Carlos J. Cuevas ()
Bankruptcy Code §727(a)(2)(A) governs an objection for a debtor’s participation in an intentional fraudulent conveyance during the year preceding the filing of his or her petition. 11 U.S.C. §727(a)(2)(A). Bankruptcy Code §727(a)(2)(A) states:
(a) The court shall grant the debtor a discharge, unless—
* * * *
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition;
11 U.S.C. §727(a)(2)(A).
In order to sustain a cause of action under Bankruptcy Code §727(a)(2)(A) a plaintiff must prove the following:
(1) that a transfer occurred;
(2) that the property transferred was property of the debtor;
(3) that the transfer was made within one year of the petition; and
(4) that at the time the transfer, the debtor possessed the requisite intent to hinder, delay or defraud a creditor.
HSBC Bank, USA v. Handel (In re Handel), 266 B.R. 585, 588 (Bankr. S.D.N.Y. 2001).
An important common law doctrine concerning Bankruptcy Code §727(a)(2)(A) is the continuing concealment doctrine because this doctrine extends the one-year statute of limitations period beyond one-year if the debtor has engaged in concealing assets. The Bankruptcy Appellate Panel for the Eighth Circuit has made the following statements concerning the continuing concealment doctrine:
Relevant to this case, “concealment is a continuing event and under the established doctrine of ‘continuing concealment,’ a concealment that originated outside the one year limitation period is within the reach of §727(a)(2)(A) if the concealment continued on into the year preceding the filing coupled with the requisite intent.” In re Craig, 195 B.R. at 449 (citing Rosen v. Bezner, 996 F.2d 1527 (3d Cir. 1993); In re Olivier, 819 F.2d 550 (5th Cir. 1987)). Asset concealment “is typically found to exist where the interest of the debtor in property is not apparent but where actual or beneficial enjoyment of that property continued.” In re Craig, 195 B.R. at 449 (citing as illustrative In re Towe, 147 B.R. 545 (Bankr. D. Mont. 1992).
Korte v. I.R.S. (In re Korte), 262 B.R. 464, 472 (Bankr. 8th Cir. 2001).
A continuing concealment objection to discharge requires that the plaintiff prove actual intent to hinder, delay or defraud on the part of the defendant. Korte, 262 B.R. at 472. Various Courts of Appeals have approved of the continuing concealment doctrine. E.g., Keeney v. Smith (In re Keeney), 227 F.3d 679, 683-85 (6th Cir. 2000); Rosen, 996 F.2d at 1531-32; Olivier, 819 F.2d at 554-55.
An important case involving the continuing concealment doctrine is Hughes v. Lawson (In re Lawson), 122 F.3d 1237 (9th Cir. 1997). There, on Jan. 7, 1991, a legal malpractice judgment was entered against the debtor. Also, on Jan. 7, 1991, the debtor recorded a $350,000 deed of trust in favor of her mother on her personal residence. This was in addition to a pre-existing $58,000 deed of trust on the debtor’s personal residence. Subsequently, the debtor borrowed a $175,000 from Elsam Company on her personal residence, and her mother agreed to subordinate her deed of trust to the Elsam Company. The judgment-creditor raised an objection to the debtor’s discharge. The bankruptcy court found that the subordination agreement reflected that the debtor retained a secret interest in the property because she was grant an interest in the property that was over-encumbered.
The U.S. Court of Appeals for the Ninth Circuit affirmed the denial of the debtor’s discharge because of the continuing concealment doctrine. The court stated:
The logic and rationale behind the “continuing concealment” doctrine as explained in Olivier is compelling; we therefore adopt the doctrine as the law of the Ninth Circuit. See also Rosen, 996 F.2d 1527 (3d Cir. 1993) (adopting doctrine of continuing concealment); In re Kauffman, 675 F.2d 127 (7th Cir. 1981) (same). This case is virtually indistinguishable from Olivier. In both cases, debtors transferred property to their mothers in order to avoid paying creditors’ judgments from state lawsuits. In both cases, the debtors retained an interest in the property. In Olivier, the interest was continuing to live in and maintain the house. In the instant case, the interest is continuing to live in the house and subordinating her mother’s deed of trust in order to obtain the $175,000 Elsam loan.
Id. at 1241.
Another pertinent case concerning the continuing concealment doctrine is Bradley v. Ingalls (In re Bradley), 501 F.3d 421, 434 (5th Cir. 2007). In Bradley, in the mid 1980s the FDIC obtained a $50,000,000.00 judgment against the debtor. On May 2, 2000, the debtor’s sister created a trust under which the debtor was the primary beneficiary (the trust). On July 19, 2002, the debtor filed for Chapter 7. The bankruptcy court found that the trust was a sham to protect the debtor’s assets from the FDIC and the IRS. The debtor was significantly involved in the management of the trust. Moreover, some of the major assets of the Trust had been previously owned by the debtor.
The U.S. Court of Appeals for the Fifth Circuit affirmed the denial of the debtor’s discharge. The court stated:
Concealment of property can be established by showing “a transfer of title coupled with the retention of the benefits of ownership.” Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550, 553 (5th Cir. 1987). In addition, this court has held that, under the continued concealment doctrine, “the concealment of an interest in an asset that continues, with the requisite intent, into the year before bankruptcy constitutes a form of concealment which occurs within the year before bankruptcy.” Id. at 555. Having reviewed the record, we agree that the bankruptcy court did not clearly err in finding that Bradley transferred assets to the Trust within one year of the bankruptcy petition and maintained and concealed his secret ownership interest in those assets with the intent to defraud his creditors. Thus, we agree that the bankruptcy court did not err in refusing to discharge Bradley from bankruptcy.
Id. at 434.
The continuing concealment doctrine has also been applied by New York bankruptcy courts in objections to discharge. E.g., Flushing Savings Bank, F.S.B. v. Vidro (In re Vidro), 497 B.R. 678 (Bankr. E.D.N.Y. 2013); Pereira v. Gardner (In re Gardner), 384 B.R. 654 (Bankr. S.D.N.Y. 2008); Congress Talcott v. Sicari (In re Sicari), 187 B.R. 861 (Bankr. S.D.N.Y. 1994).
In Flushing Savings Bank, F.S.B. v. Vidro (In re Vidro), 497 B.R. 678 (Bankr. E.D.N.Y. 2013), pursuant to Bankruptcy Code §727(a)(2)(A), Flushing Savings Bank and Trustee Kenneth Silverman prosecuted objections to discharge based upon the doctrine of continuing concealment. Almost two years prior to the filing of his bankruptcy petition, the debtor had transferred his funds into his non-debtor spouse’s bank account, and he had access to this bank account through a power of attorney. Approximately 21 months prior to the filing of his bankruptcy petition, the debtor and his non-debtor spouse also transferred their interest in the marital residence to his non-debtor spouse and step-brother as tenants-in-common. The debtor continued to reside in the residence, and he continued to take tax deductions for mortgage interest and real property taxes. Title to the residence was transferred back to the debtor two days prior to the petition date.
Judge Dorothy Eisenberg held that the continuous concealment doctrine was applicable. The court made the following observations concerning the continuous concealment doctrine:
A continuing concealment typically involves “(1) the transfer of property by a debtor who still retains a beneficial or equitable interest in the property; and (2) the debtor’s continuing to treat the property in the same manner after the transfer as before the transfer.”
Id. at 687.
Judge Eisenberg was satisfied that continuing concealment was applicable to the banking transactions because the debtor had closed his bank accounts and his expenses were paid out of his non-debtor spouse’s account to which he had access. The court was also persuaded that the continuing concealment doctrine also applied to the marital residence because the debtor continued to reside at the marital residence and continued to pay the mortgage.
Another important aspect of Vidro, is that although the property had been reconveyed to the debtor two days prior to the filing of the petition, the court ruled that Bankruptcy Code §727(a)(2)(A) was still applicable. The court followed an Eleventh Circuit decision, Davis v. Davis (In re Davis), 911 F.2d 560, 562 (11th Cir. 1990), and held that under strict statutory interpretation that the reconveyance of the marital residence was inconsequential. The debtor’s bad faith and fraudulent conduct warranted the application of Bankruptcy Code §727(a)(2)(A).