Business Law

In re Wylie, 649 B.R. 852 (Bankr. E.D. Mich. 2023)

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The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:


The Bankruptcy Court for the Eastern District of Michigan (the Court) denied chapter 7 debtors’ discharge under Bankruptcy Code § 727 (a)(2)(B) when it concluded after trial that the debtors’ election to apply expected tax refunds based on 2019 returns, filed post petition, toward 2020 tax liabilities was a transfer of property made with intent to hinder the chapter 7 trustee.  It was not pertinent that the transfer did not actually hinder the trustee.  In re Wylie, 649 B.R. 852 (Bankr. E.D. Mich. 2023).

To view the opinion, click here.


Debtors Jason and Leah Wylie (the Debtors) filed their 2018 federal and state income tax returns on March 31, 2020, five months before they filed a chapter 7 bankruptcy petition on August 27, 2021.  The Debtors elected to apply expected refunds which totaled about $39,300.00 to their 2019 estimated taxes.  Three weeks after the petition date, the Debtors filed their 2019 tax returns with expected refunds of about $41,500 (which included the overpayments from 2018) and again elected to apply them against expected taxes for 2020 rather than receive the refunds.

Chapter 7 trustee Timothy Miller (the Trustee) filed an action under §§ 727(a)(2)(A), 727(a)(2)(B), and 727(a)(4) to deny the Debtors their discharge.  After trial the Court ruled in favor of the Debtors on the §§ 727(a)(2)(A) and (a)(4) claims but denied their discharge under § 727(a)(2)(B) based on the post petition election to apply the 2019 tax refunds to their next year’s tax liability.


The three grounds for denial of discharge as pertinent here address different circumstances:  (1) § 727(a)(2)(A) denies Debtors’ discharge if with intent to hinder, delay or defraud a creditor they transfer, remove or conceal property of the debtors within one year before the petition date; (2) § 727(a)(2)(B) denies their discharge if they do the same with property of the estate after the petition date; and (3) § 727 (a)(4) denies their discharge if in connection with the case they knowingly and fraudulently make a false oath. The burden is on the Trustee to prove the elements of each claim.

The Court rejected the Trustee’s assertions that the prepetition election was done with the intent to hinder or delay creditors.  The Debtors merely intended to prefer their tax creditors over their other creditors.  Similarly, it denied the argument that they made a false oath knowingly and fraudulently even though they did not accurately disclose in their case initiation documents the amounts they had paid as estimated taxes for 2019 and failed to disclose what they intended to do with any expected refunds.  The Court concluded that because the Debtors knew they would be handing over both the 2018 and 2019 tax returns, which would reveal all these details, to the Trustee promptly, they lacked the requisite intent to defraud that Sixth Circuit precedent required for denial of discharge under that subsection.

The court, however, found that when the Debtors elected to apply the post petition refunds against 2020 taxes, they intended to hinder the ability of the Trustee to liquidate property of the estate.  To reach that conclusion, the Court first examined whether the election was a “transfer” of “property of the estate”.  That the refunds were property of the estate was well-settled; all refunds a debtor is entitled to receive on the petition date are property of the estate since the right to receive them has already accrued.  A transfer is broadly defined by § 101(54) as “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of… (i) property; or (ii) an interest in property.”  Therefore, when the Debtors disposed of their right to receive the refunds by electing to use them as a credit against the next year’s taxes, a transfer occurred.   The Court found the requisite “intent” based on the testimony of the Debtors who said the purpose of the election was to try to make sure their 2020 taxes would be paid.  Favoring a debt not yet due over prepetition creditors demonstrated their intent to hinder the Trustee.

As it turned out, when the Debtors filed their 2020 tax returns, which reflected the overpayments rolled over from 2019 and provided them with a substantial refund which included those funds, they elected to receive the refunds.  This resulted in the money in question being paid directly by the IRS to the Trustee, so in truth he was not actually hindered in collecting the estate asset.  However, the Court ruled that the relevant time for the intent element was the date the election/transfer was made; at that time, the Debtors intended to hinder the trustee’s collection of estate assets.  The Court denied their discharge.


The Court ruled correctly that the election was a transfer and that the post petition election hindered the Trustee’s collection of estate assets.  Not surprisingly, the other two claims failed based on the Trustee’s failure to prove intent.  Proving intent is always the hardest element of any § 727(a) claim, even though circumstantial evidence can meet the burden.  Here, the significant ruling of the Court was that preferring some creditors, the tax authorities, over other creditors prepetition is not an intent to hinder or delay creditors.  Based on this ruling, a debtor who elects prepetition to apply an expected tax refund against future taxes would not lose his discharge under § 727 (a)(2)(A).

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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