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Debtor’s revoked discharge reversed

A Virginia Beach debtor, whose bankruptcy discharge was revoked when she refinanced her home days after the discharge, regained her discharge when her case went to the 4th U.S. Circuit Court of Appeals.

Allison Marie Jordan’s bankruptcy appeal posed the question of just how “intransigent” a debtor has to be for a court to revoke her Chapter 7 discharge, according to the 4th Circuit panel.

A standard court order that contained an all-purpose admonition against the sale or transfer of the debtor’s property did not necessarily provide notice to the debtor that she could not refinance her home, according to the decision in In re Jordan (VLW 008-2-053).

Jordan, who filed her Chapter 7 petition on Jan. 7, 2005, was subject to the Norfolk federal bankruptcy court’s standard administrative order. That order prohibited the sale, transfer, removal, destruction or concealment of any of the debtor’s property, and stated the debtor should not turn over any property to any creditor or party in interest without the consent of the bankruptcy trustee or a court order.

Under the standard order, debtors are notified of their continued responsibility to obey court orders after discharge, and of the possibility that a discharge can be revoked for cause.

At a creditor’s meeting, the debtor submitted evidence to show a fair market value of $225,000 for her Virginia Beach home, with equity of $4,960. The bankruptcy trustee, Tom Cain Smith Jr., obtained a market analysis that valued the home at $250,000, with a possible $1,265 net at sale. Smith determined not to market the property.

The court granted Jordan a discharge on June 24, 2005. On July 1, Jordan, who had lost her business and was unemployed, refinanced her home. She paid off first and second mortgages and received $15,000 that she used for living expenses. Jordan refinanced without the knowledge or consent of the trustee or the bankruptcy court.

Cain later learned about the refinancing when he received an offer to buy the property from an unsecured creditor of Jordan’s. Cain filed a complaint for revocation of the discharge for failure to comply with the bankruptcy court’s administrative order. The bankruptcy court revoked the discharge and the Norfolk federal district court affirmed.

Under federal bankruptcy law, a trustee seeking revocation has to prove a “willful and intentional” refusal to obey a court order.

Citing the ever-ready “fresh start” rationale, two members of the 4th Circuit panel were willing to cut the debtor some slack.

The bankruptcy court’s administrative order did not “specifically prohibit the ‘refinancing’ of property,” the majority said. Refinancing technically involves a transfer, but that would not be apparent to the typical debtor, said the opinion by Chief U.S. District Judge John Preston Bailey, of the Northern District of West Virginia. It was up to the “business-savvy drafters of the administrative order” to be explicit, and not leave the debtor to “read between the lines,” Bailey said.

Jordan’s failure to comply with the court order was not willful, and she was entitled to a discharge, the court concluded.

Judge Blane Michael disagreed with the decision to reverse the revocation. The panel majority, which also included Judge Roger L. Gregory, got the rules for revocation right, but faltered in its application, according to Michael.

He said it did not take malice to prove willful refusal to comply with the court order. Michael also did not buy Jordan’s excuse that she did not understand that refinancing, mere days after the discharge, would violate the court order.

Neither Cain nor the debtor’s attorney, Leonard David Levine of Virginia Beach, could be reached for comment.

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