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Court Denies Discharge in Personal Bankruptcy Case, Finding that Transfer of Cash from Bank Account to Safe Deposit Box Had Fraudulent Intent

Caja_de_las_Letras_(Instituto_Cervantes,_Madrid)_03.jpgA debtor in a Chapter 7 personal bankruptcy case argued that the court should discharge his debts over the objection of a creditor, which claimed that he transferred money before filing bankruptcy with fraudulent intent. The debtor claimed that the transfer, which involved withdrawing cash from a personal checking account and placing it in a safe deposit box, was necessary because of allegedly unlawful collection activities by the creditor. The bankruptcy court denied the discharge, and the Bankruptcy Appellate Panel (BAP) affirmed the ruling. In re Haag (“Haag 1“), Nos. AZ-11-1661, AZ-11-1662, AZ-11-1663, memorandum (BAP 9th Cir., Sep. 27, 2012) (PDF file). The BAP held that the record supported a finding of fraudulent intent, whatever the debtor’s good intentions might have been. The Ninth Circuit affirmed the BAP and the bankruptcy court. In re Haag (“Haag 2“), No. 12-60074, memorandum (9th Cir., Aug. 20, 2014).

According to the BAP’s ruling, the debtor was the sole shareholder of a Michigan corporation involved in wastewater treatment plants construction. When the housing market collapsed in 2007, the corporation owed a substantial sum to Northwestern Bank (NWB) through a line of credit, with the debtor as guarantor. The debtor eventually shut down the business and surrendered all of its assets to NWB. He even surrendered his residence in late 2008 and moved to Arizona. In July 2009, NWB obtained a judgment in a Michigan court against the debtor, based on his guaranty, in the amount of $1.7 million. It obtained a domesticated judgment from an Arizona court in February 2010.

In early 2009, the debtor received almost $250,000 in tax refunds from the federal government and the state of Michigan. He deposited these funds in his personal account at the Bank of Tucson. A few weeks before NWB obtained the Michigan judgment, the debtor withdrew $120,000 in cash and placed it in a safe deposit box, which he held jointly with his wife, at Wachovia Bank. He filed a petition for Chapter 7 bankruptcy shortly after NWB domesticated its judgment, and he claimed that by then the money in the safe deposit box was gone, mainly spent on personal expenses.

NWB filed an adversary proceeding objecting to a discharge, claiming that the debtor had transferred money less than a year before filing bankruptcy “with intent to hinder, delay, or defraud a creditor.” 11 U.S.C. § 727(a)(2)(A). The debtor denied that this was a “transfer” within the meaning of bankruptcy law, and he claimed that he needed to withdraw the money because of privacy violations and other improper acts by NWB in the course of its debt collection efforts.

After the bankruptcy court denied a discharge under § 727, the BAP affirmed. It held that the withdrawal was a “transfer” under the Bankruptcy Code, Haag 1 at 12, 11 U.S.C. § 101(54), and that the debtor had failed to cite any legal authority for what amounted to a “necessity” defense to § 727. The Ninth Circuit also affirmed, finding that the debtor’s “alleged good intentions” could not overcome the evidence of fraudulent intent. Haag 2 at 5.

If you or your business is struggling with debt, a skilled and experienced business and personal bankruptcy attorney can help you understand your rights and advocate for your interests. James G. Schwartz has represented businesses and individuals in the Bay Area since 1976. Contact us today online or at (925) 463-1073 to schedule a free and confidential consultation.

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Photo credit: Luis García [GFDL or CC-BY-SA-3.0-es], via Wikimedia Commons.