Edward M. Johnson; Pamela J. Johnson Appellants
Daniel Johnson; Jan Johnson Appellees
Submitted: October 21, 2013
Appeal from United States District Court for the District of Minnesota - Minneapolis
Before GRUENDER, BEAM, and SHEPHERD, Circuit Judges.
After learning that debtors Edward and Pamela Johnson ("debtors") failed to report their interest in certain real property to the bankruptcy trustee, creditors Daniel and Jan Johnson ("creditors") initiated an adversary proceeding against the debtors in bankruptcy court,  requesting that the debtors' previous bankruptcy discharge be revoked. The bankruptcy court determined that the debtors still held an interest in a home that they purportedly sold to Edward Johnson's parents and thus revoked the previous discharge pursuant to 11 U.S.C. § 727(d)(1). On appeal, the district courtaffirmed the bankruptcy court's judgment. The debtors now appeal these adverse rulings.
The Chapter 7 debtors in this case, Edward and Pamela Johnson, husband and wife, owned a real estate venture known as Johnson Built Homes, LLC, with Daniel and Jan Johnson, also husband and wife. Edward and Daniel are the sons of Miles and Patricia Johnson. To fund their business venture, the debtors and creditors obtained a loan from Park Midway Bank (the "Bank") in exchange for personal guarantees and mortgages on real property. Specifically, the creditors granted the Bank a mortgage on their lake home, and the debtors granted the Bank a mortgage on their homestead. The debtors also owned a lake home but this property was left unencumbered by the business loan.
Eventually, Johnson Built Homes experienced financial difficulties, and the debtors stopped paying their debt obligations toward the business. After the debtors stopped paying, the creditors attempted to shoulder the entire business debt, but after several months, they too stopped paying, and the loan went into default. Subsequently, the Bank sought to foreclose on the mortgaged properties but had failed to properly record the mortgage on the debtors' property. Thus, the Bank only foreclosed on business property and the creditors' lake home. The Bank obtained a deficiency judgment of roughly $68, 000 against the creditors. Meanwhile, the debtors' homestead and lake home went unaffected by the default and foreclosures.
As a result of the failed business venture, the creditors initiated action against the debtors in Minnesota state court. Soon after, on June 8, 2010, the debtors filed a petition for Chapter 7 bankruptcy, listing Daniel and Jan as creditors due to the state court action. On September 14, 2010, the bankruptcy court granted the debtors a discharge.
Two months before filing their petition for bankruptcy, the debtors attempted to convey real property located in Fairfield Township, Minnesota (the "lake property"), to parents Miles and Patricia Johnson. In exchange for the conveyance and a warranty deed, Miles and Patricia paid the debtors $56, 000, which Miles procured from a home equity line of credit. None of the debtors' personal property transferred through the warranty deed, but the debtors' personal property remained on the lake property. After the transaction–which the debtors characterized as a sale of real property–the debtors continued to use and enjoy the property, even paying all utilities, property taxes, and making improvements to the property. The evidence at trial also revealed that the debtors agreed to pay back Miles and Patricia the $56, 000 plus interest equal to that paid on the home equity line of credit, at which time Miles and Patricia would return legal title to the debtors.
After discharge, the creditors initiated an adversary proceeding against the debtors, alleging that the debtors engaged in fraud and failed to report to the bankruptcy trustee a continued equitable interest in the lake property. The bankruptcy court found that the debtors' purported sale of lake property to Miles and Patricia had several badges of fraud. Rather than deeming it a sale, the court concluded the transaction constituted a loan from Miles and Patricia, with the debtors maintaining an ownership interest in the property. Further, the bankruptcy court found that the debtors engaged in the transaction with the intent to hinder, delay or defraud creditors. Based on these findings, the bankruptcy court revoked the debtors' discharge. The district court affirmed. The debtors now appeal. We affirm.
"We sit as a second court of review in bankruptcy matters, generally applying the same standards of review as the district court and reviewing the bankruptcy court's factual findings for clear error and its conclusions of law de novo." Ritchie Special Credit Inv., Ltd. v. United States Trustee, 620 F.3d 847, 853 (8th Cir. 2010). Like the district court, we must determine whether the bankruptcy court properly revoked the debtors' ...