Denial of discharge under 11 USC § 727; Whether the debtors transferred or concealed property intending to “to hinder, delay, or defraud” the trustee when they chose to apply their tax overpayments to their future tax liabilities; § 727(a)(2)(B); Whether the trustee established the necessary “specific intent”; Kawaauhau v Geiger; In re Wise (Bankr ED MI)

[This appeal was from the ED-MI.] The court held that the trustee failed to establish that the debtors (the Wylies) transferred their anticipated tax refunds “with intent to hinder” the trustee when they applied overpayments to future tax liabilities instead of receiving refunds. Thus, it affirmed the district court’s reversal of the bankruptcy court’s ruling denying them a Chapter 7 discharge under § 727(a)(2)(B). Contemplating filing for bankruptcy, the Wylies delayed filing their 2018 and 2019 federal and state tax returns. When these were filed, they used the overpayments to which they were entitled to cover any tax they would owe the next year. Plaintiff-trustee filed an adversary proceeding to deny them a discharge, arguing, among other things, that by choosing to apply their tax overpayments to their future tax liabilities, they had transferred or concealed property intending to “to hinder, delay, or defraud” the trustee, under § 727(a)(2)(B). The bankruptcy court found for the trustee, but the district court reversed on appeal. The issue before the court was whether the Wylies, in deciding to apply their tax overpayments to their future tax liabilities, “acted ‘with intent to hinder’ the trustee.” Focusing on the bankruptcy court’s ruling, the court noted that the trustee had to show “culpable, specific intent" by a preponderance of the evidence. The Supreme Court interpreted a similar intent-based Bankruptcy Code section (§ 523(a)) in Kawaauhau, where it determined that “‘actual intent’ requires that the debtor intend ‘the consequences of an act, not simply the act itself.’” Thus, the court concluded that “to support a factual finding that the debtor acted ‘with intent to hinder’ a trustee under § 727(a)(2)(B), there must be evidence that the debtor acted with the specific intent to make it more difficult for the trustee to facilitate creditors’ collection of debts from the estate.” The court considered the fact that the bankruptcy court dismissed a count under § 727(a)(2)(A) based on lack of specific intent as to the 2018 tax overpayments. Yet it determined “the Wylies ‘did intend to hinder the Trustee in making their 2019 Tax Refund Transfers,’” without identifying any “meaningful factual differences between the 2018 and 2019 tax elections to support this different finding.” The court found that the decisions as to the two counts were “irreconcilable.” It concluded that, “[b]y the bankruptcy court’s own reasoning and findings,” evidence showing “that the Wylies acted specifically intending to hinder the trustee . . . was lacking.”