Bankruptcy History Creates Inference of Intent to Hinder, Delay

Posted by NCBRC - November 18, 2016

Where the debtor’s historical use of bankruptcy filings suggested improper purpose to hinder and delay creditors, the trustee’s adversary complaint stated a claim for violation of section 727(a)(2)(A). Rupp v. Pearson (In re Pearson), No. 15-4191 (10th Cir. Nov. 7, 2016).

Ms. Pearson filed a chapter 13 bankruptcy petition and had a plan confirmed in which she agreed to contribute her expected tax refund to the extent it exceeded $2,000. However, she kept the entire $4,829 refund and spent it on non-exempt personal items. As a result, the bankruptcy court dismissed her chapter 13 case. Two week later, she filed the current chapter 7 bankruptcy petition. The trustee filed an adversary complaint seeking to have Ms. Pearson’s discharge denied due to her misappropriation of the tax refund with intent to defraud creditors, in violation of section 727(a)(2)(A).

For a section 727(a)(2)(A) complaint, the trustee must allege that the debtor transferred property of the estate within one year prior to filing bankruptcy with the intent to hinder, delay, or defraud a creditor. The bankruptcy court found that the trustee had failed to allege facts to support the element of intent and it dismissed the complaint. The district court affirmed.

The Tenth Circuit began its analysis by turning a jaundiced eye to Ms. Pearson’s nine, mostly unsuccessful, bankruptcies that she (and her husband in many cases) filed between 1993 and the current case. In 1997, after she had filed two unsuccessful chapter 13 cases, she filed a chapter 7 petition and received a discharge. Two dismissed and one pending chapter 13 cases later, Ms. Pearson filed another chapter 7. This second case was filed eight years after the first chapter 7 as required by law. Ms. Pearson received a discharge. The current chapter 7 was filed two weeks after the dismissal of her chapter 13, and immediately upon the passage of the eight year waiting period.

The court inferred from this history that Ms. Pearson was a system-gamer: that she routinely filed chapter 13 cases simply to forestall collection efforts and with no actual intention of complying with the terms of her own plans. She then filed for chapter 7 relief as soon as the law allowed. “In our view, the [trustee’s] complaint states a plausible claim that Ms. Pearson’s failure to turn over to the Chapter 13 bankruptcy estate the required portion of the tax refund was part of a scheme to hinder and delay creditors.”

The court rejected the reasoning of the lower courts in finding that the complaint failed to state a claim for relief due to an absence of “fraud markers” and the fact that the complaint failed to negate the possibility of innocent uses of the tax refund. Rather, the circuit court noted that cases under 727(a)(2)(A) are fact-specific and not subject to rigid formulas. Additionally, even if Ms. Pearson used the tax refund for legitimate expenses, she might still have filed her chapter 13 case for the improper purpose of hindering and delaying her creditors. The possibility of exigent circumstances justifying Ms. Pearson’s actions could be raised in the course of the 727(a)(2)(A) action but should not have led to dismissal of that claim.


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