First Circuit B.A.P. Case: Reversing Fraudulent Transfers

The U.S. Bankruptcy Appellate Panel for the First Circuit in the recent case of In re Hill, 2008 WL 1960478 (1st Cir. BAP 2008) addressed the vexing issue of “reversals” of a fraudulent transfers and objections to discharge. The case presented an alternative basis to deny the debtor his discharge, so the Panel discussed, but did not decide the issue.

Section 727(a)(2)(A) provides for denial of a Chapter 7 discharge when a “debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed property of the debtor, within one year before the date of the filing of the petition.”

The nature of a debtor’s intent in a suspect transfer is a question of fact. However, some courts (notably the Ninth Circuit in First Beverly Bank v. Adeeb, 787 F.2d 1339 (9th Cir.1986)) have interpreted the term “transferred” to mean “transferred and remained transferred.” Therefore, in the Ninth Circuit a transfer is not a transfer at all if it is reversed. This provides an opportunity to fix problems caused by those who unwisely seek to hide assets by giving them to someone else.

However, here in the First Circuit, Adeeb has been rejected–at least when it comes to post-petition reversals of fraudulent transfers. The First Circuit, in Martin v. Bajgar, 104 F.3d 495, 499 (1st Cir.1997) kept silent on the effect of pre-petition reversals of transfers. The Hill Panel followed suit.

In the absence of clear authority allowing the reversal of fraudulent transfers, one ordinarily should stay out of Chapter 7 within one year of any suspect transfers. And, of course, it’s even better not to make them in the first place.