IN RE ADAMS (Bankr.D.Conn. 2004)

Case No. 03-22240, Adversary Proceeding No. 03-2109.United States Bankruptcy Court, D. Connecticut.
November 19, 2004

Laura Gold Becker, Esq., Becker Law Offices, LLC, West Hartford, CT, Counsel for Plaintiff.

John J. O’Neil, Jr., Esq., Francis, O’Neil DelPiano, LLC, Hartford, CT, Counsel for Defendant.

AMENDED[1] MEMORANDUM OF DECISION

ROBERT KRECHEVSKY, Recalled Bankruptcy Judge

I.
The Bank of Southington nka Hudson United Bank (“the plaintiff”), on November 3, 2003, filed a complaint requesting that Patrice M. Adams (“the debtor”)

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be denied a discharge pursuant to Bankruptcy Code § 727(a)(2)(A) (debtor denied discharge if “debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred . . . property of the debtor, within one year before the date of the filing of the petition.”). The debtor filed an answer denying that a fraudulent transfer had taken place. A trial on the complaint concluded on October 20, 2004, at which the debtor and Attorney Thomas E. Vollmer (“Vollmer”) were the sole witnesses.

II. BACKGROUND
The parties stipulated that, at all times concerned, the plaintiff was a creditor of the debtor, holding an unpaid state-court judgment in the amount of $21,985. The debtor filed her Chapter 7 petition on July 17, 2003. She is a businesswoman who had operated and guaranteed the debts of her insolvent company, Ultimate Travel, Inc.

By warranty deed dated April 6, 2000 and recorded April 14, 2000 (“the warranty deed”), G.A.T. Inc. conveyed title to property known as 527 Club Drive, West Palm Beach, Florida (“the property”) to the debtor for a stated consideration of $45,000. This deed was executed by Jay F. Malcynsky (“Malcynsky”), as president of the grantor. Malcynsky is an attorney and the brother of the debtor. On or about the same date, the debtor, at Vollmer’s law office, executed a mortgage note for $45,0000 and a mortgage deed of the property in favor of Malcynsky. The note required principal and interest payments of $500 per month. Vollmer then sent the warranty deed and mortgage deed to Attorney Donald J. Doody (“Doody”), a Florida attorney, to be recorded on the appropriate land records.

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The debtor testified that she had no recollection of either being the grantee of a deed to the property or of executing a mortgage deed and note in favor of Malcynsky. She stated that she first became aware of the property being in her name in March 2001, when she received a Palm Beach County tax bill. She sent the tax bill to Malcynsky because, she testified, on various occasions in the past he had mentioned the possibility of placing realty in her name. The debtor stated that she had never visited the property nor paid anything on the mortgage note; that she subsequently asked Malcynsky to remove her name from the property; and that on June 21, 2002, at Malcynsky’s request, she went to Vollmer’s law office to execute a quit-claim deed of the property (“the quit-claim deed”) in favor of Malcynsky. Doody had prepared both the warranty deed and quit-claim deed. Vollmer sent the quit-claim deed to Doody on June 21, 2002, with instructions to record and submit a statement for his services rendered. By letter of June 28, 2002, Doody acknowledged receipt of the quit-claim deed and enclosed an invoice of $172.10, requesting payment “as soon as possible so that we can record the Quit Claim Deed. . . .” (Exh. B.). Vollmer paid this invoice on July 2, 2002.

About a year later, on July 8, 2003, when Vollmer realized that he had never received back the recorded quit-claim deed, he contacted Doody. By letter dated July 15, 2003, Doody advised Vollmer as follows:

The Quit Claim Deed inadvertently was not recorded with the Palm Beach County Recorder’s Office. The Quit Claim Deed was hand delivered via courier to the Recorder’s Office this morning for recording. I will forward the original Quit Claim Deed to you as soon as I receive it from the Recorder’s Office.

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I sincerely apologize for any inconvenience. The paralegal who was employed here at the time did not receive notice from our bookkeeper that the recording costs were paid and she failed to calendar this file for follow-up.

(Exh. D).

As noted, the debtor filed her bankruptcy petition on July 17, 2003.

II. POSITIONS OF THE PARTIES
Section 727(a)(2)(A) does not define when a transfer is made. The plaintiff contends that since the quit-claim deed to Malcynsky was not recorded until July 15, 2003, that is the date on which the transfer became effective as against bona fide purchasers[2] — well within the one-year requirement of § 727(a)(2)(A). It then asserts that the debtor having concededly transferred the property for no consideration to a family member, to the detriment of her financial condition, these circumstances, when added to the other “badges of fraud”,[3] such as the debtor’s suspect chronology of events, proves that the debtor made the transfer with actual intent to hinder, delay or

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defraud a creditor.

The debtor contends that since Malcynsky transferred title to property to her without her knowledge or acceptance of a deed, the property does not qualify as property of the debtor under § 727(a)(2)(A). The debtor then argues that even if the property is considered to have been the debtor’s property, the quit-claim deed was executed and delivered on June 21, 2002, when the transfer was effective between the parties whether or not valid as against bona fide purchasers, and that is the effective date for purposes of § 727(a)(2)(A). Finally, the debtor contends the plaintiff has not carried its burden of proof on the issue of actual intent of the debtor to hinder, delay or defraud creditors.

IV. DISCUSSION A.
Courts generally have recognized the importance of the discharge to the debtor and, accordingly, have construed the provisions of § 727 liberally in favor of debtors. “Clearly, § 727 imposes an extreme penalty for wrongdoing. As such, we have held that it must be construed strictly against those who object to the debtor’s discharge and liberally in favor of the bankrupt.” In re Chalasani, 92 F.3d 1300, 1310 (2d Cir. 1996) (citation and quotation marks omitted).

B.
Since, for reasons hereafter stated, the court concludes that under the facts of this proceeding, the property was property of the debtor, but that the property transfer

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took place more than one year before the date of the debtor’s petition, it is unnecessary for the court to determine whether the transfer was made to hinder, delay or defraud creditors.

C.
The court concludes that notwithstanding the debtor’s inability to remember such events, the debtor became the owner of the property in April, 2000, when Malcynsky executed the warranty deed on behalf of G.A.T., Inc. in favor of the debtor, and the debtor executed a mortgage deed in favor of Malcynsky. Vollmer’s testimony and the physical evidence of the mortgage deed and note signed by the debtor are more than sufficient to overcome the debtor’s lack of memory.

D.
There is no precedential appellate authority in the Second Circuit on the issue of whether a debtor should be denied a discharge if the transfer of property was made before, but the recording of the transfer was made within the one-year period stated in § 727(a)(2)(A). Elsewhere, there is a split of authority on this issue. Cf. Dean Witter Reynolds, Inc. v.MacOuown (In re MacQuown), 717 F.2d 859, 863 (3d Cir. 1983) (date of recordation rather than date of deed determines whether transfer occurred within one year before petition because that is date when transfer good as against bona fide purchaser) withFinalco, Inc. v. Roosevelt (In re Roosevelt), 87 F.3d 311
(9th Cir. 1996), cert. denied, 520 U.S. 1209 (1997) (one-year period should be measured from date of the debtor’s act, regardless of when the transfer is recorded by the transferee).See 6 Collier on Bankruptcy ¶ 727.02[2][c] (15th ed. rev. 2004) for additional lower court

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authorities.

The view adopted by the Ninth Circuit in Finalco is “the better view” according to Collier. “[The Finalco] approach recognizes that the recording of a transfer may not always be in the debtor’s control and gives effect to the often-expressed preference for strictly construing objections to discharge in favor of granting relief to the debtor.” Id. The facts in this proceeding support the Finalco reasoning. Doody’s letter to Vollmer (Exh. D.) clearly establishes that the delay in recording of the quit-claim deed was due solely to a paralegal’s negligence in Doody’s office. Section 727 deals with the entitlement of a debtor to obtain a discharge, not with property rights of the trustee or a creditor. Accordingly, it makes sense to interpret the effective date of a transfer as the date the transfer becomes effective against the debtor. Upon delivery of the deed to the transferee, it becomes effective against the debtor. See Fla. Stat. ch. 695.01. The purpose of recording, to provide notice to subsequent transferees of the initial transferee’s rights in the property, is not relevant to the purpose of § 727(a)(2), which provides “grounds for denial of discharge center[ed] on the debtor’s wrongdoing in or in connection with the bankruptcy case.” H.R. Rep. No. 95-595, 1st Sess. 384 (1977); S. Rep. No. 95-989, 2d Sess. 98 (1978). The court concludes that the transfer to Malcynsky by the debtor occurred on June 21, 2002, when the debtor signed the quit-claim deed and Vollmer sent it the same day to Doody for recording, more than one year prior to the filing of the debtor’s petition.

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V. CONCLUSION
The transfer of the property by the debtor to Malcynsky having taken place more than one year before the date of the filing of the debtor’s petition, a judgment shall enter that the plaintiff’s objection to discharge be denied and that the defendant be granted a discharge.