[co-author: Amanda Glaubach]

Fat Tony: Bart, is it wrong to steal a loaf of bread to feed your starving family?

Bart: No.

Fat Tony: Well, suppose you got a large starving family. Is it wrong to steal a truckload of bread to feed them?

Bart: Uh uh.

Fat Tony: And, what if your family don’t like bread? They like… cigarettes?

-The Simpsons, “Bart the Murderer”

The Bankruptcy Code contemplates several penalties for transfers made by a debtor with an intent to “hinder, delay, or defraud” creditors. Although most situations focus on an “actual intent to defraud,” the Tenth Circuit Court of Appeals recently reminded us that such penalties can also be appropriate when a debtor has the noblest of intentions – so long as the debtor also exhibited some element of an intent to hinder or delay his or her creditors.

In Rupp v. Pearson, the debtor, a serial bankruptcy filer, violated the terms of a prior Chapter 13 plan when she spent the entirety of a tax refund on living expenses and bills for her and her children, rather than remit the proper amounts to her creditors (the plan had only permitted her to keep up to $2,000 of that refund – but she instead spent all $4,829). The Chapter 7 trustee consequently commenced an adversary proceeding seeking a denial of the debtor’s request for a Chapter 7 discharge, contending that the debtor’s personal use of the extra $2,829 provided grounds, pursuant to section 727(a)(2)(A) of the Bankruptcy Code, to deny the bankruptcy discharge. That section provides, in relevant part, that a discharge can be denied if a debtor transfers property with an “intent to hinder, delay, or defraud” creditors in the year prior to the commencement of a Chapter 7 bankruptcy case.

The debtor did not respond to the complaint, but the bankruptcy court refused to enter a default judgment, instead dismissing the Chapter 7 trustee’s complaint for failure to demonstrate that the facts alleged therein supported an inference of any “improper intent” in misusing the proceeds of the tax refund. The district court then affirmed on the same grounds. The Tenth Circuit reversed, concluding that it is wholly unnecessary to allege any specific “badges of fraud” to demonstrate that the debtor had an intent to “hinder, delay, or defraud” creditors. The provision is written in the disjunctive (i.e., “or”); consequently, transfers made with any intent to hinder or delay creditors can suffice to meet this standard.

Importantly, the Tenth Circuit acknowledged that such intent to hinder or delay creditors does not necessarily require any malicious or fraudulent intent. Rather, even the most innocent motive – such as providing for one’s family – can motivate someone to transfer property or use funds with an intent to “hinder” or “delay” creditors who might otherwise be entitled to the property.  As the Tenth Circuit generously (or perhaps over-generously) observed, “[w]henever a debtor hinders creditors, it is likely that the debtor wants the money to go for a ‘good’ purpose, such as helping the debtor’s children or paying other creditors.”

Even though the Tenth Circuit’s decision was premised on a complaint to deny a discharge pursuant to section 727(a)(2)(A) of the Bankruptcy Code, substantially similar terminology is used in section 548(a)(1)(A), which allows a trustee or a debtor in possession to avoid transfers made with an “actual intent to hinder, delay, or defraud” creditors. Such provision is also written in the disjunctive; even if a debtor had the best of intentions (for example, keeping its business afloat, retaining sufficient cash to pay employees, etc.), any transfers made with an actual intent to defraud or hinder or delay creditors are avoidable – subject, of course, to the other requirements for the avoidance of actual fraudulent transfers and any applicable defenses.

To be sure, the Tenth Circuit did not conclude that the debtor’s discharge should necessarily be denied – nor would the analysis of an action to avoid an “actual” fraudulent transfer be complete upon a showing of an intent to hinder, delay or defraud. But it did expressly conclude that an absence of malicious intent or of any of the traditional badges of fraud was not, and should not be, inherently dispositive of the necessary intent to hinder, delay, or defraud creditors.