In re: Kenneth Huff and Rosemarie Huff ( 2014 )

FILED
MAR 10 2014
1
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. NV-13-1263-JuKiTa
)
6 KENNETH HUFF and ROSEMARIE ) Bk. No. 11-53159-BTB
HUFF, )
7 ) Adv. No. 12-05001-BTB
Debtors. )
8 ______________________________)
)
9 A & H INSURANCE, INC., )
)
10 Appellant, )
)
11 v. ) M E M O R A N D U M*
)
12 KENNETH HUFF; ROSEMARIE HUFF, )
)
13 Appellees. )
______________________________)
14
Argued and Submitted on January 24, 2014
15 at Las Vegas, Nevada
16 Filed - March 10, 2014
17 Appeal from the United States Bankruptcy Court
for the District of Nevada
18
Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding
19 _________________________
20 Appearances: Jeffrey L. Hartmann, Esq., of Hartman & Hartman,
argued for appellant A & H Insurance, Inc.;
21 Kevin Darby, Esq., of The Darby Law Practice,
argued for appellees, Kenneth and Rosemarie Huff.
22 _________________________
23 Before: JURY, KIRSCHER, and TAYLOR, Bankruptcy Judges.
24
25
26 *
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
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1 Judgment creditor A & H Insurance, Inc. (Appellant) filed
2 an adversary proceeding against chapter 111 debtors, Kenneth and
3 Rosemarie Huff (collectively, Debtors), seeking denial of their
4 discharge under § 727(a)(2)(A). On cross-motions for summary
5 judgment, the bankruptcy court granted Debtors’ motion, denied
6 Appellant’s, and entered an order consistent with its ruling.
7 From this order, Appellant filed a timely appeal.
8 Because we conclude that Appellant’s § 727 claim against
9 Debtors was barred as a matter of law, we agree with the result
10 — albeit on other grounds — but VACATE the order based on the
11 bankruptcy court’s erroneous application of the law and REMAND
12 with instructions to dismiss the adversary complaint.
13 I. FACTS
14 A. Prepetition Facts
15 Appellant filed a lawsuit against Mrs. Huff2 in the Second
16 Judicial District Court in Washoe County, Nevada, alleging that
17 she breached an employment agreement.
18 On April 15, 2010, Mr. Huff received $75,047.30 from an
19 investment that he had made prior to his marriage to Mrs. Huff
20 and four days later he deposited it into Debtors’ checking
21 account. In March 2011, Mr. Huff withdrew $40,000 from Debtors’
22 checking account and on the same day deposited the funds into a
23 joint account he had with his son (Joint Account). On July 22,
24
1
Unless otherwise indicated, all chapter and section
25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
26 “Rule” references are to the Federal Rules of Bankruptcy
Procedure.
27
2
Appellant also named Mt. Rose Insurance, LLC as a
28 defendant, but did not name Mr. Huff.
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1 2011, Mr. Huff withdrew the $40,000 from the Joint Account and
2 on the same day deposited the funds into Debtors’ checking
3 account. Debtors then purchased an annuity titled in the names
4 of Mr. and Mrs. Huff with the funds.
5 After these transfers, on August 9, 2011, following a jury
6 trial, the state court entered a Corrected Final Judgment on
7 Jury Award (Judgment) in Appellant’s favor and against Mrs. Huff
8 in the amount of $303,772.05.3
9 B. Postpetition Facts
10 On October 7, 2011, Debtors filed a joint chapter 11
11 petition. In Schedule B, they listed the annuity in the amount
12 of $40,000 and in Schedule C they claimed the annuity exempt.
13 On January 9, 2012, Appellant filed an adversary proceeding
14 against Debtors seeking denial of their discharge under
15 § 727(a)(2)(A) based on the transfer of the $40,000 from
16 Debtors’ Checking Account into the Joint Account.
17 On February 6, 2012, Debtors answered the complaint,
18 asserting general denials and pleading no affirmative defenses.
19 On March 8, 2012, Debtors filed their disclosure statement
20 and plan. In their disclosure statement, Debtors described the
21 adversary proceeding filed by Appellant and stated that although
22 they believed they would prevail, if they did not, there would
23 be no discharge entered. Debtors’ plan was a reorganization
24 plan with Debtors contributing their disposable income to fund
25 the plan. Debtors classified Appellant as an unsecured creditor
26
3
27 This amount included $182,821.55 in compensatory damages,
$10,677.80 in prejudgment interest through June 9, 2011, and
28 $109,294.40 in attorneys fees and costs.
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1 in the plan. Finally, Debtors’ plan stated that they would
2 receive their discharge under § 1141(d)(5).
3 On March 15, 2012, Debtors filed a motion for summary
4 judgment in the adversary proceeding. After Appellant opposed
5 Debtors’ MSJ on the grounds that it was premature and that
6 additional discovery was needed, the parties stipulated to
7 continue the hearing so that they could conduct discovery and
8 take depositions. By stipulation, the hearing was continued
9 many times, and finally to December 20, 2012, so that Appellant
10 could file its cross MSJ.
11 Meanwhile, on September 19, 2012, the bankruptcy court
12 approved Debtors’ disclosure statement. On October 5, 2012,
13 Appellant objected to confirmation of Debtors’ plan on several
14 grounds. In its objection, Appellant stated: “The Debtors
15 acknowledge that if the adversary proceeding is successful by A
16 and H as plaintiff, there will be no discharge.”
17 On November 20, 2012, Appellant filed its cross MSJ in the
18 adversary proceeding asserting the following undisputed facts:
19 Debtors had a minor son named Ryan; Mr. Huff and Ryan had the
20 Joint Account at Umpqua Bank; Mr. Huff always maintained
21 possession, dominion and control of the Joint Account; Ryan did
22 not have access to the account and did not withdraw funds from
23 the Joint Account; on March 24, 2011, Mr. Huff transferred
24 $40,000 to the Joint Account; on July 22, 2011, Mr. Huff
25 transferred the $40,000 from the Joint Account back to Debtors’
26 Checking Account; and on August 9, 2011, Appellant obtained its
27 Judgment against Mrs. Huff.
28 Based on these undisputed facts, Debtors maintained that
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1 they were entitled to judgment as a matter of law. First, they
2 asserted there was no “transfer” of property within the meaning
3 of §§ 101(54)(D) and 727(a)(2)(A) because Mr. Huff never
4 relinquished or parted with the funds, having had possession and
5 control over the Joint Account at all times. Second, Debtors
6 argued that even if there was a transfer, they were entitled to
7 the protection of the disclose-and-recover exception defense set
8 forth in First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d
9 1339 (9th Cir. 1986) because Mr. Huff returned the funds to
10 Debtors’ Checking Account before they filed their petition.
11 See In re Adeeb, 787 F.2d at 1334 (“transferred” under
12 § 727(a)(2)(A) means “transferred and remained transferred.”).
13 In November 2012, Appellant filed its cross MSJ, a
14 statement of undisputed facts in support, and the declaration of
15 Stephanie Ittner.4 Appellant argued that a “transfer” occurred
16 under the holding in Bernard v. Sheaffer (In re Bernard),
17 96 F.3d 1279 (9th Cir. 1996) when Mr. Huff withdrew the $40,000
18 from Debtors’ Checking Account and deposited it into the Joint
19 Account. Appellant also asserted that when the funds were
20 transferred to the Joint Account, Debtors relinquished control
21 and parted ways with the $40,000. According to Appellant,
22 Mr. Huff was on the Joint Account with his son Ryan because the
23 bank’s policy mandated that a minor could not be the only signor
24 on the account. Appellant also pointed out that Mr. Huff
25 testified on May 10, 2012, in a deposition that the funds in
26
4
27 Stephanie Ittner was employed by Hartman & Hartman,
counsel for Appellant, and transcribed a portion of the recorded
28 § 341(a) meeting of creditors.
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1 Ryan’s account were “just birthday gifts, could have been
2 graduation money. It’s basically Ryan’s. It was Ryan’s savings
3 account.” Based on these facts, Appellant argued that the funds
4 in the Joint Account belonged to Ryan and Mr. Huff held nothing
5 but bare legal title - and then, only by virtue of being the
6 required parental signatory on the account. Finally, Appellant
7 argued that Mr. Huff’s testimony at the creditors’ meeting
8 demonstrated that Debtors had the subjective intent to hinder
9 and delay their creditors.
10 On December 20, 2012, the bankruptcy court heard the
11 parties’ cross motions for summary judgment and requested
12 further briefing from the parties on issues not relevant to this
13 appeal.
14 On February 7, 2013, the bankruptcy court held a second
15 hearing on the parties’ cross motions for summary judgment and
16 issued a tentative ruling granting Debtors’ MSJ and denying
17 Appellant’s cross motion.
18 The next day, the bankruptcy court issued its ruling. The
19 bankruptcy court determined that this case was somewhere in
20 between the facts of Adeeb and those in Bernard. The court
21 found that unlike Bernard, Debtors did not attempt to lie and
22 conceal the movement of funds and did not squander the funds,
23 but rather moved the funds back into Debtors’ Checking Account
24 prior to the entry of the Judgment against Mrs. Huff and their
25 bankruptcy filing. The court further found that Debtors
26 disclosed the annuity by listing it in their Schedules.
27 The bankruptcy court also noted that the funds were moved
28 in and out of Debtors’ Checking Account and the Joint Account,
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1 an account that Mr. Huff controlled as evidenced by the fact
2 that Mr. Huff was able to move the funds between the two
3 accounts without the assistance or signature of his son.
4 Because Mr. Huff had control and possession of the funds at all
5 times, the court concluded that as a matter of law there was no
6 “transfer” because the definition of a transfer under
7 § 101(54)(D) requires the “disposing of or parting with
8 property.” The bankruptcy court further found that if there was
9 a transfer, Debtors were entitled to the protection of the
10 disclose-and-recover exception defense under Adeeb.
11 Acknowledging that the case was a close one, the court
12 recognized that § 727 should be liberally construed in Debtors’
13 favor and strictly against Appellant. In the end, the
14 bankruptcy court adopted its original decision, granting
15 Debtors’ MSJ and denying Appellant’s cross MSJ.
16 On April 11, 2013, the bankruptcy court confirmed Debtors’
17 plan. The confirmed plan contains no provision whereby Debtors
18 agreed that there would be no discharge in their case if
19 Appellant prevailed in the § 727 adversary proceeding.
20 Moreover, the plan is not a liquidating plan as it contemplates
21 that Debtors will continue to rent some of their properties and
22 contribute their disposable income to the plan for a five-year
23 term. The order confirming the plan has become final.
24 On May 17, 2013, the bankruptcy court entered the order
25 granting Debtors’ MSJ and denying Appellant’s cross motion in
26 the adversary proceeding. Appellant timely appealed the
27
28
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1 bankruptcy court’s order.5
2 II. JURISDICTION
3 The bankruptcy court had jurisdiction over this proceeding
4 under 28 U.S.C. §§ 1334 and 157(b)(2)(J). We have jurisdiction
5 under 28 U.S.C. § 158.
6 III. ISSUE
7 The ultimate issue is this appeal is whether the bankruptcy
8 court erred in granting Debtors’ MSJ and denying Appellant’s
9 MSJ. Our resolution of this issue turns upon the sub-issue of
10 whether Appellant’s § 727 claim against chapter 11 Debtors was
11 barred as a matter of law.
12 IV. STANDARD OF REVIEW
13 We review de novo a bankruptcy court’s ruling on
14 cross-motions for summary judgment. Trunk v. City of San Diego,
15 629 F.3d 1099, 1105 (9th Cir. 2011).
16
17
18
19
5
20 The order granting Debtors’ MSJ and denying Appellant’s
cross motion was a final order because it disposed of the sole
21 claim asserted in the adversary complaint. Under Fed. R. Civ.
P. 56, generally a separate document embodying a final judgment
22
that is distinct from the order granting a motion for summary
23 judgment should be entered. See Rule 9021. As of June 4, 2013,
no separate judgment had been entered on the bankruptcy court’s
24 docket. As a result, the clerk sent notice to the parties
regarding the separate judgment requirement. On June 12, 2013,
25 Appellant submitted a “judgment” that the bankruptcy court
26 signed, but the judgment was simply a grant of Debtors’ MSJ and
denial of Appellant’s cross motion. Therefore, no separate
27 judgment has been entered and the separate document requirement
has been waived. Bankers Trust Co. v. Mallis, 435 U.S. 381, 388
28 (1978).
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1 V. DISCUSSION
2 A. Appellant’s § 727 Claim Against Chapter 11 Debtors Was
Barred As A Matter of Law
3
4 Through its § 727 claims, Appellant seeks to deny Debtors
5 their entire discharge. Section 727(a) has no direct
6 application to this bankruptcy case because Debtors filed their
7 case under chapter 11. Section 727(a) appears in subchapter II
8 of chapter 7 and as such applies “only in a case under such
9 chapter.” § 103(b). Section 727(a) therefore provides no
10 basis, standing alone, to deny a chapter 11 debtor’s discharge.
11 Torrington Livestock Cattle Co. v. Berg (In re Berg), 423 B.R.
12 671, 677 (10th Cir. BAP 2010).
13 However, § 727(a) applies in chapter 11 cases under the
14 limited circumstances described in section 1141(d). The
15 chapter 11 discharge is triggered by entry of an order
16 confirming the plan (§ 1141(d)(1)) subject to § 1141(d)(5) when
17 the debtor is an individual.6 Section 1141(d)(1)(A) declares
18 that the confirmation of a plan discharges a chapter 11 debtor
19 from all debts arising before confirmation. Section 1141(d)(3)
20 then creates an exception to this broad discharge, stating:
21 The confirmation of a plan does not discharge a debtor
if—
22
(A) The plan provides for the liquidation of all or
23 substantially all of the property of the estate;
24 (B) the debtor does not engage in business after
consummation of the plan; and
25
26 6
Under § 1141(d)(5)(A), in an individual’s case,
27 confirmation of the plan does not discharge any debt provided for
in the plan until the court grants a discharge on completion of
28 all payments under the plan.
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1 (C) the debtor would be denied a discharge under
section 727(a) of this title if the case were a case
2 under chapter 7 of this title.
3 The three subparts of § 1141(d)(3) are written in the
4 conjunctive, meaning that an individual chapter 11 debtor will
5 only be denied a discharge if, in addition to the existence of
6 grounds for denial of discharge under § 727(a), the confirmed
7 plan is a liquidating one and the debtor does not engage in
8 business after the plan has been consummated. In re Williams,
9 227 B.R. 589, 593 (D.R.I. 1998); In re Duncan, 2012 WL 5462917,
10 at *3 (Bankr. D. Ariz. 2012) (“If any one of the three subparts
11 cannot be shown, an individual creditor may not proceed solely
12 on the § 1141(d)(3)(C) prong (the § 727 feature of the
13 statute).”).
14 Here, Debtors’ confirmed plan is not a liquidating plan.
15 Although Debtors’ plan calls for some property to be turned over
16 to secured creditors, Debtors will continue to rent some of
17 their properties and also provide payment to creditors with
18 their disposable income over a five-year term. Therefore, since
19 the first element under § 1141(d)(3)(A) was not met, Appellant’s
20 § 727 claim against Debtors was barred as a matter of law.
21 Accordingly, the matter should have been dismissed.
22 B. The Bankruptcy Court’s Reasons For Granting Debtors’ MSJ
Were In Error
23
24 Although the bankruptcy court reached the right result, it
25 did so for the wrong reasons. To prevail under § 727(a)(2)(A),
26 a plaintiff must show, by a preponderance of the evidence:
27 (1) a disposition of property, such as transfer or concealment;
28 (2) the property belonged to the debtor; (3) the transfer
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1 occurred within one year of the bankruptcy filing; and (4) the
2 debtor executed the transfer with the intent to hinder, delay or
3 defraud a creditor. Aubrey v. Thomas (In re Aubrey), 111 B.R.
4 268, 273 (9th Cir. BAP 1990); Grogan v. Garner, 498 U.S. 279,
5 284 (1991); see Rule 4005. Here, we are concerned only with the
6 first element — whether there was a transfer.
7 Historically, the term “transfer” has been granted a broad
8 interpretation. See Pirie v. Chi. Title & Trust Co., 182 U.S.
9 438, 444 (1901) (stating that the term “transfer” should be
10 interpreted in its most comprehensive sense). This definition
11 has endured over time. More recently, in Barnhill v. Johnson,
12 503 U.S. 393, 397 (1992), the United States Supreme Court
13 stated: “We acknowledge that § 101(54) adopts an expansive
14 definition of transfer. . . .” The Bankruptcy Code itself
15 defines “transfer” in § 101(54)(D) expansively: “each mode,
16 direct or indirect, absolute or conditional, voluntary or
17 involuntary, of disposing of or parting with—(i) property; or
18 (ii) an interest in property.” The broad definition of
19 “transfer” applies in the context of the § 727. See
20 In re Bernard, 96 F.3d at 1282.
21 In this case, the bankruptcy court quoted the definition of
22 a “transfer” under § 101(54)(D), but emphasized the phrase
23 “disposing of or parting with”, and focused on the fact that
24 Mr. Huff had possession and control at all times over the funds
25 after they were deposited in the Joint Account.7 Even if
26
27
7
At no time did the bankruptcy court analyze the “transfer”
28 with respect to Mrs. Huff.
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1 Appellant’s § 727 claim against Debtors was not barred as a
2 matter of law, the bankruptcy court’s analysis was misguided and
3 incorrect as a matter of law.
4 In deciding whether there was a transfer when it comes to
5 withdrawals or deposits into bank accounts, we do not write on a
6 clean slate in construing the phrase “disposing of or parting
7 with.” In Bernard, the Ninth Circuit rejected the debtors’
8 argument that their withdrawals from a bank account were not
9 transfers when the funds remained in their possession for two
10 reasons. First, citing Adeeb, the Ninth Circuit reiterated that
11 depletion of assets (or injury to creditors) was not a
12 prerequisite to a denial of discharge under § 727(a)(2)(A). Id.
13 Second, quoting the legislative history of the statutory
14 definition of a transfer, the court emphasized that the
15 definition of transfer was extremely broad, “[a] deposit in a
16 bank account or similar account is a transfer.” Id. (emphasis
17 in original) (quoting S.Rep. No. 989, 95th Cong., 2d Sess. 27
18 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5813).
19 On this latter point, the Ninth Circuit reasoned that “if
20 depositing money into a bank account is a transfer, then later
21 withdrawing money from that account should be a transfer, too —
22 it ought to be a two-way street.” To support its conclusion,
23 the court explained that under California law, “[a]s between the
24 bank and the depositor such money becomes property of the bank
25 and the bank becomes the debtor of the depositor for the amount
26 deposited.” Id. Based upon this relationship between the
27 depositor and bank, the court found that “[i]nstead of owning
28 money sitting in their accounts, the Bernards owned claims
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1 against their bank. When they withdrew from their accounts,
2 they exchanged debt for money. Thus, when the Bernards made
3 their withdrawals they parted with property, satisfying the
4 Code’s definition of transfer.” Id. at 1282-83. In the end,
5 the Ninth Circuit determined that the debtors’ mere act of
6 removing the money from their bank account to hinder their
7 creditors warranted denial of their discharge.
8 In light of the Bankruptcy Code’s expansive definition of
9 “transfer,” which literally encompasses “every” mode of parting
10 with an interest in property, and the express holding in
11 Bernard, Mr. Huff’s withdrawal of the $40,000 from Debtors’
12 Checking Account was a “parting with” property, as was
13 Mr. Huff’s deposit of the funds into the Joint Account. Under
14 the holding in Bernard, there is no ambiguity around the
15 definition of a transfer; withdrawals and deposits into bank
16 accounts clearly qualify.
17 Further, the rationale behind the Ninth Circuit’s holding
18 in Bernard is supportable under Nevada law. Like California,
19 under Nevada law:
20 The relation between a bank and its depositors is that
of debtor and creditor. There can be no doubt of this
21 proposition. Money deposited in a bank becomes part
of its general assets, and the bank simply becomes a
22 debtor of the depositor. The absolute title to the
money by the mere act of deposit passes to the bank.
23
24 McStay Supply Co. v. John S. Cook & Co., 132 P. 545, 548 (Nev.
25 1912).8 Therefore, by withdrawing the $40,000 from Debtors’
26
8
27 This position is the majority position in the United
States. See, e.g., N.Y. Cnty. Nat’l Bank v. Massey, 192 U.S.
28 (continued...)
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1 Checking Account, Debtors exchanged debt for money and then by
2 depositing the money into the Joint Account, exchanged money for
3 debt. These transactions resulted in a “parting with” property
4 under the holding in Bernard as a matter of law. Finally, as
5 stated in Bernard, the fact that the funds remained in the
6 possession, custody or control of Mr. Huff does not change the
7 result because depletion of assets is not a prerequisite to
8 denial of a bankruptcy discharge under the holding in Adeeb. In
9 sum, the bankruptcy court erred in concluding that no transfer
10 occurred.
11 Likewise, the bankruptcy court erred in deciding that the
12 disclose-and-recover defense set forth in Adeeb applied under
13 these facts. In Adeeb, the Ninth Circuit interpreted the term
14 “transferred” under § 727(a)(2)(A) to mean “transferred and
15 remained transferred.” 787 F.2d at 1344. The court found that
16 its interpretation of the word “transferred” in § 727(a)(2)(A)
17 was “most consistent” with the statute’s legislative purpose.
18 The court noted that § 727(a)(2)(A)’s language demonstrated that
19 “Congress intended to deny discharge to debtors who take actions
20 designed to keep their assets from their creditors either by
21 hiding the assets until after they obtain their discharge in
22 bankruptcy or by destroying them.” Id. at 1345. Based on this
23 observation, the Ninth Circuit concluded that “[t]he only type
24
25 8
(...continued)
26 138, 147–49 (1904); United States v. Banco Cafetero Panama,
797 F.2d 1154, 1158 (2d Cir. 1986). See also Restatement
27 (Second) of Trusts § 12, cmt. l (1959) (“A general deposit of
money in a commercial bank does not create a trust, but a
28 relation of debtor and creditor. . . .”).
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1 of transfer that has the effect of keeping assets from creditors
2 is a transfer in which the property remains transferred at the
3 time the bankruptcy petition is filed.” Id.
4 Next, the court found its interpretation supported by the
5 purposes of the Bankruptcy Code: the equitable distribution of
6 the estate among creditors and giving the honest debtor a fresh
7 start. Id. By reading “transferred” in § 727(a)(2)(A) to mean
8 “transferred and remained transferred,” the Ninth Circuit
9 reasoned that honest debtors would be encouraged to recover
10 property they have transferred during the year preceding
11 bankruptcy which, in turn, facilitates the equitable
12 distribution of assets among creditors. Id. Taking into
13 consideration the debtor’s fresh start, the court noted that its
14 interpretation “permits the honest debtor to undo his mistakes
15 and receive his discharge.”
16 However, the Ninth Circuit held that the debtor’s
17 discharge may be granted only if “he reveals the transfers to
18 his creditors, [and] recovers substantially all of the property
19 before he files his bankruptcy petition. . . .” Id. Although
20 Adeeb was an involuntary case, the Panel subsequently revisited
21 the disclose-and-recover exception defense in the context of a
22 voluntary case in Beauchamp. There, the Panel held that in
23 cases of voluntary petitions, both “disclosure and recovery”
24 must occur before the filing. In re Beauchamp, 236 B.R. at 733.
25 There is no evidence in the record showing that Debtors
26 disclosed the transfers at issue to Appellant prior to the
27 petition date. Further, although Mr. Huff transferred the funds
28 back into Debtors’ Checking Account prior to the petition date,
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1 the recovery requirement under Adeeb means recovery for the
2 benefit of creditors. See Pac. W. Bank. v. Johnson (In re
3 Johnson), 68 B.R. 193, 199-200 (Bankr. D. Or. 1986). Plainly,
4 Debtors did not recover the $40,000 for their creditors’ benefit
5 when they invested it in an annuity they later claimed exempt.
6 Despite the temporal limitations imposed by Adeeb and
7 Beauchamp, and the fact that, unlike Adeeb, Debtors neither
8 recovered for Appellant’s benefit nor disclosed to Appellant the
9 transfer of the $40,000 prior to the petition date, the
10 bankruptcy court concluded that Adeeb should apply as a matter
11 of law. The bankruptcy court’s decision to expand the express
12 temporal limitation set forth in Adeeb was in error. We
13 reemphasize that the disclose-and-recover exception defense is a
14 narrow one: disclosure and recovery must occur prior to the
15 petition date and recovery must be for the benefit of creditors.
16 Only then can the “honest debtor” receive his or her discharge.
17 Therefore, the bankruptcy court erred in two material ways
18 in granting Debtors’ MSJ: (1) it found there was no transfer as
19 a matter of law and (2) if there was a transfer, it found the
20 “disclose-and-recover” exception of Adeeb applied, and it does
21 not. Accordingly, we vacate the judgment based on the
22 bankruptcy court’s erroneous application of the law.
23 VI. CONCLUSION
24 For the reasons stated, we agree with the result — albeit
25 on other grounds — but VACATE the order based on the bankruptcy
26 court’s erroneous application of the law and REMAND with
27 instructions to dismiss the adversary complaint.
28
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