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In re Smiley

decided: January 9, 1989.

IN THE MATTER OF C. RITCHEY SMILEY AND MARIE W. SMILEY, DEBTORS. C. RITCHEY SMILEY, DEFENDANT-APPELLANT. FIRST NATIONAL BANK OF BELLEVILLE, BANK OF BELLEVILLE, BANK OF O'FALLON, MURPHY-WALL STATE BANK & TRUST CO., FIRST NATIONAL BANK & TRUST OF ALTON, FIDELITY FEDERAL SAVINGS & LOAN ASSOC., BANK OF EDWARDSVILLE, FIRST GRANITE CITY NATIONAL BANK, BANKERS TRUST CO. OF O'FALLON, COLONIAL BANK OF GRANITE CITY, AND STATE BANK OF COLLINSVILLE, PLAINTIFFS-APPELLEES


Appeal from the United States District Court for the Southern District of Illinois. No. 87-5172--William L. Beatty, Judge.

Wood, Jr. and Flaum, Circuit Judges, and Hubert L. Will, Senior District Judge.*fn*

Author: Will

Hubert L. WILL, Senior District Judge.

Plaintiffs, creditors of defendants C. Ritchey Smiley and his wife Marie W. Smiley, filed involuntary Chapter 7 bankruptcy proceedings against the Smileys and subsequently objected to their discharge. The bankruptcy court discharged Marie Smiley but refused to discharge Mr. Smiley. The district court affirmed and Mr. Smiley appealed. We affirm.

I. Factual background.

Defendant Smiley was a businessman in O'Fallon, Illinois who owned a real estate development company, an insurance agency, a travel agency and one-half of another real estate company called Remax. As a result of the high interest rates and general decline in the real estate market in 1983 and 1984, Mr. Smiley's businesses fell on hard times. Defendant's wife, Marie Smiley, had wanted for some period of time to leave the O'Fallon area to be closer to one of her daughters in either Kansas or Texas. Because of the declining business conditions and because he wanted to escape any embarrassment to his wife and mother from his business failures, Mr. Smiley shared his wife's desire to leave.

In July of 1984, the Smileys were visiting their daughter in Kansas and looked at homes there. In September of 1984, the Smileys' search became more serious, and on November 7, 1984, the Smileys' daughter signed on their behalf a contract to purchase a house in Prairie Village, Kansas. The closing on the purchase took place on November 15. The purchase price of approximately $380,000 was financed by taking out a second mortgage on the Smileys' O'Fallon residence (which raised it from $52,000 to $210,000), by taking out a $200,000 loan from Citizens Bank & Trust of Shawnee, Kansas secured by Mr. Smiley's interest in a promissory note from Yong B. and Anne Kim ("the Kim Note") and by taking out a $36,500 loan against one of Mr. Smiley's life insurance policies.

Mr. Smiley carried out a set of transactions in preparation for the purchase of the Kansas home and for resolving his financial difficulties. On October 30, 1984, the Smileys deeded their property in O'Fallon to their daughter's corporation, Lynk, Inc., for two alleged purposes: to make it easier to finance their Kansas home and to prevent any one creditor from obtaining a preference. In early November, the title to the O'Fallon house was returned to the Smileys. Mr. Smiley, along with his attorney, Mr. Bold, met with all of his creditors on October 31, 1984 to discuss Mr. Smiley's financial problems. Mr. Smiley said that he would like to keep his home and estimated that the creditors should receive about forty cents on the dollar if they agreed to a voluntary work out.

At the next creditors' meeting on November 16, which took place after the purchase of the Kansas home, Mr. Bold presented the Smileys' plan of liquidation. Three of the assets discussed were those which made the purchase of the Kansas house possible: the life insurance, the Kim Note and the O'Fallon home. Mr. Smiley represented that the life insurance policy had a cash surrender value of between $4,000 and $7,000, although its actual cash surrender value was $36,000, and indicated that its entire value (minus enough to pay premiums for one year) was available to the creditors. He proposed to sell or borrow against the Smileys' one-third interest in the Kim Note and make one half of its proceeds available to the creditors. Finally, the creditors were informed that the Smileys wanted to keep their home, which was subject to a $52,000 mortgage (the O'Fallon residence). The creditors rejected the November 16 proposal and suggested that Mr. Smiley make a new one.

Neither Mr. Smiley nor Mr. Bold told the creditors at the November 16 meeting about the purchase of the Kansas home or about the various means of financing its purchase. When questioned at the bankruptcy hearing about the nondisclosures, Mr. Smiley stated that the purchase did not act the Smileys' assets and that he understood that Mr. Bold would send an explanation to Mr. Lowery (the attorney for the creditors). The three assets discussed above are part of a total of $2,288,857 in assets subject to $2,614,262 in liabilities, as reflected in the bankruptcy schedules eventually filed by the Smileys.

After the November 16 meeting, the Smileys moved to the Kansas house bringing with them some of their personal property. The Smileys moved the rest of their personal property within one week. Within a few days, the creditors discovered the remortgage of the O'Fallon property and filed an involuntary bankruptcy petition on November 21.

The Smileys did not contest the petition, but filed bankruptcy schedules on February 1, 1985 claiming that the entire value of the Kansas home, as well as their personal property, car and insurance policies, were exempt pursuant to Kansas exemption law. Kans. Stat. Ann. §§ 40-711, 60-2301, 60-2304 (1987). The bankruptcy trustee objected to the Kansas exemptions, and the bankruptcy court determined that 11 U.S.C. § 522(b)(2)(A) (1982) required the Smileys to claim their exemptions based on Illinois and not Kansas law, because of the short length of their residence in Kansas. The Illinois homestead exemption is limited to $7500. Ill. Rev. Stat. ch. 110, para. 12-901 (1984). As a result, the creditors were returned to a similar position than the one they were in before the purchase of the Kansas house with regard to the Smileys' assets. The only loss they experienced because of the Smileys' attempt to obtain the Kansas exemptions was a $20,000 loss on the sale of the Kansas house purchased by the Smileys for approximately $380,000 and sold by the bankruptcy trustee for approximately $360,000.

The bankruptcy court pointed out in its decision that the denial of discharge under Section 727(a)(2)(A) requires not only proof of a transfer of non-exempt to exempt property, but also proof of actual intent to hinder, delay or defraud a creditor. The court also concluded that proof that the creditors were actually hindered, delayed or defrauded is not required. The Smileys' behavior after their creditors began to discuss repayment was not, according to the court, satisfactorily explained, and the court resolved that Mr. Smiley intended to conceal assets from the Smileys' creditors in violation of Section 727. Because of Mrs. Smiley's lack of knowledge of Mr. Smiley's business affairs, the court discharged her. On appeal, the district court affirmed the bankruptcy court's decision denying discharge of Mr. Smiley.

II. Discussion.

The bankruptcy court's denial of discharge relied on 11 U.S.C. § 727(a)(2)(A) (1982) ...


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