Facts
Jason and Leah Wylie filed for Chapter 7 bankruptcy in 2020 following financial hardships caused by Mr. Wylie’s health issues. Before filing, they delayed filing tax returns for 2018 and 2019. When the returns were filed, the Wylies elected to apply their substantial overpayments from those years to future tax liabilities instead of requesting refunds.
The bankruptcy trustee filed an adversary proceeding under 11 U.S.C. § 727 to deny discharge, alleging the Wylies transferred anticipated tax refunds from the bankruptcy estate with the intent to hinder, delay, or defraud creditors. The bankruptcy court agreed with the trustee on one count—related to post-petition transfers—and denied discharge. On appeal, the district court reversed, and the trustee appealed to the Sixth Circuit.
Analysis
The Sixth Circuit focused on whether the bankruptcy court’s finding of specific intent to hinder the trustee was clearly erroneous. Section 727(a)(2) requires evidence of actual intent to hinder, delay, or defraud a creditor or the trustee.
The court found no evidence that the Wylies acted with such intent. The bankruptcy court had itself noted that the Wylies’ primary motive was to ensure their taxes were paid, not to hinder the trustee. The Sixth Circuit emphasized that a mere preference to pay certain creditors, such as taxing authorities, over others does not meet the statute’s specific intent requirement. It also pointed out that the Wylies were not intimately familiar with the Bankruptcy Code’s priority scheme, undermining the trustee’s claim of intentional hindrance.
The court found the bankruptcy court’s reasoning inconsistent, as it had dismissed a similar claim related to pre-petition transfers due to a lack of specific intent. The Sixth Circuit ultimately affirmed the district court’s decision and remanded the case for entry of discharge.
Conclusion
The Sixth Circuit’s decision highlights the high burden of proof required under § 727(a)(2). Without clear evidence of specific intent to hinder creditors or the trustee, courts are reluctant to deny debtors a discharge, given the extreme consequences of such a penalty.
NCBRC and NACBA filed an amici brief in support of the debtor.