UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

COVINGTON DIVISION

IN RE:

LARRY D. TOY

BRENDA L. TOY

DEBTORS CASE NO. 96-20628

MICHAEL L. BAKER, Trustee PLAINTIFF

VS. ADV. NO. 96-2040

LARRY D. TOY

BRENDA L. TOY

BRANDON SCOTT MERRITT DEFENDANTS

MEMORANDUM OPINION

This matter is before the Court pursuant to an Agreed Order of Submission entered on May 21, 1997. The record consists of the depositions of both debtors, Stipulations of Fact, and other documentary evidence. The Agreed Order also dismissed Brandon Scott Merritt as a party. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(J).

The trustee filed a Complaint on August 30, 1996, alleging that the debtors had conveyed property to their minor grandson for no consideration, that the transfer constituted a fraudulent conveyance pursuant to 11 U.S.C. '548 and KRS 378.020, and that the failure to disclose that transfer was conduct requiring denial of a discharge pursuant to 11 U.S.C. '727(a)(2), (3), (4), and (5). The debtors denied these allegations by their Answer filed on September 16, 1996. The minor defendant, Brandon Scott Merritt, answered by his Guardian Ad Litem on October 2, 1996.

An Order for Trial entered on January 23, 1997, originally set this matter for trial on April 29, 1997. The debtors filed a Motion for Summary Judgment on February 18, 1997. The trustee filed his Motion for Summary Judgment and Response to Motion for Summary Judgment on March 11, 1997. The debtors filed their Reply to Plaintiff's Response to Motion for Summary Judgment on March 17, 1997. At a hearing conducted on March 25, 1997, both Motions for Summary Judgment were overruled, and an Order consistent with that ruling was entered on April 2, 1997.

The trustee and the debtor/defendants filed Stipulations of Fact on May 19, 1997, which provide as follows:

"1. This Court has jurisdiction to hearing the said matters arising under 28 U.S.C. '1334 and 28 U.S.C. '157. The matter before the Court is a core proceeding as defined under 28 U.S.C. '157. The matters complained of arise under 11 U.S.C. '727.

2. The Debtors, Larry D. Toy and Brenda L. Toy, filed a voluntary Chapter 7 bankruptcy petition on May 9, 1997 in the United States Bankruptcy Court for the Eastern District of Kentucky. At all times complained of herein, the Debtors, Larry D. Toy and Brenda L. Toy were and remain husband and wife.

3. On November 18, 1995, the Debtors executed a deed for the real estate where in they reside at 712 Lawrence Road, Maysville, Kentucky 41056 in favor of their twelve (12) year old grandson, Brandon Scott Merrit for no consideration. The deed, which is attached as joint Exhibit "C" includes an affidavit of consideration as required under Kentucky Law that states that the value of the property passing was $10,000.00. Said deed was recorded in Deed Book 262, Page 540 of the Mason County Clerk's Records at Maysville, Kentucky.

4. The Debtors acquired the subject real estate by deed from Donald A. and Connie Davenport on July 31, 1990 and paid the sum of $10,000.00 for the same property. The deed of conveyance to the Debtors is attached hereto as joint Exhibit "B".

5. On August 24, 1995 the Debtors made an application for a loan with American General Finance where in they sought to borrow the sum of $2,500.00. A copy of the loan application is attached to this stipulation as joint Exhibit "A". The Debtors admit that they signed the application.

6. In the bankruptcy petition, which was filed on May 9, 1996 and which is marked as joint Exhibit "D", the Debtors aver under penalty of perjury that they made no transfers of property when in one year of the filing of the bankruptcy petition. In addition, the Debtors also stated under oath that they had made no gifts within one year of filing of the bankruptcy petition in the answer to question 7 of the Statement of Financial Affairs. Again, the Debtors also failed to reveal that if they had not made a gift that they held property for the benefit of another person, namely their grandson, when they continued to reside at the property located at 712 Lawrence Road, Maysville, Kentucky.

7. The Trustee learned of the ownership interest of the Debtors by a letter from a creditor dated June 30, 1996, which is attached as joint Exhibit "F".

8. After the Trustee instituted this adversary proceeding, the Debtors requested an appraisal from the firm of Kachler and Associates on the subject premises. The appraisal reveals that the property is in substandard condition and has no operating septic or sewage system and as a result, the appraiser valued the property at best in the amount of $5,000.00.

9. As a result of this appraisal, the Trustee has abandoned the subject real estate.

The parties will stipulate that if in fact the Debtors had listed the property properly in the bankruptcy petition and had not transferred ownership to their grandson, that the homestead exemption of the Debtors exceed any value to the estate."

Both debtors gave a deposition in this matter. The debtor husband testified that he did not read very well. He did not know that the term "the debtor" on his bankruptcy petition referred to him. (Larry Toy depo., pp. 10-11) He testified that the loan officer at American General Finance suggested, and then wrote on the loan application, that the subject property was worth $30,000.00. He stated that he did not know what it was worth. (Larry Toy depo., p.31)

He further testified that after the mortgage on the subject property was paid off, he and his wife conveyed it to their minor grandson who lives with them and is handicapped. They did this, he stated, so that their grandson would always have a place to live. (Larry Toy depo., pp. 37-39)

When asked why he failed to disclose the transfer of real estate on the bankruptcy petition, he stated that he thought a transfer referred to selling something and getting money for it. He also did not believe he was making a gift to his grandson, because he and his wife still live there. (Larry Toy depo., p. 51)

Brenda Toy's testimony was consistent with her husband's. She characterized the transfer to their grandson as "giving him a place to live." (Brenda Toy depo., p. 22) She thought that any reference to a transfer in regard to the subject property meant for money. (Brenda Toy depo., p.29)

The sole issue remaining before the Court is whether the debtors should be denied a discharge pursuant to 11 U.S.C. '727(a)(2), (3), (4), and (5). These paragraphs provide respectively that a debtor shall be granted a discharge unless he/she, with intent to hinder, delay or defraud a creditor or officer of the estate, transfers, removes, destroys, mutilates or conceals property within one year of filing his/her petition; conceals, destroys, mutilates, falsifies or fails to keep or preserve records concerning his/her financial condition; makes a false oath or account, presents a false claim, or withholds information from the trustee concerning his/her financial affairs; and fails to explain, before determination of denial of discharge, any loss or deficiency of assets to meet his/her liabilities. The party objecting to discharge must prove by a preponderance of the evidence that the discharge should be denied. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 660, 112 L.Ed.2d 755 (1991).

The trustee asserts that the debtors' conduct is sufficient to deny them a discharge pursuant to all these provisions, although he appears to confine his arguments to 11 U.S.C. ''727(a)(2)(A) and (a)(4). It is clear and the Court finds that there is no evidence in the record to support an objection to discharge pursuant to 11 U.S.C. '(a)(3) or (5). The trustee asserts that the fact that the subject property turned out to be almost worthless is insignificant.

It is interesting to examine the treatment of the homestead exemption under Kentucky law. In In re Powell, 173 B.R. 338 (Bkrtcy.E.D.Ky. 1994), this Court considered the question of the debtor's right to assert his homestead exemption in the absence of a forced sale. This Court stated:

Kentucky has clearly recognized the right of a debtor to assert the homestead exemption in the absence of a forced sale. In First National Bank of Jackson v. Oliver, 150 S.W.2d 894, Ky. (1941), Kentucky's highest court held that the right to a homestead exemption vests at the acquisition of the property or at any time thereafter and that Oliver's voluntary conveyance to his son could not be set aside:

Thus it will be seen that Walter Oliver had a homestead right in the property at the time he executed the deed to his son; and since his interest was worth less than $1,000 [the then exempt amount] it was exempt from the payment of his debts. Nor was the status of the exemption changed by the conveyance of the property to the son, even had the transaction been without consideration. If this were not the rule the deed could be set aside in the lifetime of the grantor, the legal effect of which would be to leave the title in the grantor, and since the homestead was exempt from the debts of the grantor before the conveyance, it would continue to be exempt, the same as if no attempt to divest the owner of his title had been made.

At page 896. See also: In re Grisanti, 58 F.Supp. 646 (W.D.Ky. 1945) (the District Court for the Western District of Kentucky recognized this interpretation of when the Kentucky homestead exemption arises); Tong &c. v. Eifort, 80 Ky. 152, 3 K.L.R. 647 (1882) (conveyance valid since homestead exempt from creditor's demands); W. M. Davis v. Davis, Trabue & Co., 6 Ky.Opin. 487 (1873) (creditors cannot be injured by sale of homestead property by debtors since it is exempt); Kessler v. Tapp, 180 S.W.2d 552 (Ky. 1944) (since a homestead is exempt, the owner may convey it as he sees fit and such conveyance is not a preference under the state preferential conveyance statute).

At page 340. It is clear, therefore, that the debtors' conveyance of the subject property to their minor grandson for no consideration is of no consequence, and is not to be considered a fraudulent transfer under Kentucky law.

The debtors= problems arise from their failure to disclose the transfer in their schedules filed with this Court. As above, if they had waited until after the petition had been filed, the transfer of the property to their grandson would not be objectionable.

Considering all of the facts of this case, the Court does not believe that the debtors had the requisite intent to hinder, delay or defraud their creditors required by '727(a)(2). Likewise the Court finds that the debtors lacked the sophistication to appreciate the disclosure requirements of the schedules herein and did not therefore knowingly fail to provide the information so as to fall afoul of '727(a)(4).

In consideration of all of the foregoing, it is the opinion of this Court that the trustee has not established that the debtors should be denied a discharge pursuant to 11 U.S.C. '727(a)(2)(A), '727(a)(4) or the other sections of that statute cited by the trustee in his complaint. An order in conformity with this opinion will be entered separately.

Dated:

By the Court -

____________________________

Judge

Copies to:

Debtors

Michael L. Baker, Esq., Trustee

Gerald W. Shaw, Esq.