1.  INTRODUCTION - Debtors moved for summary judgment, claiming that as a matter of law, the trustee's action to revoke the debtors' discharge under § 727(d)(2) of the Bankruptcy Code is deficient.

Barbara Vockner conveyed property to her sister pre-petition which was recovered by the trustee in settlement of a fraudulent transfer action against the sister. In addition, after the transfer, but before the settlement, Barbara Vockner received cash proceeds from the property both pre-petition and post-petition. The trustee is seeking to recover some of these proceeds also from debtors.

The debtors argue that the property conveyed and the proceeds were not "property of the estate" as defined in the Bankruptcy Code so       3 ABR 426  that its nondisclosure does not support an action to revoke debtors' discharge under § 727(d)(2) of the Bankruptcy Code.

Under the facts alleged in this case, the property may be property of the estate, and the trustee's action is not barred as a matter of law. Summary judgment is denied which would dismiss the trustee's complaint to revoke the debtors' discharge.

This memorandum does not discuss the denial of the summary judgment motion by the debtors that the trustee is also barred from recovering the cash proceeds paid to Barbara Vockner. The court orally ruled against debtors on that count too.

     2.  FACTS - The Vockners filed a chapter 7 proceeding on April 17, 1990. Their discharge was entered on August 29, 1991.

In a prior adversary proceeding, the trustee sued Joan Mickelsen, Barbara Vockner's sister, under § 544(b) and Louisiana law, claiming that oil-producing real property of substantial value located in Louisiana was fraudulently conveyed to Mickelsen in 1988.

The trustee settled with Ms. Mickelsen, recovering almost all the property and its proceeds. The settlement reserved the right of the trustee to bring an action against the debtors to recover cash proceeds not recovered in the Mickelsen settlement. The trustee claims to have learned of the $17,258.23 transfer only during the negotiations to settle the Mickelsen case.

The present adversary proceeding was filed on November 3, 1993, shortly after the Mickelsen settlement was approved by this court.

The trustee alleges that the Vockners did not disclose the transfers or the payment of proceeds to Barbara Vockner from the transferred property both pre-petition and post-petition. The transfer to Joan Mickelsen is characterized as a ruse to hide the property from the debtors' creditors and the trustee.

The trustee argues that the retained interest can be inferred by use of bank accounts in California to "launder" the funds and return proceeds to or for the benefit of Barbara Vockner to the tune of about $75,000.

           3 ABR 427    DEFENDANTS' SUMMARY JUDGMENT CONTENTIONS -

§ 727(d)(2) of the Bankruptcy Code provides:

(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if-
(2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee;

To support their contention, the Vockners ask the court to adopt an analogy to a line of cases involving § 362(a), automatic stay issues, exemplified by In re Saunders, 101 BR 303 (Bankr ND Fla 1989). See, also, In re Colonial Realty Company, 980 F2d 125, 130-31 (2nd Cir 1992).

In Saunders, a creditor of the debtor had obtained a pre-petition judgment against the Saunders for about $460,000. The creditor brought an action under the Florida fraudulent conveyance statute against four entities to whom the Saunders had allegedly fraudulently transferred property. The state court judge ruled that $170,000 had been fraudulently transferred to the four entities. Debtors then filed chapter 7.

The creditor moved for relief from stay under § 362(a)(3) of the Bankruptcy Code to continue with its collection action against the four non-debtor entities. § 362(a)(3) provides:

§ 362. Automatic stay

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title [11 USC §§ 301, 302, 303], or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78eee(a)(3)) [15 USC § 78eee(a)(3)], operates as a stay, applicable to all entities, of-

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise       3 ABR 428  control over property of the estate; . . .

§ 541. Property of the estate

(a) The commencement of a case under section 301, 302, or 303 of this title [11 USC § 301, 302, or 303] creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.

(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723 of this title [11 USC § 329(b), 363(n), 543, 550, 553, or 723].

First, § 541(a)(3) defines property of the estate as: "[A]ny interest in property that the trustee recovers under section 329(b), 363(n), 543 [sic 544], 550, 553, or 723 of this title." Section 550 allows the trustee to recover fraudulently transferred property for the benefit of the estate to the extent that a transfer is avoided under either §§ 544 or 548; § 541(a)(3) then brings the property actually recovered by the trustee into the estate. If property that has been fraudulently transferred is included in the § 541(a)(1) definition of property of the estate, then § 541(a)(3) is rendered meaningless with respect to property recovered pursuant to fraudulent transfer actions.

We think that the inclusion of property recovered by the trustee pursuant to his avoidance powers in a separate definitional subparagraph clearly reflects the congressional intent that such property is not to be considered property of the estate until it is recovered. Until a judicial determination has been made that the property was, in fact, fraudulently transferred, it is not property of the estate. If it were, the trustee could simply use a turnover action under 11 U.S.C. §       3 ABR 429  542, and the two (2) year statute of limitations of § 546(a) for actions under §§ 544 and 548 could be avoided. Moreover, allowing the debtor to retain an interest, legal or equitable, in fraudulently transferred property conceivably places a cloud on the title of any property transferred by the debtor until there is a judicial determination that the transfer is not avoidable. This result was clearly not contemplated by Congress.

Saunders was critical of the other line of cases epitomized by In re MortgageAmerica Corp., 714 F2d 1266, 1274-77 (5th Cir 1983). The 5th Circuit felt that the estate had an interest in property which had been fraudulently conveyed pre-petition under § 541(a)(1).

The Vockners have found no cases directly on point on the question of whether a fraudulently transferred property can be considered "property of the estate" for the purposes of revoking a discharge under § 727(d)(2) that: "the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee." They, however, argue that the Saunders reasoning should be applied.

     4.  ANALYSIS - Even if I agreed with the application of Saunders in some cases [that § 362(a)(3) is not applicable to property which has been fraudulently conveyed since it is not property of the estate pursuant to § 541(a)(3)], I disagree with the analysis as it would apply to this case.

Saunders is too black or white in its syllogism that every fraudulently conveyed property falling under the § 541(a)(3) definition cannot also be § 541(a)(1) property of the estate. Under the facts in a given case, the property may fall under both subsections. The present case, as alleged, is one of those which falls under both §§ 541(a)(1) and 541(a)(3).

The trustee has cited substantial evidence that Ms. Vockner retained a secret interest in the Louisiana property and its proceeds. Joan Mickelsen, in her settlement with the trustee agreed to give all the property back to the estate. There is a genuine issue of material fact as to whether Barbara Vockner retained a secret, equitable interest in the Louisiana property at the time her bankruptcy was filed which she       3 ABR 430  should have, but did not, disclose in her schedules. Compare In re Syrtveit, 105 BR 596, 599 (Bankr D Mont 1988), discussing the doctrine of "continuing concealment" in the context of denial of a discharge under § 727(a)(2) of the Bankruptcy Code. In that case the debtor conveyed his property to a relative more than one year before filing bankruptcy, but continued to use it. See, also, Travelers Ins. Co. v E. T. McArthur, 175 So2d 669 (CtApp La 1965).

Thus the trustee has raised a genuine issue of material fact under FRCivP 56 as to whether, on the date of filing, Barbara Vockner had an undisclosed, concealed interest in a property of substantial value. This is property of the estate under § 541(a)(1), even if the legal title to the property must also be recovered from a relative by a fraudlent transfer action and would then, also, be considered property of the estate under § 541(a)(3).

There may be fraudulently conveyed property in which, at the time a bankruptcy case is filed, a debtor retains no interest. Such property would fall within the definition under § 541(a)(3) of the bankruptcy code, and conceivably, under the argument of Saunders, not be included in § 541(a)(1). For example, if a debtor had, within one year before filing, sold property to a relative at a bargain price and retained no residual interest.

Not enough facts are given in Saunders to determine if it is the type of situation like the case at bar (with an alleged secret interest retained) or like the case where there is no retained interest (although the facts infer it is the latter).

In a case like the Vockners', common sense tells us that § 541(a)(1) is applicable without trying to cross-reference a number of sections of the Code to make them all compatible. It is apparent that a debtor who retains an equitable interest in property which is not reported on the schedules may have hidden "property of the estate" which may fall within § 727(d)(2).

§ 727(d)(2) is worded in such a way that it appears to be aimed at situations in which there is an unreported post-petition receipt of property which should have been reported. For example, the type of property described in § 541(a)(5) (certain property acquired by inheritence, in a domestic relations property settlement, or from life       3 ABR 431  insurance within 180 days of the filing). The parties have not argued this nuance of § 727(d)(2). In any event, at least part of the property which Barbara Vockner received (the $17,258.23, for example) is arguably within this definition.

     5.  CONCLUSION - There may be other grounds to attack the trustee's case (such as the statute of limitations or whether the judgment should not apply to Bernd Vockner on the grounds he is the "innocent spouse"). Summary judgment, however, cannot be granted on the grounds that § 727(d)(2) does not apply as a matter of law because no "property of the estate" was involved until the trustee recovered (or settled) a fraudulent transfer claim against Joan Mickelsen. § 727(d)(2) clearly would apply to this case if the trustee establishes the facts alleged in his complaint.

DATED: June 13, 1994

HERBERT A. ROSS
U.S. Bankruptcy Judge