Appeal from the United States District Court for the Central District of Illinois. No. 01 C 3116--Richard Mills, Judge.
Before Flaum, Chief Judge, and Bauer and Harlington Wood, Jr., Circuit
The opinion of the court was delivered by: Bauer, Circuit Judge.
The debtors filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code. The Village of San Jose, a lien creditor, opposed the discharge on the ground that within one year of filing the petition the debtors hindered, delayed, or defrauded the Village by transferring or concealing property. 11 U.S.C. sec. 727(a)(2). The bankruptcy judge granted the discharge, finding the debtors' subsequent remedial conduct of disclosing and recovering the properties negated the pre-petition conduct. The Village then appealed to the district court, which affirmed the bankruptcy judge's ruling. Though the Village stated that the debtors have no discernable method to pay the amount owed, bankruptcy or not, the Village nevertheless seeks its "pound of flesh"*fn1 in this court. After a thorough review, we find that the bankruptcy court erred, and reverse and remand for further proceedings not inconsistent with this opinion.
The Village of San Jose, Mason County, Illinois, is a small enclave of some 696 people, located approximately twenty miles south of Pekin, Illinois.*fn2 Daniel and Ida McWilliams owned a number of properties and buildings in the Village of San Jose. The main property at issue was a two-story brick building built in the late 1800s, which housed a restaurant at one time. The building, located at 120 West Vine, was fairly large, approximately 70 þ 100 feet, occupying 10,000 square feet.
In a letter dated January 4, 1999, Daniel McWilliams was notified that the building was condemned after inspection by a Village health officer. According to the health officer, the roof was sagging, there was a hole in it, and contents were falling into the structure. In a March 4, 1999 letter, the Village notified the McWilliamses that they must either repair or demolish the building, and if they failed to act, the Village would demolish it and charge the costs to them. The McWilliamses obtained an estimate that it would cost approximately $48,000 to repair the building. The McWilliamses neither repaired nor demolished the building, stating they were unable to pay for either action. On March 26, 1999, the Village moved to demolish the building and recover the costs of the demolition and attorney's fees incurred pursuant to 65 ILCS 5/11-31-1 (West 2001). An order was entered in state court on July 2, 1999, permitting the Village to demolish the building, effective July 22, 1999.*fn3 The court also granted the Village a lien on the property to satisfy the costs of demolition.
On September 3, 1999, Daniel and Ida McWilliams conveyed several lots, by quitclaim deed, to their four grandchildren for "One ($1.00) Dollar and Love." Prior to transferring the properties, the McWilliamses satisfied the outstanding mortgages with the San Jose Tri-County Bank. The deeds were recorded as transferred to the grandchil dren with the proper government officials, but the deeds were not physically delivered to the grandchildren.
In February 2000, the Village filed a supplemental motion in state court to set aside the transfers under the Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/5 (West 2001). The McWilliamses voluntarily filed for bankruptcy protection on March 15, 2000. The Bankruptcy Trustee held the first meeting of the creditors on April 10, 2000. The McWilliamses have some 28 creditors and the Village is the largest.
The following assets were disclosed in the creditors' meeting: Ida McWilliams was employed making roughly $600 per month at one job, and $500 per week at a second job. Daniel McWilliams is disabled and receives only $937 a month in Social Security Disability benefits, but he did receive a $40,000 worker's compensation settlement at the time of injury. He has been disabled since a 1984 accident at work. The McWilliamses own a home at 400 W. Vine, and two adjoining lots at 402 and 404 W. Vine. There is a house on 402 W. Vine, which the McWilliamses rent out for $300 per month. The properties at 400, 402, and 404 W. Vine have a combined value of approximately $51,000. All three properties have mortgages on them. The McWilliamses also own a commercial building on 320 S. Second, and are two years into a four year installment sales contract for $200 per month for the property. The 320 S. Second property is unencumbered. They also own a 1998 Ford Taurus and a 1988 Ford Ranger, both of which have liens on them.
During the creditors' meeting, the Trustee inquired if the McWilliamses had sold, exchanged, or given away anything of value recently. Ida McWilliams responded "no." The Trustee then specifically asked about the lots conveyed to the grandchildren. Daniel McWilliams stated that they did convey the lots in September 1999, and that their value was $2,000 each. Daniel McWilliams added that they conveyed the lots "six months before we got a bill from San Jose lawyer on what we owed them that was the reason we had to file bankruptcy."
The Village filed an objection to the McWilliamses bankruptcy petition and discharge on April 10, 2000. On May 10, 2000, the grandchildren reconveyed the lots at issue back to Daniel and Ida McWilliams. A hearing was held on February 6, 2001, before the bankruptcy judge. The McWilliamses appeared pro se at the hearing, stating they could no longer afford an attorney.*fn4 During the first few minutes of the hearing, the bankruptcy judge made his opinion of the case known to the Village's attorney.
I think on this, and I know that I have talked to you about this in the pretrial, talked to you about it on other occasions, I am not going to deny their discharge under 727(a)(2). It's been my policy, and I think it's good law, that if I file a petition that says I made these transfers and the Trustee said those are invalid, correct that, I am not going to deny a discharge. They have made no attempt to conceal anything to this Court or to the Bankruptcy Trustee. That's the purpose of the 727(a)(2) in my opinion. And you can pull out a number of cases . . . and I don't care what those say.
. . . [L]et's move on, okay. You are not going to convince me to change my mind on this. I have told you ...