In re: Whitney Brendan Cooke

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FILED JUL 22 2016 SUSAN M. SPRAUL, CLERK 1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-15-1037-KiTaKu ) 6 WHITNEY BRENDAN COOKE, ) Bk. No. 12-14393-PC ) 7 Debtor. ) Adv. No. 13-01062-PC ) 8 ) WHITNEY BRENDAN COOKE, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) JAMES RENSHAW, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on November 19, 2015, at Pasadena, California 15 Filed - July 22, 2016 16 Appeal from the United States Bankruptcy Court 17 for the Central District of California 18 Honorable Peter H. Carroll, Bankruptcy Judge, Presiding 19 Appearances: Yi Sun Kim of Greenberg & Bass LLP argued for 20 appellant Whitney Brendan Cooke; Randy E. Wells of Law Office of Ball & Yorke argued for appellee 21 James Renshaw. 22 Before: KIRSCHER, TAYLOR and KURTZ, Bankruptcy Judges. 23 Memorandum by Judge Kirscher 24 Dissent by Judge Taylor 25 26 1 27 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 28 have, it has no precedential value. See 9th Cir. BAP Rule 8024-1. 1 Debtor Whitney Brendan Cooke appeals a judgment denying his 2 discharge under § 727(a)(2)(A).2 The bankruptcy court found that 3 Cooke had spent certain funds he received just days before filing 4 bankruptcy with the intent to hinder or delay his judgment 5 creditor, appellee James Renshaw. We AFFIRM. 6 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 7 A. Prepetition events 8 In January 2011, Cooke and Renshaw were in an automobile and 9 motorcycle accident in Ojai, California. Renshaw, a former 10 fireman, was seriously and permanently injured. Cooke was a 11 seventeen year-old high school student at the time of the 12 accident; he is now a full-time student at UCLA. Cooke was 13 insured by an automobile policy through Allied Nationwide 14 Insurance Company ("AMCO") with a liability coverage limit of 15 $250,000. 16 Renshaw filed a state court action against Cooke for 17 negligence in connection with the accident. AMCO retained 18 attorney Jim Hart ("Hart") to defend Cooke. After trial, the jury 19 found Cooke liable for the accident. The state court entered a 20 judgment on July 11, 2012, awarding Renshaw $1,681,527.89, plus 21 costs and interest ("Judgment"). A significant portion of the 22 award was for Renshaw's past and future medical bills. 23 On October 12, 2012, AMCO paid directly to Renshaw the policy 24 limits of $250,000. This payment left Cooke liable for the excess 25 judgment. 26 27 2 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. -2- 1 Cooke's AMCO policy provided that certain supplemental 2 payments would be made on behalf of the insured, including payment 3 of postjudgment interest to the insured. Specifically, the 4 "Supplementary Payment" provision stated, in pertinent part: 5 In addition to our limit of liability, we will pay on behalf of an "insured:" 6 3. Interest accruing after a judgment is entered in any 7 suit we defend. Our duty to pay interest ends when we offer to pay that part of the judgment which does 8 not exceed our limit of liability for this coverage. 9 By the time AMCO made the $250,000 payment to Renshaw, the total 10 amount of interest accrued on the Judgment was $45,147.62. 11 Concurrently with the state court action against Cooke, 12 Renshaw sued AMCO in late July 2012, in part, to determine whether 13 Renshaw could recover postjudgment interest and costs directly 14 from AMCO. During briefing, AMCO argued, under California law, 15 that a judgment creditor could not recover postjudgment interest 16 and costs in a direct action. Renshaw dismissed his suit against 17 AMCO on October 29, 2012, before any ruling was made. 18 On November 13, 2012, AMCO sent a letter to Cooke's home 19 address regarding the postjudgment interest of $45,147.62 ("AMCO 20 Letter"). The AMCO Letter stated, in pertinent part: 21 James Renshaw recently sued [AMCO] and contended he was entitled to receive post-judgment interest under the 22 policy which insured you in connection with the above- referenced loss. In connection with responding to 23 Mr. Renshaw's claims, AMCO determined you are entitled to receive post-judgment interest pursuant to the 24 SUPPLEMENTARY PAYMENTS provision of the insurance policy. . . . . 25 As such, we will be issuing you a check under separate 26 cover in the amount of $45,147.62. Because Mr. Renshaw dismissed his lawsuit against AMCO based on our position 27 the post-judgment interest is owed to you rather than Mr. Renshaw, we believe it is likely Mr. Renshaw will 28 presume AMCO is paying you post-judgment interest and -3- 1 will try to recover this amount from you. We recommend you provide this correspondence to personal counsel who 2 is assisting you with the judgment collection issues to verify he or she agrees with the interest calculation and 3 to provide you advice regarding disposition of these funds in light of the judgment which was entered against 4 you in excess of policy limits. 5 (emphasis added). A copy of the AMCO Letter was also sent to 6 Cooke's mother, Pamela Cooke ("Pamela"),3 and Hart. 7 Shortly thereafter (or concurrently with the AMCO Letter), 8 AMCO sent to Cooke's home address a check payable to him for 9 $45,147.62 ("AMCO Payment"). Pamela forwarded the AMCO Letter and 10 AMCO Payment to Cooke at his UCLA residence. 11 On November 19, 2012, Cooke deposited the AMCO Payment in his 12 only checking account. Between November 19 and 28, 2012, Cooke 13 spent approximately $30,000 of the AMCO Payment on the following: 14 $1,040 Cash for miscellaneous items (Nov. 19) 15 $5,600 UCLA Housing for upcoming quarter (Nov. 21) 16 $4,670 UCLA Tuition & Fees for upcoming quarter (Nov. 23) 17 $11,000 IRS for taxes owed on the AMCO Payment (Nov. 23) 18 $4,306 Bankruptcy attorney and filing fees (Nov. 26) 19 $2,800 California Franchise Tax Board for taxes owed on 20 the AMCO Payment (Nov. 26) 21 $2,500 Computer (Nov. 27) 22 B. Postpetition events 23 Eleven days after depositing the AMCO Payment, Cooke filed a 24 chapter 7 bankruptcy case on November 30, 2012. He disclosed the 25 AMCO Payment and the transfers he made with the funds. Cooke also 26 disclosed the remaining $14,250 from the AMCO Payment in his 27 3 We refer to Cooke's mother as Pamela to avoid any 28 confusion. No disrespect is intended. -4- 1 checking account, which he claimed exempt. Renshaw was listed as 2 one of Cooke's three unsecured creditors. The other two creditors 3 were owed less than $600.00 combined. 4 1. Cooke's testimony at his § 341(a) meeting 5 With respect to the AMCO Letter and AMCO Payment, Cooke 6 testified at his first § 341(a) meeting of creditors on 7 January 22, 2013, that he had received a check for $45,147.62 from 8 AMCO, but that he "d[idn't] exactly know" what it was for, and 9 that he "wasn't informed by [his] lawyer exactly what it was 10 from." Cooke further testified: 11 Q. You didn't ask what [the AMCO Payment] was for? 12 A. I think it was for – trying to think what the interest – there was some interest on some of it. 13 Q. Interest on what? 14 A. I – they didn't – I think it was for – my insurance 15 didn't pay – make a payment as soon as possible and so I, for some reason, got the money. I don't know 16 exactly why. 17 Q. You got a check for $44,000. You don't know what you got it for? Is that what your – 18 A. I didn't ask too many questions. 19 . . . . 20 Q. Did you ever ask [Hart] what the check was for? 21 A. Not really. 22 Q. Did you ever ask anyone what the check was for? 23 When did you receive the check? 24 A. I probably (indiscernible). 25 2. Cooke's testimony at his Rule 2004 examination 26 On March 13, 2013, two months after Cooke's first § 341(a) 27 meeting, Cooke appeared and testified under oath in a Rule 2004 28 examination conducted by Renshaw. Cooke testified that he did not -5- 1 recall receiving the AMCO Letter or that Pamela had forwarded it 2 to him at UCLA. He did testify, however, that prior to depositing 3 the AMCO Payment he inquired as to why he received it and that he 4 had relied upon Hart's advice to conclude the money belonged to 5 him and not Renshaw. Cooke admitted he contemplated filing 6 bankruptcy prior to depositing the AMCO Payment. Cooke also 7 testified he knew that the AMCO Payment represented interest 8 accrued from Renshaw's Judgment, that Renshaw might try to collect 9 the money and that he could have given the money to Renshaw but 10 elected to use the money for other purposes. 11 3. Renshaw's adversary complaint 12 Renshaw filed an adversary complaint against Cooke, seeking 13 to deny his discharge under § 727(a)(2)(A).4 Renshaw claimed the 14 AMCO Payment belonged to him because it was accrued interest on 15 the Judgment and contended that Cooke should have earmarked the 16 money for payment to Renshaw. However, rather than turning the 17 funds over to him, Renshaw alleged that Cooke wrongfully spent 18 them to avoid paying him. In his answer, Cooke admitted spending 19 some of the AMCO Payment days before filing for bankruptcy, but 20 denied that he spent the funds to avoid paying Renshaw. 21 In Cooke's declaration submitted on November 27, 2013, with 22 his motion for summary judgment, Cooke stated that before he 23 deposited the AMCO Payment: (1) he reviewed the AMCO Letter; 24 (2) he was told by Pamela that she had verified Cooke's 25 26 4 Renshaw also sought other claims for relief, including § 727(a)(2)(B), (a)(3), (a)(4) and (a)(5). The bankruptcy court 27 granted Cooke summary judgment on those claims; his motion was denied as to Renshaw's § 727(a)(2)(A) claim, which went to trial 28 and is the only claim at issue on appeal. -6- 1 entitlement to the funds and that he could spend them whichever 2 way he chose; (3) Hart had also told Cooke the funds belonged to 3 him to use in any manner; and (4) he relied on the statements from 4 AMCO, Pamela and Hart and believed he could use the money for his 5 own purposes. 6 4. The trial, ruling and judgment 7 Renshaw contended in his trial brief that Cooke had knowingly 8 and intentionally spent the AMCO Payment to hinder, delay or 9 defraud him in his ability to collect on the Judgment. Renshaw 10 argued that to the extent Cooke was relying on a good faith 11 defense of advice of counsel that he could spend the funds, Cooke 12 was precluded from doing so because he continued to assert the 13 attorney-client privilege to prevent Renshaw from discovering the 14 precise advice given by Hart. Notably, no declaration was ever 15 offered from attorney Hart. 16 In his trial brief, Cooke argued that he had repeatedly 17 testified as to his reliance on the statements made in the AMCO 18 Letter and on the advice of Pamela and Hart that the AMCO Payment 19 was postjudgment interest to which he was entitled and to which he 20 could use in whichever manner he chose. Cooke contended he, not 21 Renshaw, was the intended beneficiary of the contract provision in 22 his auto policy for postjudgment interest and, thus, the money 23 paid to him by AMCO was his money. Regardless, argued Cooke, 24 Renshaw could not show that he had the requisite intent to hinder, 25 delay or defraud Renshaw. No evidence suggested that Cooke had 26 reason to believe the AMCO Payment was being made to him in trust 27 for subsequent transfer to Renshaw. Even though the AMCO Letter 28 stated that Renshaw may "try to recover" the funds, Cooke argued -7- 1 it was reasonable for him to believe they belonged to him, not 2 Renshaw, since the AMCO Letter advised that Renshaw was not able 3 to recover the postjudgment interest directly from AMCO. 4 a. The trial 5 Trial on the matter of the AMCO Payment and Cooke's discharge 6 proceeded. Renshaw, Cooke and Pamela testified. Cooke testified 7 that he had reviewed the AMCO Letter and discussed it with Pamela 8 before depositing the AMCO Payment. Renshaw's counsel then 9 proceeded to read into the record Cooke's testimony from his 10 Rule 2004 examination, which differed from this trial testimony. 11 Cooke further testified that he made inquiries to Hart, Pamela and 12 AMCO about what the AMCO Payment was for before depositing it. 13 Renshaw's counsel then played a portion of the audio file from 14 Cooke's first § 341(a) meeting, which contradicted Cooke’s current 15 testimony. 16 Under questioning at the trial by Renshaw’s counsel, Cooke 17 testified: 18 Q. Okay. Isn’t it true that you did not want Mr. Renshaw to have the money received from 19 AMCO? 20 A. Everyone I asked told me it was my money. 21 Q. I’m not – I’m asking you. Isn’t it true that you did not want Mr. Renshaw to have the 22 interest money? 23 A. That’s not true. 24 Q. Well, if it was true, wouldn’t you have given it to him? 25 A. From my counsel and the insurance told me, he 26 might try to collect on it. 27 . . . . 28 Q. Okay. And if you wanted Mr. Renshaw to have -8- 1 that money, you could have given Mr. Renshaw that money. Isn’t that true? 2 A. Yes. 3 Q. But you didn’t, did you? 4 A. No. 5 Q. Because you didn’t want Mr. Renshaw to have that 6 money. Isn’t that true? 7 A. I was told it was my money. 8 Q. I’m sorry. Excuse me. You didn’t want 9 Mr. Renshaw to have that money, did you? 10 A. I didn’t . . . . 11 Trial Tr. (Jan. 12, 2015) 52:13-22, 53:9-20. 12 Under questioning by Cooke’s counsel, Cooke testified: 13 A. Did anyone ever tell you that it had to be paid over to Mr. Renshaw? 14 Q. No. They told me he might try to collect on it, 15 but it was my money. 16 Id. at 59:8-11. 17 Cooke also testified that up until this point Pamela had paid 18 his UCLA tuition and living expenses and that he was not 19 responsible for reimbursing her for those expenses. Cooke 20 testified that he had never paid these expenses before because he 21 had no money of his own. However, he decided to pay them this 22 time to help out Pamela. 23 Pamela testified that she spoke with Hart about the AMCO 24 Letter and AMCO Payment and confirmed with Hart that the money 25 belonged to Cooke. She then relayed that information to Cooke. 26 Pamela testified that she also sought independent legal advice 27 from Laura Bartels and that Ms. Bartels essentially confirmed 28 Pamela's understanding that the money belonged to Cooke. -9- 1 After hearing closing arguments from the parties, the 2 bankruptcy court took the matter under submission. 3 b. The bankruptcy court's ruling and judgment 4 The bankruptcy court found that the AMCO Payment was property 5 of the debtor and that all of Cooke's transfers of funds occurred 6 within one year prior to his bankruptcy filing. The court further 7 found that Cooke intended to hinder or delay Renshaw in his 8 ability to collect on the Judgment by transferring the funds. 9 Based on the totality of the circumstances, the court believed 10 Cooke's transfers went beyond legitimate prebankruptcy planning 11 and were done with the intent to keep the funds from Renshaw, his 12 most significant creditor, and to maximize the benefit of the 13 funds received for himself. Cooke timely appealed the judgment 14 denying his discharge under § 727(a)(2)(A). 15 II. JURISDICTION 16 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 17 and 157(b)(2)(J). We have jurisdiction under 28 U.S.C. § 158. 18 III. ISSUE 19 Did the bankruptcy court err when it denied Cooke's discharge 20 under § 727(a)(2)(A)? 21 IV. STANDARDS OF REVIEW 22 In an action for denial of discharge, we review: (1) the 23 bankruptcy court's determinations of the historical facts for 24 clear error; (2) its selection of the applicable legal rules under 25 § 727 de novo; and (3) its application of the facts to those rules 26 requiring the exercise of judgments about values animating the 27 rules de novo. Searles v. Riley (In re Searles), 317 B.R. 368, 28 373 (9th Cir. BAP 2004), aff'd, 212 F. App'x 589 (9th Cir. 2006). -10- 1 The bankruptcy court's determinations concerning the debtor's 2 intent are factual matters reviewed for clear error. Beauchamp v. 3 Hoose (In re Beauchamp), 236 B.R. 727, 729 (9th Cir. BAP 1999). 4 Factual findings are clearly erroneous if they are illogical, 5 implausible or without support in the record. Retz v. Samson 6 (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). We give great 7 deference to the bankruptcy court's findings when they are based 8 on its determinations as to the credibility of witnesses. Id. 9 (noting that as the trier of fact, the bankruptcy court has "the 10 opportunity to note variations in demeanor and tone of voice that 11 bear so heavily on the listener's understanding of and belief in 12 what is said."). If two views of the evidence are possible, the 13 trial judge's choice between them cannot be clearly erroneous. 14 Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-75 15 (1985); Ng v. Farmer (In re Ng), 477 B.R. 118, 132 (9th Cir. BAP 16 2012). 17 V. DISCUSSION 18 The party objecting to a debtor's discharge under § 727(a) 19 bears the burden of proving by a preponderance of the evidence 20 that the debtor's discharge should be denied. In re Retz, 21 606 F.3d at 1196. Courts are to "'construe § 727 liberally in 22 favor of debtors and strictly against parties objecting to 23 discharge.'" Id. (quoting Bernard v. Sheaffer (In re Bernard), 24 96 F.3d 1279, 1281 (9th Cir. 1996)). 25 The bankruptcy court denied discharge under § 727(a)(2)(A) 26 based on Cooke's prepetition disposition of the AMCO Payment. On 27 appeal, Cooke argues: (1) no evidence was presented to prove his 28 actual intent to defraud; all evidence showed that he had no -11- 1 intent to defraud or delay Renshaw; (2) no badges of fraud were 2 present; (3) he acted in good faith, which negates any possible 3 badges of fraud; (4) prebankruptcy planning by converting 4 nonexempt assets to exempt assets on the eve of bankruptcy is not 5 in and of itself sufficient to prove fraud; and (5) the bankruptcy 6 court misapplied In re Bernard. 7 A. The bankruptcy court did not err when it denied Cooke's discharge under § 727(a)(2)(A). 8 1. Denial of discharge under § 727(a)(2)(A) 9 10 Section 727(a)(2)(A) provides that the bankruptcy court may 11 deny a debtor's discharge if the debtor has disposed of his or her 12 property, with the intent to hinder, delay or defraud a creditor, 13 within one year prior to the petition date. The party objecting 14 to discharge under § 727(a)(2)(A) must prove two things: (1) the 15 disposition of property, whether by transfer, removal, 16 destruction, mutilation or concealment (within the statutory time 17 period); and (2) the debtor's subjective intent to hinder, delay 18 or defraud a creditor through the act of disposition of the 19 property. In re Retz, 606 F.3d at 1200 (citing Hughes v. Lawson 20 (In re Lawson), 122 F.3d 1237, 1240 (9th Cir. 1997)). Cooke 21 concedes and does not contest the bankruptcy court's findings that 22 the AMCO Payment was Cooke's property and that the subject 23 transfers of funds were within one year of the petition date. 24 This appeal does not require a determination that Cooke acted with 25 fraudulent intent to defraud Renshaw. As the statutory language 26 is disjunctive, it is sufficient to prove that Cooke’s intent is 27 to hinder or delay a creditor. In re Retz, 606 F.3d at 1200 28 (citing In re Bernard, 96 F.3d at 1281). Thus, our review focuses -12- 1 on whether the court's finding that Cooke intended to hinder or 2 delay Renshaw was clearly erroneous.5 3 The intent to hinder or delay "is a question of fact that 4 requires the trier of fact to delve into the mind of the debtor 5 and may be inferred from surrounding circumstances." 6 In re Searles, 317 B.R. at 379 (citing Emmett Valley Assocs. v. 7 Woodfield (In re Woodfield), 978 F.2d 516, 518 (9th Cir. 1992) 8 (intent may be inferred from the circumstances surrounding the 9 transaction in question)). Similarly, the debtor's "course of 10 conduct may be probative of the question." Id. at 380 (citing 11 Devers v. Bank of Sheridan (In re Devers), 759 F.2d 751, 753-54 12 (9th Cir. 1985). 13 2. The bankruptcy court's finding that Cooke intended to hinder or delay Renshaw was not clearly erroneous. 14 15 To begin, the bankruptcy court questioned Cooke's credibility 16 based on his conflicting testimony about the AMCO Letter and the 17 AMCO Payment. We give credibility findings great deference. 18 19 5 The dissent’s analysis doesn’t consider intent, but rather questions whether any transfers contemplated by § 727(a)(2) 20 occurred if the transfers constitute preferment of other creditors. See Hultman v. Tevis, 82 F.2d 940, 941 (9th Cir. 21 1936). As noted in First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1343 (9th Cir. 1986), the real issue in Hultman 22 involved whether the debtor acted with the requisite intent when he “in good faith, believed and relied on his attorney’s advice 23 and acted on it in making the transfer to his son.” Id. The Hultman court concludes no other indicia of intent existed, 24 warranting a discharge. The facts in the present appeal distinguish this appeal from Hultman. Although Cooke vaguely 25 raised an advice of counsel defense, he inconsistently testified as to whether he talked to his counsel. Further he declined to 26 waive his attorney-client privilege so Hart could testify or submit a declaration as to his advice to Cooke. However, in 27 raising such a defense, Cooke could not invoke an attorney-client privilege. Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1163 28 (9th Cir. 1992). -13- 1 In re Retz, 606 F.3d at 1196. The court noted that at trial Cooke 2 testified he received and read the AMCO Letter prior to depositing 3 the AMCO Payment. However, at his Rule 2004 examination Cooke 4 testified that he did not recall receiving the AMCO Letter, he 5 would not have received it if it was sent to his home address and 6 he did not think Pamela had forwarded it to him at UCLA. The 7 court also found contradictory Cooke's testimony about what steps 8 he took after receiving the AMCO Payment to determine if the funds 9 were his to spend. At trial, Cooke testified that he asked Hart, 10 Pamela and AMCO if the check was his to keep and all said yes. At 11 his first § 341(a) meeting, which was two months before Renshaw 12 filed his adversary complaint, Cooke testified that he did not 13 know exactly what the AMCO Payment was for, Hart did not inform 14 him and he did not ask too many questions about it. 15 Cooke argues that no evidence was presented at trial that he 16 actually intended to defraud or delay Renshaw. Cooke contends the 17 evidence supports his position that the AMCO Payment was his to 18 spend; no evidence showed or suggested that anyone told him, or 19 that he had reason to believe, the AMCO Payment was being paid to 20 him in trust to then be remitted to Renshaw. 21 Bankruptcy courts may infer a debtor's intent from 22 surrounding circumstances and the debtor's course of conduct. 23 In re Woodfield, 978 F.2d at 518; In re Devers, 759 F.2d at 24 753-54; In re Searles, 317 B.R. at 379-80. In addition to Cooke's 25 conflicting testimony about the AMCO Letter and AMCO Payment — 26 i.e., whether or not he read and/or discussed with anyone the AMCO 27 Letter and/or the AMCO Payment before depositing the check and 28 spending the funds — Cooke had also testified that he knew the -14- 1 AMCO Payment was for accrued interest on the Judgment and that 2 Renshaw might try to collect the money. During the trial, Cooke 3 additionally stated he did not want Renshaw to have the AMCO 4 Payment. Further, the record reflects that Cooke knew his policy 5 limits of $250,000 would not satisfy the Judgment and that he was 6 responsible for the excess of nearly $1.5 million. Even though 7 the AMCO Payment belonged to Cooke, inferences from the facts and 8 Cooke’s course of conduct established that he knew that an 9 aggressive judgment creditor like Renshaw would look to Cooke's 10 assets for satisfaction, including the AMCO Payment. Moreover, as 11 the bankruptcy court found, the debt to Renshaw was the reason 12 Cooke filed his bankruptcy case; he had no other material debt on 13 the petition date. Perhaps one of these facts standing alone 14 would not prove Cooke's actual intent to hinder or delay Renshaw, 15 but they were the facts and circumstances the bankruptcy court 16 could consider in its subjective intent determination. 17 Cooke also takes issue with the bankruptcy court's findings 18 that he was upset with Renshaw and, thus, wanted to keep the money 19 away from Renshaw. As part of its intent finding, the bankruptcy 20 court discussed Cooke's testimony at trial that he was upset about 21 the Judgment, that he did not think he was fully responsible for 22 the accident even after the Judgment was entered, that Renshaw was 23 not entitled to the entire amount, and that he was contemplating 24 bankruptcy prior to receiving the AMCO Payment. Cooke argues that 25 anyone would be unhappy about such a significant judgment, 26 particularly someone of his age, but that such distress does not 27 constitute fraudulent intent. Again, this may be true. However, 28 Cooke's testimony as to his state of mind about the Judgment -15- 1 included more facts for the bankruptcy court to consider in its 2 totality of the circumstances analysis in determining that Cooke 3 had the intent to hinder or delay Renshaw from recovering all or 4 any part of the AMCO Payment. This analysis is further buttressed 5 by Cooke’s admission that he did not want Renshaw to have any of 6 the AMCO Payment. 7 Beyond the credibility determination, the bankruptcy court 8 also identified several elements as support for the inference that 9 Cooke acted with the requisite intent under § 727(a)(2)(A).6 10 Again, the bankruptcy court in determining Cooke’s intent was not 11 required to identify or make any findings involving any fraudulent 12 intent as this appeal involves a determination of intent to hinder 13 or delay and not an intent to defraud. See In re Retz, 606 F.3d 14 at 1200. Even if the court made such findings, they further 15 identify acts supporting its determination of Cooke’s intention to 16 hinder or delay Renshaw’s recovery. The court determined that it 17 was evident from the AMCO Letter that Renshaw was pursuing 18 collection of postjudgment interest from the Judgment. Renshaw 19 had sued AMCO for the money, but dismissed his suit when he 20 learned the funds were being sent to Cooke, who was warned by AMCO 21 that Renshaw may try to collect them. The court further found 22 that the AMCO Payment was Cooke's most significant asset, that it 23 was received on the eve of bankruptcy and that two-thirds of the 24 6 The bankruptcy court considered: “(1) the timing of the 25 transfer; (2) the amount of the transfer in relation to the remaining property of the debtor; (3) whether the transfer 26 occurred after the entry of a large judgment against the debtor; (4) whether the transfer rendered the debtor insolvent; (5) the 27 debtor’s motivation to make the transfers; and [6] the credibility of the debtor’s explanation regarding the transfers.” Trial Tr. 28 (Jan. 12, 2015) 10:23-11:5. -16- 1 funds were transferred just days before he filed. The record also 2 reflected that Renshaw was Cooke's largest creditor, holding over 3 99% of the claims against the estate and that Cooke did not want 4 Renshaw to have the money. 5 Finally, Cooke contends the bankruptcy court misapplied 6 In re Bernard, 96 F.3d 1279 (9th Cir. 1996). Specifically, Cooke 7 argues the bankruptcy court relied entirely on Bernard in 8 determining whether he had the "intent to hinder or delay" 9 Renshaw. Cooke contends this was in error because the facts in 10 that case were significantly different from his own and the legal 11 question did not involve intent. In making its ruling against 12 Cooke, the bankruptcy court noted it was "a close case," and then 13 went on to discuss the facts in Bernard: 14 [T]he debtors . . . withdrew $64,000 from their money market account to avoid efforts by a creditor to collect 15 on an $83,000 judgment, spent the money, and filed for Chapter 7 to discharge the judgment. After withdrawing 16 the funds from the money market, the Ninth Circuit noted that the bankruptcy estate was 'virtually worthless' as 17 a result of their actions. The Ninth Circuit confirmed a denial of discharge stating: "Denial of discharge is 18 a harsh remedy; however, bankruptcy has its roots in equity and to get equity one must do equity." Bernard at 19 page 1279. 20 Hr'g Tr. (Jan. 16, 2015) 14:9-21. 21 We agree the facts in Bernard are distinguishable in that 22 "intent" was not at issue; the Bernards essentially admitted they 23 withdrew the money market funds to fend off their creditor's 24 attempt to reach their assets. 96 F.3d at 1282. The question in 25 Bernard was whether the withdrawals were "transfers" of property 26 within the meaning of § 727(a)(2)(A), which the Ninth Circuit 27 answered in the affirmative, based on its broad interpretation of 28 -17- 1 the bankruptcy code’s definition of the word “transfer.”7 It 2 appears the bankruptcy court was relying on Bernard for the 3 proposition that Cooke's expenditure of the AMCO Payment 4 constituted "transfers" beyond that of legitimate prebankruptcy 5 planning, which supported an inference of Cooke's subjective 6 intent. Nevertheless, we perceive no error. 7 While Bernard may not be on "all fours" with Cooke's case, it 8 is clear from the record the bankruptcy court applied the correct 9 law. It articulated the correct elements for a claim under 10 § 727(a)(2)(A) and made the necessary findings. The court also 11 properly relied upon inferences and course of conduct that may be 12 considered in determining a debtor's actual intent. Although two 13 views of the evidence may exist, the court’s choice between them 14 in determining that Cooke actually intended to hinder or delay, 15 cannot be clearly erroneous. 16 VI. CONCLUSION 17 While each of us individually may have reached a different 18 conclusion in this case, and clearly the dissent would have, we 19 perceive no clear error with respect to the bankruptcy court's 20 7 The dissent asserts that the analysis in this appeal is 21 independent of the bankruptcy court’s finding of intent and relies on the interpretation of the word “transfers”; a legal issue 22 reviewed de novo and not a factual determination of the word “intent,” which is reviewed for clear error. The Ninth Circuit in 23 In re Bernard, 96 F.3d at 1282-83, concluded that the Bankruptcy Code’s definition is “extremely broad,” including bank deposits 24 and withdrawals. See § 101(54). Definitionally, “transfers” are not categorized by whether the property transferred may be 25 exempted under § 522 or whether the property may be equivalent to permitted distributions of property of the estate under § 726 or 26 some other operative bankruptcy statute. The transfers involved in this appeal occurred prepetition and involve property of the 27 debtor. In the requisite analysis for this appeal, we need to determine if the bankruptcy court’s finding of actual intent was 28 clear error. -18- 1 finding that Cooke actually intended to hinder or delay Renshaw; 2 such finding is not illogical, implausible or without support in 3 the record. Any potential legal error by the bankruptcy court in 4 its application of Bernard was harmless and certainly does not 5 compel a reversal of the discharge judgment; the correct law was 6 applied in this case. Accordingly, we conclude the bankruptcy 7 court did not err when it denied Cooke's discharge under 8 § 727(a)(2)(A), and we AFFIRM. 9 10 11 12 Dissent begins on next page. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -19- 1 TAYLOR, Bankruptcy Judge, Dissenting: 2 I acknowledge that we review intent findings for clear error. 3 And I understand that where two plausible views of the facts exist 4 we cannot reverse. But, nonetheless, I find reversible error 5 here; I respectfully dissent. 6 I do not contest the bankruptcy court’s determinations as to 7 the preliminary facts of this case; they are not controversial. 8 On de novo review where appropriate in connection with a denial of 9 discharge, however, I cannot conclude that the bankruptcy court 10 correctly took into consideration all the “applicable rules” 11 required in consideration of a § 727 claim by binding Ninth 12 Circuit authority. And given that conclusion, I cannot on 13 appropriate de novo review agree that it correctly applied the 14 facts to these rules. 15 I discuss my reasoning in detail hereafter, but, in short, I 16 never reach the question of intent because I see no “transfer” 17 that appropriately supports a discharge denial given established 18 Ninth Circuit authority. 19 Even if I review the bankruptcy court’s intent findings, I 20 conclude that remand is necessary. In particular, the record 21 reveals that the bankruptcy court’s findings regarding Cooke’s 22 state of mind were based in very significant measure on its 23 erroneous assumption that Cooke paid taxes prior to bankruptcy 24 that he could not discharge in his chapter 7 case. Its assumption 25 in this regard was in error. The majority simply ignores this 26 significant error which was the apparent linchpin of the 27 bankruptcy court’s state of mind findings. I conclude that, at a 28 minimum, remand is required. -1- 1 Undisputed Facts. It is undisputed that Cooke lacked 2 resources to pay Renshaw’s judgment in full or even in any 3 significant way. There is no evidence that he would ever be able 4 to retire this debt, especially given the interest accrual which 5 is well in excess of $100,000 a year. 6 Cooke, at some point, decided that he needed to file a 7 bankruptcy. The decision to file bankruptcy is subject neither to 8 question nor to recrimination - it certainly does not justify 9 denial of discharge even where the only reason for filing is to 10 halt the collection efforts of a creditor. 11 There is no evidence that Cooke was intoxicated at the time 12 of the accident and, thus, no argument that § 523(a)(9) bars 13 discharge. Renshaw’s injuries were horrific, but that does not 14 change the calculus. Congress has made a hard decision, and the 15 Bankruptcy Code allows discharge of a judgment arising from 16 negligence where a debtor acts appropriately in the bankruptcy 17 process. Thus, Cooke had the right to discharge his debt to 18 Renshaw through a chapter 7 case. 19 Cooke’s problems in the bankruptcy arose because his 20 insurance company did not promptly pay the judgment to the extent 21 of his policy limits. As a result, it was liable to Cooke, not to 22 Renshaw, for the interest that accrued on the judgment prior to 23 payment, $45,147.62; it paid this amount directly to Cooke. His 24 pre-petition use of a portion of what the bankruptcy court 25 acknowledged was his own money (the “Funds”) is what we must 26 evaluate. 27 So the question becomes: what did Cooke do with the Funds 28 that would justify the loss of discharge? The answer, I submit, -2- 1 is that he did nothing that was an appropriate basis for discharge 2 denial under § 727(a)(2)(A). 3 The bankruptcy court made no finding of fraud, and I see no 4 evidence of fraud or other similar nefarious conduct supporting a 5 discharge denial on this record. The bankruptcy court based its 6 decision exclusively on the determination that Cooke’s actions 7 were intended to hinder and delay Renshaw. It found no basis for 8 a determination that this case involved fraud; I agree. There is 9 no evidence that Cooke hid money or assets, paid fake or inflated 10 claims, initiated fraudulent transfers, or attempted to retain 11 access to the Funds post-bankruptcy in a manner inconsistent with 12 the Bankruptcy Code. This is important because the absence of 13 fraud - or anything even close to fraud - makes this case 14 distinguishable from the vast majority of reported § 727(a)(2)(A) 15 cases based on a determination that a debtor hindered or delayed 16 creditors.1 The bankruptcy court and the majority fail to cite a 17 1 18 Having reviewed numerous reported and unreported decisions from circuit courts and bankruptcy appellate panels affirming 19 denial of discharge on account of actions that hinder or delay creditors, I find no case that did not involve conduct that did 20 not include deceit, non-disclosure, transfer of assets without consideration, inappropriate pre-payment, excessive 21 collateralization, or similar conduct. Looking only at reported Ninth Circuit and Panel decisions provides a representative 22 example of the national scope of cases where denial of discharge was appropriate under § 727(a)(2)(A) and based on a determination 23 that the debtor hindered or delayed creditors. Adeli v. Sachs (In re Adeli), 384 F. App’x 599 (9th Cir. 2010) (assets moved into 24 name of a friend to shield them from creditor claims); Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279 (9th Cir. 1996)(money 25 withdrawn from bank account, not paid to any creditor, and then spent on a future vacation and gambling); Wolkowitz v. Beverly 26 (In re Beverly), 374 B.R. 221 (9th Cir. BAP 2007) aff’d in part, dismissed in part, 551 F.3d 109 (9th Cir. 2008) (collusive marital 27 settlement agreement stripped debtor of all non-exempt assets and fraudulent transfers); Beauchamp v. Hoose (In re Beauchamp), 28 (continued...) -3- 1 single reported Ninth Circuit or Panel decision where a court 2 denied discharge based on efforts to hinder or delay that did not 3 involve deceit or other objectively or subjectively improper 4 conduct. 5 Renshaw did not have a lien on the Funds or a right to 6 priority payment from the Funds. It is important to put to rest a 7 theme that pervades Renshaw’s position on appeal and that may have 8 influenced the bankruptcy court improperly. Implicit in his 9 argument is the assertion of entitlement to the Funds. Express in 10 his argument is the claim that they should have been paid to him. 11 The problem with this assertion is that it is not based on any 12 law, state or federal. 13 As Renshaw conceded during oral argument, the Funds were not 14 encumbered by any lien in his favor prior to bankruptcy; state law 15 does not provide for such a lien automatically, and Renshaw had 16 not otherwise acquired a judgment lien on the Funds. There is no 17 evidence or argument that Cooke impeded Renshaw during the 18 prepetition period. 19 Renshaw, ignoring these realities, first claimed entitlement 20 to the Funds as a third party beneficiary of the contract between 21 Cooke and his insurer; neither state law nor the Bankruptcy Code 22 nor the bankruptcy court recognized this alleged interest. The 23 24 1 (...continued) 236 B.R. 727 (9th Cir. BAP 1999), aff’d, 5 F. App’x 743 (9th Cir. 25 2001) (checks deposited in a hidden account); Lawson v. Hughes (In re Lawson), 193 B.R. 520 (9th Cir. BAP 1996), aff’d, 122 F.3d 26 1237 (9th Cir. 1997) (assets transferred to mother while debtor retained a beneficial interest); Aubrey v. Thomas (In re Aubrey), 27 111 B.R. 268 (9th Cir. BAP 1990) (no evidence supported assertion that transfer was based on a legitimate obligation as opposed to 28 an attempt to put assets beyond creditors’ reach). -4- 1 Funds were compensation to Cooke for the damages he suffered in 2 the form of interest accrual as a result of his insurer’s failure 3 to pay immediately - at least to the extent of his policy limits. 4 Ultimately, Renshaw conceded in oral argument that his claim 5 was based on an alleged “moral obligation.” I appreciate the 6 point, but neither the California legislature nor Congress allow 7 us to determine rights based on our perception of the moral 8 superiority of one claim over another. The law, in general, and 9 the Bankruptcy Code, in particular, create mandates and establish 10 priorities between similarly situated creditors; and there may 11 well be a moral element undergirding some of this legislation. 12 But here no such priority existed, and, until Renshaw created a 13 lien, he had no greater right to this money under either state or 14 federal law than any other creditor. 15 Similarly, as a matter of law, Cooke had no legal obligation 16 to turn the Funds over to Renshaw, was entitled to exempt a 17 portion of the Funds from any judgment lien, and was entitled, 18 within limits, to use the Funds for other purposes. My review of 19 the bankruptcy court’s oral ruling causes me to question whether 20 the bankruptcy court gave improper weight to this moral imperative 21 argument. The bankruptcy court noted that there was an admission 22 that Cooke knew that he was responsible for interest on the debt 23 and that he received the Funds on account of interest accrual. To 24 the extent the bankruptcy court equated the general entitlement to 25 interest on a judgment with a legal requirement that Cooke pay the 26 Funds to Renshaw, that was legal error. 27 Use of the Funds to pay an appropriate fee to an attorney to 28 initiate a bankruptcy case cannot be a basis for a denial of -5- 1 discharge under § 727(a)(2)(A). It is the rare case where a 2 debtor does not file a bankruptcy with the express intent of 3 delaying and hindering at least one and sometimes all of his 4 creditors. The automatic stay has that effect any time it stops a 5 foreclosure, garnishment, or other collection activity. If 6 payment to an attorney from free and clear funds for the purpose 7 of initiating a bankruptcy is a transfer for § 727(a)(2)(A) 8 purposes, then discharge would be unobtainable for most, if not 9 all, debtors who retain counsel to assist them in filing a 10 bankruptcy. Such a construction of § 727(a)(2)(A), thus, is 11 nonsensical. 12 Here, there is no evidence that the attorney’s fees were 13 unreasonable in amount or transferred with an improper intent. 14 Again, this was not a fraud case. To the extent the bankruptcy 15 court included this payment as a transfer for § 727(a)(2)(A) 16 purposes, this was error.2 17 Binding Ninth Circuit authority and prior decisions of this 18 Panel make clear that use of the Funds to pay other creditors 19 cannot be considered an independent basis for a § 727(a)(2)(A) 20 discharge denial. In Hultman v. Tevis, an Act case, the Ninth 21 Circuit stated as follows: “The mere fact that a bankrupt has made 22 23 2 In an unreported decision, Perrine v. Speier (In re Perrine), 2008 WL 8448835 (9th Cir. BAP 2008), the Panel 24 did rely on a transfer to an attorney as a basis for denial of discharge under § 727(a)(2)(A). There, however, the transfer was 25 not solely or even largely on account of legal services either actually provided or reasonably anticipated. Id. at *5. Indeed, 26 as of the time of decision, the fees had still not reached the level of the transferred funds. See id. Here, the fee appears 27 reasonable based on my knowledge of the rates charged in Southern California for chapter 7 cases; and the record contains no 28 evidence to the contrary. -6- 1 a preferential payment or transfer to one of his creditors is no 2 ground for denying a discharge.” 82 F.2d 940, 941 (9th. Cir. 3 1936) (citations omitted). The debtor had transferred “large 4 sums” to his son during the year prior to bankruptcy allegedly 5 with the intent to hinder, delay, or defraud other creditors. Id. 6 The Ninth Circuit declined to determine whether this transaction 7 had a detrimental impact on other creditors and disregarded the 8 fact that the transaction involved preferment of an insider. 9 Instead, it focused on the undisputed fact that the debtor owed 10 his son $50,000 at the time of the transfer and that the payments, 11 though substantial, failed to pay this debt in full. Thus, it 12 found discharge appropriate. 13 Hultman remains good law and bound the bankruptcy court here. 14 Indeed, the Panel previously considered the continuing impact of 15 Hultman and required far more than preferment of a creditor in a 16 discharge denial situation. See In re Perrine, 2008 WL 8448835, 17 at *5 (evidence that a transfer to attorney exceeded value of 18 services and, thus, was for a purpose other than debt repayment 19 and removed only asset from reach of creditors justified 20 conclusion that Hultman was inapplicable and that discharge denial 21 was appropriate). 22 At least one other circuit court has articulated a rule 23 similar to that stated in Hultman in a case decided under the 24 Code. See Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 25 307 (11th Cir. 1994).3 In Miller, the debtor transferred property 26 3 27 Hultman relied on decisions, from other circuits, which stated this rule in a case decided under the Act. See 82 F.2d at 28 (continued...) -7- 1 to a close business colleague in exchange for cancellation of 2 debt. See id. at 304. The evidence suggested that the property 3 was worth more than the debt. Id. at 307. The Eleventh Circuit 4 agreed with the bankruptcy court, however, that discharge denial 5 was not supported by this fact, stating that: “A mere preferential 6 transfer of this sort is not tantamount to a fraudulent transfer 7 for the purposes of denying discharge.” Id. It also 8 distinguished the case from those involving transfers to 9 non-creditors. Id. 10 The bankruptcy court here did not acknowledge the rule in 11 Hultman and erroneously relied on Cooke’s use of the Funds to pay 12 other creditors. The bankruptcy court and the Panel majority turn 13 a blind eye to this binding precedent. In footnote 5, the 14 majority attempts to avoid the requirement that it follow Hultman 15 by arguing that the “real” issue in that case was the debtor’s 16 intent and the evidence supporting a lack of intent to hinder or 17 delay when the debtor relied on advice of counsel. Maj. Op. at 13 18 n.5. I agree that this was one basis for the Ninth Circuit’s 19 decision in Hultman, and I agree that the evidence that Cooke 20 acted on advice of counsel is not strong. If this was the sole 21 reason for the Ninth Circuit’s ruling in Hultman, it would not bar 22 affirmance here. I, however, cannot agree with the majority’s 23 decision to simply disregard the other basis for the relevant 24 ruling in Hultman. 25 26 3 (...continued) 27 941 (citing Rutter v. General Motors Acceptance Corp., 70 F.2d 479, 481 (10th Cir. 1934); In re Ricther, 57 F.2d 159, 160 (2nd 28 Cir. 1932); Bailey v. Ross, 53 F.2d 783, 784 (8th Cir. 1931)). -8- 1 After making the point emphasized by the majority, Hultman 2 then stated as follows: 3 Furthermore, the amount of money so transferred was less than the amount then owing by the bankrupt to his son. 4 The mere fact that a bankrupt has made a preferential payment or transfer to one of his creditors is no ground 5 for denying a discharge. 6 82 F.2d at 941. 7 “Furthermore” indicates that this reason for affirmance is 8 additional to the only point the majority chooses to consider. 9 Hultman clearly states that payment of legitimate creditor claims, 10 even to insiders, is not a basis for discharge denial. Both the 11 bankruptcy court and the majority ignore this authority; I cannot 12 and do not do so. 13 Almost all of Cooke’s transfers4 paid other debts. Renshaw 14 had the burden of proof and provided no evidence that these 15 payments did not relate to legitimate debts. Thus, the bankruptcy 16 court’s reliance on Cooke’s payments to other creditors as 17 “transfers” within the meaning of § 727(a)(2)(A) was error. 18 First, the payments of debt were not to insiders; Cooke paid 19 his bankruptcy lawyer, paid his taxes, and paid his college 20 tuition and housing expenses. The argument that his mother had 21 paid his college expenses in the past is irrelevant. There is no 22 evidence that she had a legal obligation to do so in the future.5 23 The case law does not allow a bankruptcy court to change the 24 25 4 In footnote 7, the majority correctly states that the term transfer is broadly construed. I agree, and I agree that Cooke 26 made transfers. But, as the Ninth Circuit made clear in Hultman, some transfers do not support discharge denial as a matter of law. 27 5 Further, as discussed below, when Cooke did so, he used 28 money for which he had an available exemption. -9- 1 quality of the UCLA bills as debt just because Cooke had a loving 2 parent who might be willing to pay his obligations. The focus 3 here is on what Cooke owed. As a result, this is a stronger case 4 than Hultman, which involved direct payment to an insider. 5 Second, taxes enjoy special protection under the Bankruptcy 6 Code. Congress has determined that taxes should be paid even if 7 this leaves a deserving creditor such as Renshaw unpaid. Here, 8 the bankruptcy court found that the taxes arose in connection with 9 the Funds themselves. There was no evidence that Cooke overpaid 10 the taxes. 11 Third, as already discussed, the payment of an appropriate 12 fee to a bankruptcy attorney in connection with a chapter 7 case 13 cannot be the basis for a § 727(a)(2)(A) denial of discharge. The 14 rule in Hultman, thus, provides additional but not exclusive 15 support for the conclusion that this payment should not have been 16 a basis for discharge denial. 17 The bankruptcy court erred when it based its decision on 18 Cooke’s payment of these legitimate obligations. In inferring an 19 inappropriate intent to hinder or delay, it focused on the total 20 amount of pre-petition payments from the Funds. But its 21 consideration of over 90% of this amount was improper under the 22 rule established by the Ninth Circuit in Hultman. And this error 23 was not harmless. 24 The bankruptcy court failed to consider Hultman and, instead, 25 relied on Bernard as analogous. As the majority concedes, nothing 26 could be farther from the case; the debtors in Bernard depleted 27 funds putting them beyond the reach of all creditors. Here, Cooke 28 -10- 1 merely preferred certain creditors.6 This did not justify a 2 § 727(a)(2)(A) denial of discharge. 3 Even if the taxes were not payable when paid, the outcome is 4 the same as they were entitled to priority treatment in a 5 chapter 7 case. While there is no evidence from Renshaw, who had 6 the burden of proof, that the taxes were pre-paid, a common sense 7 argument can be made that the taxes - which relate to Cooke’s 8 receipt of the Funds - were not due when paid. The question then 9 becomes whether that fact takes those payments outside the rule 10 articulated in Hultman. I assert that it does not. 11 Income tax liability arises at the end of the tax year; 12 typically, the last day of the tax year. See Towers v. United 13 States (In re Pac.-Atl. Trading Co.), 64 F.3d 1292, 1295, 1301 14 (9th Cir. 1995). But there is a possible exception when an 15 individual files a chapter 7 case and there are assets available 16 for distribution. 17 Section 1398(d)(2)(A) of the Internal Revenue Code allows a 18 debtor in an asset case to elect to bifurcate the 19 bankruptcy-filing year into two tax years and to terminate the 20 first tax year on the petition date. The tax debt accruing prior 21 to the petition date is then treated as pre-petition debt and is 22 available for treatment as a priority claim under § 507. Because 23 the Internal Revenue Code allows this treatment for federal tax 24 liability, the Bankruptcy Code mandates the same tax treatment for 25 state income taxes. See 11 U.S.C. § 346(a). 26 6 And, as discussed hereafter, to the extent of his taxes, 27 he did so exactly as the Bankruptcy Code allows. While, in the case of the transfers to parties other than his attorney, he used 28 exempt assets. -11- 1 In paying tax liabilities, albeit prior to bankruptcy, Cooke 2 merely duplicated the treatment that these taxes would have 3 received if he held onto all of the Funds and took them into his 4 bankruptcy estate. Again, pre-petition payment of a legitimate 5 tax debt - payable in full as a priority in a chapter 7 case - 6 does not support a § 727(a)(2)(A) denial of discharge. 7 The bankruptcy court erred when it ignored the treatment the 8 taxes would have received in an asset case. In its findings, the 9 bankruptcy court erroneously concludes that Cooke paid the taxes 10 “to avoid any non-dischargeable claims that would result after his 11 petition was filed.” Hr’g Tr. (Jan. 16, 2015) at 14:3-5. This 12 finding assumes that the taxes would not receive priority 13 treatment in an asset case; such an assumption, again, was 14 erroneous. And there is no evidence in the record that Cooke paid 15 the taxes based on an erroneous view of the law. The only 16 evidence in the record even remotely related to his understanding 17 of his tax obligations is the fact that he generally had access to 18 an accountant. There is nothing that supports the bankruptcy 19 court’s conclusion that, in effect, Cooke paid his taxes based on 20 an erroneous view of the law. 21 The bankruptcy court’s error as to the dischargeability of 22 the taxes related to the Funds was not harmless; it painted the 23 pre-petition tax payments as opportunistic and unduly beneficial 24 to Cooke. Because of the provisions of the Bankruptcy Code and 25 the Internal Revenue Code, the payment of taxes was neither. The 26 majority ignores this error entirely. 27 Cooke’s replacement of his laptop did not, in isolation, 28 justify a denial of discharge. The undisputed evidence before the -12- 1 bankruptcy court was that Cooke’s prior computer was five to six 2 years old, that the screen had recently cracked and broken, and 3 that Cooke was a college student who needed a computer. Trial Tr. 4 (Jan. 12, 2015) at 57:21-23. Nefarious conduct, this was not.7 5 The record does not reflect that the bankruptcy court 6 considered this purchase in isolation, but if it denied discharge 7 based solely on this use of the Funds, I submit that this was 8 error. Such a conclusion turns the strong policy in favor of 9 discharge on its head. 10 Moreover, the Ninth Circuit allows debtors to engage in some 11 forms of pre-bankruptcy planning and to protect assets by 12 converting them from non-exempt to exempt. See, e.g., Gill v. 13 Stern (In re Stern), 345 F. 3d 1036, 1043 (9th Cir. 2003) (“[T]he 14 purposeful conversion of nonexempt assets to exempt assets on the 15 7 As previously noted, I do not reach the bankruptcy court’s 16 intent findings in my decision to reverse. I acknowledge that the bankruptcy court found a lack of credibility in one area, which 17 the majority appears to determine was not erroneous, but nothing in the record suggests that this finding related to the testimony 18 regarding the state of Cooke’s computer. This evidence was neither contradicted nor controversial. 19 I also note that I find the credibility findings troubling. There is some discord in Cooke’s various discussion of when, 20 whether, and how he got confirmation that he was free to spend the Funds. My problems with this whole area of testimony, however, 21 are several. First, the § 341(a) meeting testimony ends with a question related to this topic and, according to the transcript, 22 an inaudible response. Next, the questions seem to ignore that his mother was copied on the letter from the insurance company 23 explaining relevant points. But most importantly, this seems to be a tempest in a teapot. Cooke received the Funds in his own 24 name and there is no question that he had the legal right to use them. Similarly, Cooke knew that he owed Renshaw on the judgment 25 and there was no suggestion that he naively believed that Renshaw would not seek payment. Cooke had no duty to double check before 26 using the Funds and his use was for legitimate purposes. The bankruptcy court did not find Cooke to lack credibility for all 27 purposes, and nothing in the credibility finding suggests that I adopt a more expansive view of his lack of credibility and 28 disregard his testimony regarding his computer. -13- 1 eve of bankruptcy is not fraudulent per se.” (quoting Wudrick v. 2 Clements, 451 F.2d 988, 989 (9th Cir. 1971)). The bankruptcy 3 court here acknowledged this fact, stating that this was a close 4 case, but finding that combined expenditures from the Funds tipped 5 the balance towards a denial of discharge. In a close case, the 6 bankruptcy court could not find that the purchase of a much-needed 7 tool of Cooke’s trade as a student, one that involved use of less 8 than ten percent of the Funds, justified discharge denial.8 9 Reversal is warranted as a matter of law because the 10 bankruptcy court’s factual finding of intent was based on 11 transfers which it could not consider for purposes of 12 § 727(a)(2)(A). In summary, I would reverse because the 13 bankruptcy court erred as a matter of law when it based its 14 decision almost entirely on Cooke’s payment of other debt. 15 Hultman, as recognized by this Panel, does not permit this 16 reliance. I also conclude that the laptop computer acquisition in 17 isolation did not justify § 727(a)(2)(A) denial of discharge. 18 I emphasize that my analysis is independent of the bankruptcy 19 court’s finding of intent. As already noted, all commencements of 20 bankruptcy cases involve, to some extent, an express intent to 21 hinder and delay a creditor. Further, almost all bankruptcy cases 22 23 8 Cooke exempted most of the laptop computer’s value as a tool of the trade in his case; this was a classic transfer of non- 24 exempt assets to exempt assets. Any additional value remained available to his creditors, so arguably only the $1,500 that he 25 claimed as exempt is properly considered as a transfer. Further, as discussed hereafter, he actually used some otherwise exempt 26 portions of the Funds to make this purchase. So, in part, this was simply a change of the form of exempt assets. The math of the 27 transaction is discussed more thoroughly hereafter, but any “transfer” related to the asset involved only a negligible portion 28 of the Funds that was not otherwise exempt. -14- 1 involve some measure of transfer in anticipation of the creditor- 2 hindering-or-creditor-delaying bankruptcy; bankruptcy lawyers are 3 paid, creditors are preferred, and in some reasonable regards 4 non-exempt assets become exempt or goods or services essential to 5 day-to-day existence are obtained. These types of transfers do 6 not justify a denial of discharge, so one never need consider a 7 debtor’s intent when causing them. And Hultman provides a firm 8 foundation for a determination that not all transfers are 9 appropriately considered in a § 727(a)(2)(A) context. Adeeb is 10 another such case. 11 In Adeeb, the debtor admitted to making pre-petition 12 transfers with improper intent. 787 F.2d at 1341-42. But, he 13 repented and attempted to retrieve the assets. Id. The Ninth 14 Circuit, thus, reversed the district court and remanded to the 15 bankruptcy court for a determination as to whether recovery had 16 been complete. Id. at 1346. The Ninth Circuit read transferred 17 in § 727(a)(2)(A) as meaning “transferred and remained 18 transferred.” Id. at 1345. And it noted that Congress intended 19 to deny discharge where debtors took actions to keep assets from 20 their creditors by hiding assets or destroying them. Id. The 21 facts here evidence no such improper conduct. Instead, as in 22 Hultman, the transfers did not support § 727(a)(2)(A) discharge 23 denial. 24 Were we writing on a blank slate, I might join in the 25 majority’s decision, but we are not. The Ninth Circuit in Hultman 26 and Adeeb made clear that not every transfer supports a § 727 27 objection to discharge. The majority ignores this precedent as 28 did the bankruptcy court. -15- 1 Reversal is also appropriate here because the transfers at 2 issue did not impact Renshaw in any way appropriately recognized 3 by law. Relying on Adeeb, in Bernard the Ninth Circuit determined 4 that injury was not an element of a § 727(a)(2)(A) claim. 96 F.3d 5 at 1281-82. But see id. at 1283 (O’Scannlain, J., dissenting) (“I 6 read Adeeb as holding only that lack of injury to creditors is 7 irrelevant for purposes of denying a discharge in bankruptcy.”) 8 (internal quotation marks and citation omitted). Having 9 acknowledged that, I would still reverse here because, as stated, 10 the transfers at issue almost entirely duplicated the treatment 11 Renshaw would have received if Cooke paid his attorney and brought 12 the entirety of the Funds into his chapter 7 estate. I would 13 conclude as a matter of law that where the pre-petition transfers 14 merely facilitate the filing of a bankruptcy by paying an attorney 15 to file the case and then almost entirely duplicate the treatment 16 that creditors would receive under the Bankruptcy Code that they 17 cannot be considered in isolation as transfers that justify denial 18 of discharge. 19 The record makes clear that Cooke understood that he had a 20 wildcard exemption under state law, among others, and that he 21 intended to use it to protect his rights to the Funds. Here, on 22 the petition date, the California wildcard exemption totaled 23 $23,250. Thus, if one considers only these two factors, the most 24 that would have been available to his estate if Cooke filed 25 bankruptcy and brought all of the Funds, net of the payment to the 26 attorney, into the case is $17,592. This creates an asset case, 27 but there are two relevant consequences of that fact here. 28 First, the Trustee would be entitled to his statutory fee -16- 1 which can be approximated at $2,500 pursuant to § 326(a) if the 2 estate was an asset estate holding about $17,590 for distribution. 3 This left approximately $15,092 available to creditors. 4 And the second reality is that, as discussed above, the 5 taxing authorities would have a priority claim to this amount. 6 Tax claims based on Cooke’s accountant’s calculation totaled 7 $11,000 payable to the IRS and $2,800 payable to the California 8 Franchise Tax Board. Thus, tax debt would be payable from almost 9 all remaining non-exempt funds. The balance of approximately 10 $1,292 would be further reduced by Trustee expenses and admittedly 11 small payments to other creditors. It is unclear that Renshaw 12 would have received anything. 13 What this analysis shows is that unless the real point of 14 Renshaw’s argument is that Cooke wasn’t entitled to file 15 bankruptcy or that Cooke was obligated to pay the Funds to him 16 prior to filing (a payment that would be recoverable as a 17 preference), the transfers of the Funds were not in any cognizable 18 way a deviation from the treatment he otherwise would have 19 received in Cooke’s chapter 7 case. 20 Where Cooke made transfers that are entirely consistent with 21 the priorities under the Bankruptcy Code or, in the case of UCLA 22 and the laptop, where the transfers were made almost entirely from 23 funds that Cooke could claim as exempt, a determination of 24 discharge denial was reversible error. 25 Here, the bankruptcy court concluded that Cooke’s use of the 26 money was intended “to maximize the benefit of the [F]unds 27 received for himself.” Hr’g Tr. (Jan. 16, 2015) at 15:1-2. 28 Again, this conclusion was a negative one allegedly supporting -17- 1 discharge denial. But here all Cooke did was to pay an attorney 2 to file his bankruptcy, pay taxes as allowed by the Bankruptcy 3 Code, make other payments from assets for which he had an 4 available state law exemption, and use a tiny portion of the non- 5 exempt funds to acquire an exempt asset necessary for his work as 6 a student. Such intended use of funds does not support discharge 7 denial unless we expand § 727(a)(2)(A) to a point unsupported by 8 case law and requiring a nonsensical interpretation of the 9 statute. 10 In any event, if reversal is not appropriate, remand is 11 required. The majority disagrees with my conclusion that the 12 transfers here are not appropriately considered for § 727 13 purposes. I respectfully disagree with their analysis. But even 14 if I were to agree that the transfers were properly considered, I 15 remain incapable of affirmance. If reversal is not the correct 16 result, remand is required. 17 The bankruptcy court specifically determined that Cooke paid 18 the taxes in order to avoid an otherwise nondischargeable debt. 19 In doing so, however, the bankruptcy court did not refer to any 20 testimony or evidence, documentary or otherwise, in the case. 21 And, in fact, the bankruptcy court could not have relied on any 22 such evidence because no such evidence exists in the record. 23 Instead, the bankruptcy court plucked a motive from the air and 24 inferred that it was Cooke’s. 25 In deferring to the bankruptcy court’s discretion in this 26 regard, the majority goes too far. They rubber stamp the 27 bankruptcy court’s inference of wrongful intent when the 28 Bankruptcy Code and Internal Revenue Code make clear that Cooke -18- 1 had no risk of nondischargeable tax debt if he brought the Funds 2 into his bankruptcy estate. Put more bluntly, the bankruptcy 3 court inferred, based on not a shred of evidence, that Cooke made 4 these payments based on the erroneous belief that the tax claims 5 would be nondischargeable. As these payments constitute the 6 majority of the payments made pre-bankruptcy, remand is 7 appropriate so that the bankruptcy court can reconsider its 8 determination that Cooke made all payments with the intent to 9 hinder or delay Renshaw in light of the tax treatment required by 10 law in a chapter 7 asset case. 11 The testimony regarding Cooke’s understandings about the 12 Funds and feelings about payment to Renshaw do not sufficiently 13 support affirmance on this record. The majority and the 14 bankruptcy court, make much of allegedly inconsistent testimony by 15 Cooke. My review of the record leads me to question this 16 assumption as already discussed. Among other things, the 17 questions asked at the § 341(a) meeting, in deposition, and at 18 trial are subtly, but significantly, different. 19 The majority, but not the bankruptcy court, also rely on the 20 trial testimony that concludes as follows: 21 Q. I’m sorry. Excuse me. You didn’t want Mr. Renshaw to 22 have that money, did you? 23 A. I didn’t . . . . 24 An ellipsis generally indicates an omission of words. This 25 was not a firm statement, and the majority reaches too far when it 26 converts this apparently incomplete or equivocal statement into 27 “an admission that [Cooke] did not want Renshaw to have any of the 28 [Funds].” Maj. Op. at 18; see also id. at 16. This testimony -19- 1 gives me no comfort in affirming the bankruptcy court. 2 First, the majority turns it into a specific declarative 3 statement. That, simply, is not the case, as the party 4 transcribing the testimony used an ellipsis, not the period 5 appropriate with a firm declaration of state of mind. 6 Second, the bankruptcy court did not mention this testimony 7 in its ruling. The majority, thus, gives this equivocal response 8 a weight beyond that found appropriate by the trial court which 9 heard the testimony and was able to observe demeanor and hear 10 tone. 11 Third, the question asked and the response given merely 12 relate to desire to pay; this is not an admission of intent to 13 hinder or delay. 14 To be clear, were this the only disagreement I have with the 15 majority’s analysis, it would be a minor one. But given the 16 fundamental problems I have described, I merely point out that I 17 view any differences in testimony as essentially nonexistent and 18 the equivocal testimony as to desire to pay as immaterial. This 19 testimony does not allow me to overlook what I believe to be legal 20 error. 21 I would reverse or, at a minimum, remand. 22 23 24 25 26 27 28 -20-