In re: Joseph Ellison
CC-16-1328-PaTaKu
| 9th Cir. BAP | Sep 8, 2017Background
- Debtor Joseph Ellison (former JPMorgan financial advisor) lost a FINRA arbitration to JPM and owed roughly $789,000; debtor filed Chapter 7 after the award and related litigation commenced.
- In the year before filing, Debtor refinanced his home, causing about $249,000 in loan proceeds to be deposited into his bank account, then made multiple transfers: payments to friends, transfers to his wife’s law-office account, prepayments to mortgage lenders, and transfers to a corporation he owned.
- Debtor testified he met an asset-protection attorney, feared collection by his former counsel (Shustak) and JPM, and intended to protect his family and prefer certain creditors.
- JPM filed an adversary complaint under 11 U.S.C. § 727(a)(2)(A) seeking denial of discharge for transfers made within one year of the petition with intent to hinder, delay, or defraud creditors.
- The bankruptcy court found many of the prepetition transactions were transfers and, considering the totality of the circumstances (timing, amounts, admissions, meetings with an asset-protection lawyer, depletion of nonexempt assets), concluded Debtor had the requisite intent and denied discharge; the BAP affirmed.
Issues
| Issue | Plaintiff's Argument (JPM) | Defendant's Argument (Ellison) | Held |
|---|---|---|---|
| Whether prepetition payments to creditors (e.g., mortgage prepayments) may be considered evidence of intent to hinder/delay creditors under § 727(a)(2)(A) | Such payments, together with other facts, are circumstantial evidence of intent to hinder or delay collection | Hultman means mere payment to a creditor cannot be used to deny discharge; such payments are benign absent reliance on bad faith | Payments can be considered as evidence of intent when accompanied by other circumstantial/direct evidence; no legal error in considering them |
| Whether transfers of funds from Debtor’s nonexempt accounts to wife’s exempt (law-office) account can be probative of intent to hinder/delay creditors | Converting nonexempt to exempt assets shortly before filing, especially with other evidence, indicates intent to hinder/delay | Stern prohibits inferring fraudulent intent solely from conversion timing; transfers between community parties are ineffective to shield assets because creditors may reach community property | Conversions may be probative when accompanied by additional evidence of illicit intent; court correctly considered transfers to wife’s account as part of totality |
| Whether the listed transactions constituted "transfers" under § 101(54) for § 727(a)(2)(A) purposes | The refinancing proceeds, prepayments, and account transfers are dispositions of property within one year | Debtor contested some characterizations (waived on appeal) | Bankruptcy court’s transfer findings were upheld (challenge waived where not timely raised) |
| Whether debtor had the requisite subjective intent to hinder/delay creditors | Circumstantial badges of fraud (timing to FINRA award, meeting with asset-protection attorney, depletion of nonexempt assets, admissions preferring mortgage lenders) establish intent | Debtor claimed legitimate motives (survive arbitration, protect family, reliance on advice, community property limits collection) | Credibility and totality-of-circumstances support finding of intent; denial of discharge affirmed |
Key Cases Cited
- Hultman v. Tevis, 82 F.2d 940 (9th Cir. 1936) (payments to creditors not inherently grounds for denial of discharge when made in good faith/relying on counsel)
- Gill v. Stern, 345 F.3d 1036 (9th Cir. 2003) (timing-based inference of fraudulent conversion of exempt assets is insufficient alone)
- Emmett Valley Assocs. v. Woodfield, 978 F.2d 516 (9th Cir. 1992) (intent may be inferred from surrounding circumstances)
- Retz v. Samson (In re Retz), 606 F.3d 1189 (9th Cir. 2010) (deference to bankruptcy court credibility findings; standards for clear error)
- First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339 (9th Cir. 1986) (intent to hinder or delay warrants denial of discharge notwithstanding other motives)
- Hughes v. Lawson (In re Lawson), 122 F.3d 1237 (9th Cir. 1997) (elements and burden for § 727(a)(2) denial of discharge)