge made his opinion of the case known to the Village's attorney.

I think on this, and I know that I have talked to you about this in the pretrial, talked to you about it on other occasions, I am not going to deny their discharge under 727(a)(2). It's been my policy, and I think it's good law, that if I file a petition that says I made these transfers and the Trustee said those are invalid, correct that, I am not going to deny a discharge. They have made no attempt to conceal anything to this Court or to the Bankruptcy Trustee. That's the purpose of the 727(a)(2) in my opinion. And you can pull out a number of cases... and I don't care what those say.

... [L]et's move on, okay. You are not going to convince me to change my mind on this. I have told you that from the day you filed it.

After the hearing, consistent with his prior comments, the judge issued a ruling granting the McWilliams' petition. The Village appealed to the district court, which affirmed the bankruptcy court's ruling.

ANALYSIS

The bankruptcy court's factual determinations are reviewed for clear error and legal conclusions de novo. See, e.g., Cult Awareness Network, Inc. v. Martino (In re Cult Awareness Network), 151 F.3d 605, 607 (7th Cir.1998) (noting that in bankruptcy cases on appeal from the district court, we use the same standard of review as the district court). The bankruptcy court interpreted 11 U.S.C. § 727(a)(2) as allowing a discharge even if the debtor violated the section, as long as the infraction was rectified and none of the creditors were harmed. The construction of the Bankruptcy Code is question of law we review de novo. See, e.g., In re Cult Awareness Network, 151 F.3d at 607.

The Village makes numerous arguments urging reversal, not the least of which is a constitutional due process argument. The Village argues that the bankruptcy judge decided the case before hearing its arguments. The district court found that the bankruptcy judge made his decision based on the pleadings and Trustee's report; however, the bankruptcy court's order stated the determination the McWilliamses lacked the intent to defraud was based, in part, on testimony from the hearing. The district court noted that if the judge "was obligated to recuse himself from this case simply because he had read the pleadings before the hearing, no judge could ever come to court prepared." The district judge's comment was right on the mark, and we need not elevate this disagreement to a constitutional level when it is more appropriately framed as a ordinary review for error.

A. Discharge in Bankruptcy

The purpose of the Code is to provide equitable distribution of the debtor's assets to the creditors and "to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes." Williams v. United States Fid. & Guar. Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 59 L.Ed. 713 (1915). We construe the Bankruptcy Code "liberally in favor of the debtor and strictly against the creditor." Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th Cir. 1997); In re Reines, 142 F.3d 970, 973 (7th Cir.1998); In re Adlman, 541 F.2d 999, 1003 (2d Cir.1976); 11 U.S.C. § 727(a) (providing that, "[t]he court shall grant the debtor a discharge, unless ..."). Thus, consistent with the Code, bankruptcy protection and discharge may be denied to a debtor who was less than honest. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ("But in the same breath that we have invoked this `fresh start' policy, we have been careful to explain that the Act limits the opportunity for a completely unencumbered new beginning to the `honest but unfortunate debtor.'") (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)); Mayer v. Spanel Int'l Ltd., 51 F.3d 670, 674 (7th Cir.1995) ("Congress concluded that preventing fraud is more important than letting defrauders start over with a clean slate, and we must respect that judgment."). If a creditor...