Brian K. Farley v. Margaret Kempff, 847 F.3d 444

Margaret Kempff filed Chapter 7 while foreclosure on her former marital home (secured by first, second, and Farley’s third-priority mortgage) was pending; Farley had lent Bart $400,000 secured by a mortgage with Margaret’s forged signature.
Bart embezzled ≈$1.2M from his employer, used Farley’s loan to replenish funds, was later convicted and disbarred; foreclosure proceeds did not satisfy senior liens and nonpriority lienholders (including Farley) received nothing.
Farley brought an adversary complaint seeking denial of Margaret’s Chapter 7 discharge under 11 U.S.C. § 727(a)(2) (postpetition fraudulent transfer) and § 727(a)(4) (false oaths/filings).
The bankruptcy judge held a three-day bench trial, credited Margaret’s testimony that (a) a $7,200 tax payment made by her accountant to the Illinois Department of Revenue postpetition occurred without her knowledge, and (b) multiple inaccuracies in her schedules were innocent mistakes or attorney errors.
The bankruptcy court found no fraudulent intent and denied Farley’s claims; the district court affirmed, and the Seventh Circuit likewise affirmed.

Issue	Farley’s Argument	Margaret’s Argument	Held
Whether a postpetition transfer (payment of tax levy) bars discharge under § 727(a)(2)	Transfer to IL Dept. of Revenue was a postpetition transfer intended to hinder/delay/defraud creditors	Transfer occurred without Margaret’s knowledge or intent; her attorney notified parties of the stay	Affirmed: no § 727(a)(2) denial because judge credited lack of actual fraudulent intent
Whether false statements in schedules warrant denial under § 727(a)(4)	Multiple misstatements (divorce claim omitted/valuations/creditor listings/income/payment amounts) show knowing, fraudulent intent or reckless disregard	Errors were innocent, due to misunderstanding, typographical error, or counsel incompetence; Margaret lacked intent to deceive	Affirmed: judge’s credibility finding (no fraudulent intent) binding; discharge not denied
Whether creditor must show actual harm for § 727(a)(2)	Argues harm or effect on creditor is relevant	Statute requires proof of debtor’s intent; actual creditor harm not required	Court: Harm not required, but actual intent is; Farley failed to show intent
Whether Margaret’s testimony about attorney advice was an improper unpled "advice of counsel" affirmative defense	Contended testimony functioned as an unpleaded affirmative defense under Rule 8(c)	Testimony was admissible evidence rebutting fraudulent intent, not an affirmative defense	Affirmed: Rule 8(c) inapplicable; evidence admissible to negate intent

Stamat v. Neary, 635 F.3d 974 (7th Cir.) (standards for § 727(a)(4) false-oath claims and intent)
Grogan v. Garner, 498 U.S. 279 (Sup. Ct.) (discharge reserved for the honest but unfortunate debtor; burden for denial)
In re Marcus-Rehtmeyer, 784 F.3d 430 (7th Cir.) (review standards; deference to credibility findings; disclosure obligations)
Kovacs v. United States, 614 F.3d 666 (7th Cir.) (clear-error standard for factual findings)
In re Krehl, 86 F.3d 737 (7th Cir.) ( § 727 standards and credibility deference)
Village of San Jose v. McWilliams, 284 F.3d 785 (7th Cir.) (actual intent to defraud required under § 727(a)(2))
In re Katsman, 771 F.3d 1048 (7th Cir.) (intent to deceive is the operative standard for § 727)
In re Chavin, 150 F.3d 726 (7th Cir.) (upholding denial where debtor fraudulently omitted creditors)
In re Yonikus, 974 F.2d 901 (7th Cir.) (false statements in schedules can support denial)
In re Gotwald, 488 B.R. 854 (Bankr. E.D. Pa.) (debtor testimony about counsel advice may negate fraudulent intent)