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IN RE SCHAFER

May 13, 2003

IN RE NEIL SCHAFER, DEBTOR. JEFFRY LOCKE, TRUSTEE, PLAINTIFF/APPELLEE,
v.
NEIL SCHAFER, DEFENDANT/APPELLANT.



The opinion of the court was delivered by: Susan Illston, United States District Judge

JUDGMENT

The judgment of the Bankruptcy Court is affirmed.

IT IS SO ORDERED AND ADJUDGED.

ORDER AFFIRMING DECISION OF BANKRUPTCY COURT
Now before the Court is appellant Neil Schafer's appeal from the denial of discharge of his debts in bankruptcy through the grant of summary judgment to Trustee Jeffrey Locke by the United States Bankruptcy Court, the Honorable Alan S. Jarolslovsky, presiding. This Court has jurisdiction under 28 U.S.C. § 158 (a). Upon careful consideration of the papers submitted, the Court AFFIRMS the decision of the bankruptcy court for the reasons discussed below.

BACKGROUND

Neil Schafer owned and operated World R.V., a sole proprietorship, until January 2001, when he formed Schafer RV, LLC. Transamerica Commercial Finance Corporation provided a "flooring" line of credit to Schafer's World R.V. Following the establishment of the LLC, Schafer sought to transfer this line of credit to the LLC. According to Schafer, due to the lag time associated with securing financing for the LLC, Schafer was unable to maintain financial solvency.

Schaefer defaulted in making payments to Transamerica, and on October 2, 2001, Transamerica obtained an ex parte writ of attachment against Schafer and attached the funds in Schafer's Vintage Bank Account. Schafer opened a new account at Mechanic's Bank on October 16, 2001 and deposited $75,000 into this account. Schafer continued to make additional deposits to this account throughout the period prior to filing for bankruptcy.

In deposition testimony, Schafer stated that he opened the new account at Mechanics Bank because Transamerica previously attached his old account. See Exh. E 2004 RT 14:3-8. Schafer stated that he used the money in the new account to pay his creditors on a pro rata basis. RT at 27:4-17. Schafer further stated that he held money in the form of cashier's checks to keep it from being attached by Transamerica. Exh. E. at 44:1-5. All of these activities occurred between October 2001 and December 2001.

Schafer filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code on December 31, 2001. On June 25, 2002 Trustee Jeffry Locke filed a complaint asking the Bankruptcy Court to deny discharge, arguing that Schafer was not entitled to discharge because he transferred his assets for the purpose of avoiding his creditor, Transamerica, less that one year prior to filing for bankruptcy, in contravention of 11 U.S.C. § 727 (a)(2)(A).

Locke filed a summary judgment motion which was granted by the Bankruptcy Court on November 7, 2002. Judge Jarolslovsky held that § 727(a)(2)(A) of the Bankruptcy Code prohibited the discharge of debts through bankruptcy to Schafer because Schafer was a debtor who, less than one year prior to filing for bankruptcy transferred funds to "hinder, delay or defraud creditors." See Exh. K, Memorandum on Motion for Summary Judgment dated October 29, 2002, and Exh. L Order Granting Motion for Entry of Summary Judgment, dated November 7, 2002. The court's Memorandum states: "Schafer's testimony is full of frank, damning admissions." The court cited one example illustrative of these "damning admissions":

Q. So because they were trying to attach your funds, when you got money in, you put it in to the Mechanics Bank and you took it out in the form of a cashier's check to keep it from being garnished or attached?
A. Correct.

Memorandum at 2.

The Court further stated:

Perhaps the most persistent myth in insolvency law is that it is legitimate for a debtor to play cat-and-mouse games with a creditor so long as the debtor's overall intent is to pay his creditors as a whole. If ยง 727(a) referred to intent to hinder "creditors," then this sort of intent would indeed be a defense. However, a discharge is to be denied any debtor who has hindered "a creditor." Once property is concealed from a single creditor, the debtor has lost his discharge. It is no defense that he ...

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