In re: Kenneth Huff and Rosemarie Huff

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: March 10, 2014
• Docket: NV-13-1263-JuKiTa
• Status: Unpublished

Opinion

FILED MAR 10 2014 1 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NV-13-1263-JuKiTa ) 6 KENNETH HUFF and ROSEMARIE ) Bk. No. 11-53159-BTB HUFF, ) 7 ) Adv. No. 12-05001-BTB Debtors. ) 8 ______________________________) ) 9 A & H INSURANCE, INC., ) ) 10 Appellant, ) ) 11 v. ) M E M O R A N D U M* ) 12 KENNETH HUFF; ROSEMARIE HUFF, ) ) 13 Appellees. ) ______________________________) 14 Argued and Submitted on January 24, 2014 15 at Las Vegas, Nevada 16 Filed - March 10, 2014 17 Appeal from the United States Bankruptcy Court for the District of Nevada 18 Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding 19 _________________________ 20 Appearances: Jeffrey L. Hartmann, Esq., of Hartman & Hartman, argued for appellant A & H Insurance, Inc.; 21 Kevin Darby, Esq., of The Darby Law Practice, argued for appellees, Kenneth and Rosemarie Huff. 22 _________________________ 23 Before: JURY, KIRSCHER, and TAYLOR, Bankruptcy Judges. 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8013-1.

-1- 1 Judgment creditor A & H Insurance, Inc. (Appellant) filed 2 an adversary proceeding against chapter 111 debtors, Kenneth and 3 Rosemarie Huff (collectively, Debtors), seeking denial of their 4 discharge under § 727(a)(2)(A). On cross-motions for summary 5 judgment, the bankruptcy court granted Debtors’ motion, denied 6 Appellant’s, and entered an order consistent with its ruling. 7 From this order, Appellant filed a timely appeal. 8 Because we conclude that Appellant’s § 727 claim against 9 Debtors was barred as a matter of law, we agree with the result 10 — albeit on other grounds — but VACATE the order based on the 11 bankruptcy court’s erroneous application of the law and REMAND 12 with instructions to dismiss the adversary complaint. 13 I. FACTS 14 A. Prepetition Facts 15 Appellant filed a lawsuit against Mrs. Huff2 in the Second 16 Judicial District Court in Washoe County, Nevada, alleging that 17 she breached an employment agreement. 18 On April 15, 2010, Mr. Huff received $75,047.30 from an 19 investment that he had made prior to his marriage to Mrs. Huff 20 and four days later he deposited it into Debtors’ checking 21 account. In March 2011, Mr. Huff withdrew $40,000 from Debtors’ 22 checking account and on the same day deposited the funds into a 23 joint account he had with his son (Joint Account). On July 22, 24 1 Unless otherwise indicated, all chapter and section 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 26 “Rule” references are to the Federal Rules of Bankruptcy Procedure. 27 2 Appellant also named Mt. Rose Insurance, LLC as a 28 defendant, but did not name Mr. Huff.

-2- 1 2011, Mr. Huff withdrew the $40,000 from the Joint Account and 2 on the same day deposited the funds into Debtors’ checking 3 account. Debtors then purchased an annuity titled in the names 4 of Mr. and Mrs. Huff with the funds. 5 After these transfers, on August 9, 2011, following a jury 6 trial, the state court entered a Corrected Final Judgment on 7 Jury Award (Judgment) in Appellant’s favor and against Mrs. Huff 8 in the amount of $303,772.05.3 9 B. Postpetition Facts 10 On October 7, 2011, Debtors filed a joint chapter 11 11 petition. In Schedule B, they listed the annuity in the amount 12 of $40,000 and in Schedule C they claimed the annuity exempt. 13 On January 9, 2012, Appellant filed an adversary proceeding 14 against Debtors seeking denial of their discharge under 15 § 727(a)(2)(A) based on the transfer of the $40,000 from 16 Debtors’ Checking Account into the Joint Account. 17 On February 6, 2012, Debtors answered the complaint, 18 asserting general denials and pleading no affirmative defenses. 19 On March 8, 2012, Debtors filed their disclosure statement 20 and plan. In their disclosure statement, Debtors described the 21 adversary proceeding filed by Appellant and stated that although 22 they believed they would prevail, if they did not, there would 23 be no discharge entered. Debtors’ plan was a reorganization 24 plan with Debtors contributing their disposable income to fund 25 the plan. Debtors classified Appellant as an unsecured creditor 26 3 27 This amount included $182,821.55 in compensatory damages, $10,677.80 in prejudgment interest through June 9, 2011, and 28 $109,294.40 in attorneys fees and costs.

-3- 1 in the plan. Finally, Debtors’ plan stated that they would 2 receive their discharge under § 1141(d)(5). 3 On March 15, 2012, Debtors filed a motion for summary 4 judgment in the adversary proceeding. After Appellant opposed 5 Debtors’ MSJ on the grounds that it was premature and that 6 additional discovery was needed, the parties stipulated to 7 continue the hearing so that they could conduct discovery and 8 take depositions. By stipulation, the hearing was continued 9 many times, and finally to December 20, 2012, so that Appellant 10 could file its cross MSJ. 11 Meanwhile, on September 19, 2012, the bankruptcy court 12 approved Debtors’ disclosure statement. On October 5, 2012, 13 Appellant objected to confirmation of Debtors’ plan on several 14 grounds. In its objection, Appellant stated: “The Debtors 15 acknowledge that if the adversary proceeding is successful by A 16 and H as plaintiff, there will be no discharge.” 17 On November 20, 2012, Appellant filed its cross MSJ in the 18 adversary proceeding asserting the following undisputed facts: 19 Debtors had a minor son named Ryan; Mr. Huff and Ryan had the 20 Joint Account at Umpqua Bank; Mr. Huff always maintained 21 possession, dominion and control of the Joint Account; Ryan did 22 not have access to the account and did not withdraw funds from 23 the Joint Account; on March 24, 2011, Mr. Huff transferred 24 $40,000 to the Joint Account; on July 22, 2011, Mr. Huff 25 transferred the $40,000 from the Joint Account back to Debtors’ 26 Checking Account; and on August 9, 2011, Appellant obtained its 27 Judgment against Mrs. Huff. 28 Based on these undisputed facts, Debtors maintained that

-4- 1 they were entitled to judgment as a matter of law. First, they 2 asserted there was no “transfer” of property within the meaning 3 of §§ 101(54)(D) and 727(a)(2)(A) because Mr. Huff never 4 relinquished or parted with the funds, having had possession and 5 control over the Joint Account at all times. Second, Debtors 6 argued that even if there was a transfer, they were entitled to 7 the protection of the disclose-and-recover exception defense set 8 forth in First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 9 1339 (9th Cir. 1986) because Mr. Huff returned the funds to 10 Debtors’ Checking Account before they filed their petition. 11 See In re Adeeb, 787 F.2d at 1334 (“transferred” under 12 § 727(a)(2)(A) means “transferred and remained transferred.”). 13 In November 2012, Appellant filed its cross MSJ, a 14 statement of undisputed facts in support, and the declaration of 15 Stephanie Ittner.4 Appellant argued that a “transfer” occurred 16 under the holding in Bernard v. Sheaffer (In re Bernard), 17 96 F.3d 1279 (9th Cir. 1996) when Mr. Huff withdrew the $40,000 18 from Debtors’ Checking Account and deposited it into the Joint 19 Account. Appellant also asserted that when the funds were 20 transferred to the Joint Account, Debtors relinquished control 21 and parted ways with the $40,000. According to Appellant, 22 Mr. Huff was on the Joint Account with his son Ryan because the 23 bank’s policy mandated that a minor could not be the only signor 24 on the account. Appellant also pointed out that Mr. Huff 25 testified on May 10, 2012, in a deposition that the funds in 26 4 27 Stephanie Ittner was employed by Hartman & Hartman, counsel for Appellant, and transcribed a portion of the recorded 28 § 341(a) meeting of creditors.

-5- 1 Ryan’s account were “just birthday gifts, could have been 2 graduation money. It’s basically Ryan’s. It was Ryan’s savings 3 account.” Based on these facts, Appellant argued that the funds 4 in the Joint Account belonged to Ryan and Mr. Huff held nothing 5 but bare legal title - and then, only by virtue of being the 6 required parental signatory on the account. Finally, Appellant 7 argued that Mr. Huff’s testimony at the creditors’ meeting 8 demonstrated that Debtors had the subjective intent to hinder 9 and delay their creditors. 10 On December 20, 2012, the bankruptcy court heard the 11 parties’ cross motions for summary judgment and requested 12 further briefing from the parties on issues not relevant to this 13 appeal. 14 On February 7, 2013, the bankruptcy court held a second 15 hearing on the parties’ cross motions for summary judgment and 16 issued a tentative ruling granting Debtors’ MSJ and denying 17 Appellant’s cross motion. 18 The next day, the bankruptcy court issued its ruling. The 19 bankruptcy court determined that this case was somewhere in 20 between the facts of Adeeb and those in Bernard. The court 21 found that unlike Bernard, Debtors did not attempt to lie and 22 conceal the movement of funds and did not squander the funds, 23 but rather moved the funds back into Debtors’ Checking Account 24 prior to the entry of the Judgment against Mrs. Huff and their 25 bankruptcy filing. The court further found that Debtors 26 disclosed the annuity by listing it in their Schedules. 27 The bankruptcy court also noted that the funds were moved 28 in and out of Debtors’ Checking Account and the Joint Account,

-6- 1 an account that Mr. Huff controlled as evidenced by the fact 2 that Mr. Huff was able to move the funds between the two 3 accounts without the assistance or signature of his son. 4 Because Mr. Huff had control and possession of the funds at all 5 times, the court concluded that as a matter of law there was no 6 “transfer” because the definition of a transfer under 7 § 101(54)(D) requires the “disposing of or parting with 8 property.” The bankruptcy court further found that if there was 9 a transfer, Debtors were entitled to the protection of the 10 disclose-and-recover exception defense under Adeeb. 11 Acknowledging that the case was a close one, the court 12 recognized that § 727 should be liberally construed in Debtors’ 13 favor and strictly against Appellant. In the end, the 14 bankruptcy court adopted its original decision, granting 15 Debtors’ MSJ and denying Appellant’s cross MSJ. 16 On April 11, 2013, the bankruptcy court confirmed Debtors’ 17 plan. The confirmed plan contains no provision whereby Debtors 18 agreed that there would be no discharge in their case if 19 Appellant prevailed in the § 727 adversary proceeding. 20 Moreover, the plan is not a liquidating plan as it contemplates 21 that Debtors will continue to rent some of their properties and 22 contribute their disposable income to the plan for a five-year 23 term. The order confirming the plan has become final. 24 On May 17, 2013, the bankruptcy court entered the order 25 granting Debtors’ MSJ and denying Appellant’s cross motion in 26 the adversary proceeding. Appellant timely appealed the 27 28

-7- 1 bankruptcy court’s order.5 2 II. JURISDICTION 3 The bankruptcy court had jurisdiction over this proceeding 4 under 28 U.S.C. §§ 1334 and 157(b)(2)(J). We have jurisdiction 5 under 28 U.S.C. § 158. 6 III. ISSUE 7 The ultimate issue is this appeal is whether the bankruptcy 8 court erred in granting Debtors’ MSJ and denying Appellant’s 9 MSJ. Our resolution of this issue turns upon the sub-issue of 10 whether Appellant’s § 727 claim against chapter 11 Debtors was 11 barred as a matter of law. 12 IV. STANDARD OF REVIEW 13 We review de novo a bankruptcy court’s ruling on 14 cross-motions for summary judgment. Trunk v. City of San Diego, 15 629 F.3d 1099, 1105 (9th Cir. 2011). 16 17 18 19 5 20 The order granting Debtors’ MSJ and denying Appellant’s cross motion was a final order because it disposed of the sole 21 claim asserted in the adversary complaint. Under Fed. R. Civ. P. 56, generally a separate document embodying a final judgment 22 that is distinct from the order granting a motion for summary 23 judgment should be entered. See Rule 9021. As of June 4, 2013, no separate judgment had been entered on the bankruptcy court’s 24 docket. As a result, the clerk sent notice to the parties regarding the separate judgment requirement. On June 12, 2013, 25 Appellant submitted a “judgment” that the bankruptcy court 26 signed, but the judgment was simply a grant of Debtors’ MSJ and denial of Appellant’s cross motion. Therefore, no separate 27 judgment has been entered and the separate document requirement has been waived. Bankers Trust Co. v. Mallis, 435 U.S. 381, 388 28 (1978).

-8- 1 V. DISCUSSION 2 A. Appellant’s § 727 Claim Against Chapter 11 Debtors Was Barred As A Matter of Law 3 4 Through its § 727 claims, Appellant seeks to deny Debtors 5 their entire discharge. Section 727(a) has no direct 6 application to this bankruptcy case because Debtors filed their 7 case under chapter 11. Section 727(a) appears in subchapter II 8 of chapter 7 and as such applies “only in a case under such 9 chapter.” § 103(b). Section 727(a) therefore provides no 10 basis, standing alone, to deny a chapter 11 debtor’s discharge. 11 Torrington Livestock Cattle Co. v. Berg (In re Berg), 423 B.R. 12 671, 677 (10th Cir. BAP 2010). 13 However, § 727(a) applies in chapter 11 cases under the 14 limited circumstances described in section 1141(d). The 15 chapter 11 discharge is triggered by entry of an order 16 confirming the plan (§ 1141(d)(1)) subject to § 1141(d)(5) when 17 the debtor is an individual.6 Section 1141(d)(1)(A) declares 18 that the confirmation of a plan discharges a chapter 11 debtor 19 from all debts arising before confirmation. Section 1141(d)(3) 20 then creates an exception to this broad discharge, stating: 21 The confirmation of a plan does not discharge a debtor if— 22 (A) The plan provides for the liquidation of all or 23 substantially all of the property of the estate; 24 (B) the debtor does not engage in business after consummation of the plan; and 25 26 6 Under § 1141(d)(5)(A), in an individual’s case, 27 confirmation of the plan does not discharge any debt provided for in the plan until the court grants a discharge on completion of 28 all payments under the plan.

-9- 1 (C) the debtor would be denied a discharge under section 727(a) of this title if the case were a case 2 under chapter 7 of this title. 3 The three subparts of § 1141(d)(3) are written in the 4 conjunctive, meaning that an individual chapter 11 debtor will 5 only be denied a discharge if, in addition to the existence of 6 grounds for denial of discharge under § 727(a), the confirmed 7 plan is a liquidating one and the debtor does not engage in 8 business after the plan has been consummated. In re Williams, 9 227 B.R. 589, 593 (D.R.I. 1998); In re Duncan, 2012 WL 5462917, 10 at *3 (Bankr. D. Ariz. 2012) (“If any one of the three subparts 11 cannot be shown, an individual creditor may not proceed solely 12 on the § 1141(d)(3)(C) prong (the § 727 feature of the 13 statute).”). 14 Here, Debtors’ confirmed plan is not a liquidating plan. 15 Although Debtors’ plan calls for some property to be turned over 16 to secured creditors, Debtors will continue to rent some of 17 their properties and also provide payment to creditors with 18 their disposable income over a five-year term. Therefore, since 19 the first element under § 1141(d)(3)(A) was not met, Appellant’s 20 § 727 claim against Debtors was barred as a matter of law. 21 Accordingly, the matter should have been dismissed. 22 B. The Bankruptcy Court’s Reasons For Granting Debtors’ MSJ Were In Error 23 24 Although the bankruptcy court reached the right result, it 25 did so for the wrong reasons. To prevail under § 727(a)(2)(A), 26 a plaintiff must show, by a preponderance of the evidence: 27 (1) a disposition of property, such as transfer or concealment; 28 (2) the property belonged to the debtor; (3) the transfer

-10- 1 occurred within one year of the bankruptcy filing; and (4) the 2 debtor executed the transfer with the intent to hinder, delay or 3 defraud a creditor. Aubrey v. Thomas (In re Aubrey), 111 B.R. 4 268, 273 (9th Cir. BAP 1990); Grogan v. Garner, 498 U.S. 279, 5 284 (1991); see Rule 4005. Here, we are concerned only with the 6 first element — whether there was a transfer. 7 Historically, the term “transfer” has been granted a broad 8 interpretation. See Pirie v. Chi. Title & Trust Co., 182 U.S. 9 438, 444 (1901) (stating that the term “transfer” should be 10 interpreted in its most comprehensive sense). This definition 11 has endured over time. More recently, in Barnhill v. Johnson, 12 503 U.S. 393, 397 (1992), the United States Supreme Court 13 stated: “We acknowledge that § 101(54) adopts an expansive 14 definition of transfer. . . .” The Bankruptcy Code itself 15 defines “transfer” in § 101(54)(D) expansively: “each mode, 16 direct or indirect, absolute or conditional, voluntary or 17 involuntary, of disposing of or parting with—(i) property; or 18 (ii) an interest in property.” The broad definition of 19 “transfer” applies in the context of the § 727. See 20 In re Bernard, 96 F.3d at 1282. 21 In this case, the bankruptcy court quoted the definition of 22 a “transfer” under § 101(54)(D), but emphasized the phrase 23 “disposing of or parting with”, and focused on the fact that 24 Mr. Huff had possession and control at all times over the funds 25 after they were deposited in the Joint Account.7 Even if 26 27 7 At no time did the bankruptcy court analyze the “transfer” 28 with respect to Mrs. Huff.

-11- 1 Appellant’s § 727 claim against Debtors was not barred as a 2 matter of law, the bankruptcy court’s analysis was misguided and 3 incorrect as a matter of law. 4 In deciding whether there was a transfer when it comes to 5 withdrawals or deposits into bank accounts, we do not write on a 6 clean slate in construing the phrase “disposing of or parting 7 with.” In Bernard, the Ninth Circuit rejected the debtors’ 8 argument that their withdrawals from a bank account were not 9 transfers when the funds remained in their possession for two 10 reasons. First, citing Adeeb, the Ninth Circuit reiterated that 11 depletion of assets (or injury to creditors) was not a 12 prerequisite to a denial of discharge under § 727(a)(2)(A). Id. 13 Second, quoting the legislative history of the statutory 14 definition of a transfer, the court emphasized that the 15 definition of transfer was extremely broad, “[a] deposit in a 16 bank account or similar account is a transfer.” Id. (emphasis 17 in original) (quoting S.Rep. No. 989, 95th Cong., 2d Sess. 27 18 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5813). 19 On this latter point, the Ninth Circuit reasoned that “if 20 depositing money into a bank account is a transfer, then later 21 withdrawing money from that account should be a transfer, too — 22 it ought to be a two-way street.” To support its conclusion, 23 the court explained that under California law, “[a]s between the 24 bank and the depositor such money becomes property of the bank 25 and the bank becomes the debtor of the depositor for the amount 26 deposited.” Id. Based upon this relationship between the 27 depositor and bank, the court found that “[i]nstead of owning 28 money sitting in their accounts, the Bernards owned claims

-12- 1 against their bank. When they withdrew from their accounts, 2 they exchanged debt for money. Thus, when the Bernards made 3 their withdrawals they parted with property, satisfying the 4 Code’s definition of transfer.” Id. at 1282-83. In the end, 5 the Ninth Circuit determined that the debtors’ mere act of 6 removing the money from their bank account to hinder their 7 creditors warranted denial of their discharge. 8 In light of the Bankruptcy Code’s expansive definition of 9 “transfer,” which literally encompasses “every” mode of parting 10 with an interest in property, and the express holding in 11 Bernard, Mr. Huff’s withdrawal of the $40,000 from Debtors’ 12 Checking Account was a “parting with” property, as was 13 Mr. Huff’s deposit of the funds into the Joint Account. Under 14 the holding in Bernard, there is no ambiguity around the 15 definition of a transfer; withdrawals and deposits into bank 16 accounts clearly qualify. 17 Further, the rationale behind the Ninth Circuit’s holding 18 in Bernard is supportable under Nevada law. Like California, 19 under Nevada law: 20 The relation between a bank and its depositors is that of debtor and creditor. There can be no doubt of this 21 proposition. Money deposited in a bank becomes part of its general assets, and the bank simply becomes a 22 debtor of the depositor. The absolute title to the money by the mere act of deposit passes to the bank. 23 24 McStay Supply Co. v. John S. Cook & Co., 132 P. 545, 548 (Nev. 25 1912).8 Therefore, by withdrawing the $40,000 from Debtors’ 26 8 27 This position is the majority position in the United States. See, e.g., N.Y. Cnty. Nat’l Bank v. Massey, 192 U.S. 28 (continued...)

-13- 1 Checking Account, Debtors exchanged debt for money and then by 2 depositing the money into the Joint Account, exchanged money for 3 debt. These transactions resulted in a “parting with” property 4 under the holding in Bernard as a matter of law. Finally, as 5 stated in Bernard, the fact that the funds remained in the 6 possession, custody or control of Mr. Huff does not change the 7 result because depletion of assets is not a prerequisite to 8 denial of a bankruptcy discharge under the holding in Adeeb. In 9 sum, the bankruptcy court erred in concluding that no transfer 10 occurred. 11 Likewise, the bankruptcy court erred in deciding that the 12 disclose-and-recover defense set forth in Adeeb applied under 13 these facts. In Adeeb, the Ninth Circuit interpreted the term 14 “transferred” under § 727(a)(2)(A) to mean “transferred and 15 remained transferred.” 787 F.2d at 1344. The court found that 16 its interpretation of the word “transferred” in § 727(a)(2)(A) 17 was “most consistent” with the statute’s legislative purpose. 18 The court noted that § 727(a)(2)(A)’s language demonstrated that 19 “Congress intended to deny discharge to debtors who take actions 20 designed to keep their assets from their creditors either by 21 hiding the assets until after they obtain their discharge in 22 bankruptcy or by destroying them.” Id. at 1345. Based on this 23 observation, the Ninth Circuit concluded that “[t]he only type 24 25 8 (...continued) 26 138, 147–49 (1904); United States v. Banco Cafetero Panama, 797 F.2d 1154, 1158 (2d Cir. 1986). See also Restatement 27 (Second) of Trusts § 12, cmt. l (1959) (“A general deposit of money in a commercial bank does not create a trust, but a 28 relation of debtor and creditor. . . .”).

-14- 1 of transfer that has the effect of keeping assets from creditors 2 is a transfer in which the property remains transferred at the 3 time the bankruptcy petition is filed.” Id. 4 Next, the court found its interpretation supported by the 5 purposes of the Bankruptcy Code: the equitable distribution of 6 the estate among creditors and giving the honest debtor a fresh 7 start. Id. By reading “transferred” in § 727(a)(2)(A) to mean 8 “transferred and remained transferred,” the Ninth Circuit 9 reasoned that honest debtors would be encouraged to recover 10 property they have transferred during the year preceding 11 bankruptcy which, in turn, facilitates the equitable 12 distribution of assets among creditors. Id. Taking into 13 consideration the debtor’s fresh start, the court noted that its 14 interpretation “permits the honest debtor to undo his mistakes 15 and receive his discharge.” 16 However, the Ninth Circuit held that the debtor’s 17 discharge may be granted only if “he reveals the transfers to 18 his creditors, [and] recovers substantially all of the property 19 before he files his bankruptcy petition. . . .” Id. Although 20 Adeeb was an involuntary case, the Panel subsequently revisited 21 the disclose-and-recover exception defense in the context of a 22 voluntary case in Beauchamp. There, the Panel held that in 23 cases of voluntary petitions, both “disclosure and recovery” 24 must occur before the filing. In re Beauchamp, 236 B.R. at 733. 25 There is no evidence in the record showing that Debtors 26 disclosed the transfers at issue to Appellant prior to the 27 petition date. Further, although Mr. Huff transferred the funds 28 back into Debtors’ Checking Account prior to the petition date,

-15- 1 the recovery requirement under Adeeb means recovery for the 2 benefit of creditors. See Pac. W. Bank. v. Johnson (In re 3 Johnson), 68 B.R. 193, 199-200 (Bankr. D. Or. 1986). Plainly, 4 Debtors did not recover the $40,000 for their creditors’ benefit 5 when they invested it in an annuity they later claimed exempt. 6 Despite the temporal limitations imposed by Adeeb and 7 Beauchamp, and the fact that, unlike Adeeb, Debtors neither 8 recovered for Appellant’s benefit nor disclosed to Appellant the 9 transfer of the $40,000 prior to the petition date, the 10 bankruptcy court concluded that Adeeb should apply as a matter 11 of law. The bankruptcy court’s decision to expand the express 12 temporal limitation set forth in Adeeb was in error. We 13 reemphasize that the disclose-and-recover exception defense is a 14 narrow one: disclosure and recovery must occur prior to the 15 petition date and recovery must be for the benefit of creditors. 16 Only then can the “honest debtor” receive his or her discharge. 17 Therefore, the bankruptcy court erred in two material ways 18 in granting Debtors’ MSJ: (1) it found there was no transfer as 19 a matter of law and (2) if there was a transfer, it found the 20 “disclose-and-recover” exception of Adeeb applied, and it does 21 not. Accordingly, we vacate the judgment based on the 22 bankruptcy court’s erroneous application of the law. 23 VI. CONCLUSION 24 For the reasons stated, we agree with the result — albeit 25 on other grounds — but VACATE the order based on the bankruptcy 26 court’s erroneous application of the law and REMAND with 27 instructions to dismiss the adversary complaint. 28

-16-