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In re Margaret Kempff

United States Court of Appeals, Seventh Circuit

January 30, 2017

In re: Margaret Kempff, Debtor-Appellee. Appeal of: Brian K. Farley.

          Argued February 23, 2016

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 14 C 9810 - Thomas M. Durkin, Judge.

          Before Wood, Chief Judge, and Sykes and Hamilton, Circuit Judges.

          Sykes, Circuit Judge.

         Margaret Kempff s ex-husband Bart embezzled more than $1 million from his employer while the two were still married. To evade detection, he attempted to replenish the stolen funds, borrowing $400, 000 from his friend Brian Farley on the ruse that the money would be used for a real-estate development. As security for the loan, Bart gave Farley a third-priority lien on the couple's home, forging Margaret's signature on the note and mortgage.

         Bart's effort to cover his tracks did not succeed. His employer discovered the embezzlement and reported it to police; he was eventually convicted of felony theft. In the meantime, Margaret divorced him and the couple's home went into foreclosure. Farley filed a cross-claim in the foreclosure action seeking to enforce his lien, but the sale of the home did not yield nearly enough to cover even the first mortgage. Margaret filed for bankruptcy while the foreclosure was pending, which stayed Farley's claim.

         Farley then filed an adversary complaint challenging Margaret's eligibility for a Chapter 7 discharge. He claimed that she made a fraudulent transfer after filing her bankruptcy petition and made multiple false statements in her bankruptcy schedules. Margaret testified at trial that these were innocent mistakes. The bankruptcy judge credited her testimony and rejected each of Farley's contentions, and the district court affirmed that decision. We do the same. Farley's arguments for overturning the bankruptcy judge's ruling are most charitably described as ill-considered. The decision rests on the judge's acceptance of Margaret's testimony as credible. Credibility determinations are almost never disturbed on appeal. Farley gives us no good reason to do so here.

         I. Background

         Bart Kempff, an attorney, was general counsel for a luxury home builder in suburban Chicago. Over time he embezzled approximately $1.2 million from his employer. In early August 2007, he launched a desperate scheme to avoid detection by surreptitiously replenishing the stolen money. To that end he asked Brian Farley, also an attorney, to lend him $400, 000, ostensibly for a real-estate development. In exchange Bart offered Farley a security interest on the real-estate project and a second mortgage on the home he and Margaret owned. Farley agreed.

         On August 8 Bart signed a note and mortgage, and Farley wrote him a check for $400, 000. Bart had concealed his fraudulent activity from his wife, so Margaret wasn't present for this transaction. Bart assured Farley that she was willing to sign and promised to obtain her signature on the loan documents. He then used the money to partially restore the stolen funds. On August 21 Bart and Margaret closed on a bank loan secured by a second mortgage on their home. Two days later, Bart forged Margaret's signature on the Farley loan documents and sent them back to Farley, clearing the way for him to record the mortgage. Farley did so, but by then it was third in order of priority.

         While all this was unfolding, Bart's employer learned of the embezzlement. On August 21-the same day he and Margaret closed on the bank loan-Bart was fired. Things unraveled quickly after that. Several of Margaret's relatives loaned the couple sizable sums in the hope that Bart could repay his employer and avoid prosecution. To no avail; the State's Attorney charged him with felony theft, and he was eventually convicted and disbarred. Meanwhile, the lender holding the first mortgage on the couple's home initiated foreclosure proceedings. Farley filed a cross-claim against Bart and Margaret in the foreclosure action, but the proceeds of the home sale were insufficient to cover even the first mortgage. The nonpriority lienholders received nothing.[1]

         While the foreclosure action was pending, Margaret filed a petition for bankruptcy, which automatically stayed Farley's claim against her. Farley turned to the bankruptcy court for relief, filing an adversary action challenging Margaret's eligibility for a Chapter 7 discharge. He raised many grounds; only two remain relevant here. Farley accused Margaret of transferring property "with intent to hinder, delay, or defraud a creditor" after the date of her bankruptcy petition. 11 U.S.C. § 727(a)(2). He also alleged that she "knowingly and fraudulently" made false statements in her bankruptcy filings. Id. § 727(a)(4).

         The bankruptcy judge held a three-day bench trial on Farley's claims. Margaret testified that she did not authorize the postpetition transfer and that the inaccurate statements in her bankruptcy filings were innocent mistakes or misunderstandings. The judge credited her testimony, found that she lacked fraudulent intent, and rejected Farley's claims. The district court upheld this ruling, and Farley has appealed.

         II. ...

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