Thomas Laughlin v. Nouveau Body and Tan, LLC, et a

REVISED April 15, 2010

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals

Fifth Circuit

F I L E D

No. 09-10622

March 29, 2010

Charles R. Fulbruge III

In the Matter of: THOMAS JAMES LAUGHLIN, Clerk

Debtor

---------------------------------------------------------------------

THOMAS J. LAUGHLIN,

Plaintiff - Appellant

v.

NOUVEAU BODY AND TAN, L.L.C.; MARIE C RALSTON; TERRI J

OUELLETTE,

Defendants - Appellees

Appeal from the United States District Court

for the Northern District of Texas

Before KING, JOLLY, and STEWART, Circuit Judges.

KING, Circuit Judge:

Thomas J. Laughlin appeals the district court’s order affirming the

bankruptcy court’s judgment denying discharge pursuant to 11 U.S.C.

§ 727(a)(2). The bankruptcy court determined that Laughlin fraudulently

No. 09-10622

transferred property under § 727(a)(2) by renouncing his interest in his father’s

estate before filing his Chapter 7 petition, and the district court affirmed. For

the following reasons, we REVERSE the bankruptcy court’s judgment and

REMAND for further proceedings.

I. FACTUAL AND PROCEDURAL BACKGROUND

Laughlin is involved in the spray tan business and has invented and

implemented several technologies used in spray tan machines. He was the

president of a company called Mist-On Systems, Inc. (“Mist-On”), which

produced and sold spray tanning machines to tanning salons, and he also was

the secretary and treasurer and a board member of Laughlin Products, Inc.

(“LPI”), which was also engaged in the spray tan business.

In August 2003, Mist-On and Laughlin brought suit against one of its

customers, Nouveau Body & Tan, L.L.C. (“Nouveau”), alleging, inter alia, claims

of defamation and trade disparagement based on statements made by Nouveau

regarding Mist-On and Laughlin’s products. Nouveau answered this complaint,

denied all of Mist-On and Laughlin’s claims, and counterclaimed for damages

arising from alleged defects in Mist-On’s tanning machines, which it claimed

caused a substantial loss of business. Nouveau also requested attorneys’ fees for

defending against Mist-On and Laughlin’s allegedly baseless defamation claims.

After a trial and jury verdict, a joint and several judgment for $629,000 was

entered against Mist-On and Laughlin on February 15, 2007, and on May 17,

2007, the district court awarded $393,588.75 in attorneys’ fees to Nouveau.

Laughlin admits that neither he nor Mist-On could pay the judgments entered

against them and that he began exploring options to manage his financial

situation.

Also on February 15, 2007, Laughlin’s father, a Louisiana resident, died

intestate in Acadia Parish, Louisiana. Under Louisiana intestacy rules,

Laughlin was to receive a quarter of his father’s estate; Laughlin’s father’s estate

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No. 09-10622

was valued at about $155,000. Included in this estate were 40,000 shares of LPI,

which were later valued by Laughlin, in his Chapter 7 statement of assets, at

$4,000; these 40,000 shares constituted 33.5% of LPI’s outstanding stock.

Laughlin claims that everyone in his family knew that his father’s intent was to

give the entire estate to Laughlin’s mother, who was still married to and living

with Laughlin’s father at the time of his death.

Following his father’s death, Laughlin and his family considered ways to

ensure that his mother received the full value of his father’s estate. To this end,

Laughlin renounced any interest in his father’s estate on June 4, 2007. Under

Louisiana succession rules, Laughlin’s share of his father’s estate then passed

to his daughter, who ultimately transferred this interest to Laughlin’s mother.

On July 21, 2007, Laughlin filed a Chapter 7 bankruptcy petition, in which

he disclosed the renunciation of his interest in his father’s estate. Nouveau filed

an adversary action against Laughlin and objected to Laughlin’s discharge of

debt, pursuant to 11 U.S.C. § 727(a)(2), arguing that Laughlin’s renunciation of

his interest in his father’s estate was a transfer of property made within one

year of the bankruptcy petition that was made with the intent to delay, hinder,

or defraud his creditors.1

1

Nouveau also claimed that discharge should be denied under § 727(a)(5), urging that

because Laughlin had stated in his bankruptcy petition that he owned 100% of LPI’s stock and

in later proceedings claimed to own only 66% of LPI’s stock, he had failed to explain a loss of

assets and should be denied a transfer under that section. Section 727(a)(5) provides that

“[t]he court shall grant the debtor a discharge, unless . . . the debtor has failed to explain

satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor’s liabilities.”

Nouveau also argued that Laughlin actually did own 100% of the LPI stock and that, in either

event, he should be estopped from claiming that he owned less than 100% of LPI. Laughlin

responded that he had always owned only 66% of LPI and that the 100% figure was incorrectly

based on “tax attribution” rules, where certain family members’ stock is attributed to the

taxpayer. The bankruptcy court determined that Laughlin did not fail to explain the

discrepancy in his percentage ownership of LPI, that Laughlin’s percentage ownership of LPI

had not changed from the date of his petition, that it was inappropriate to apply Nouveau’s

estoppel theory to Laughlin, and that, accordingly, Laughlin should not be denied a discharge

under § 727(a)(5). Nouveau cross-appealed the bankruptcy court’s § 727(a)(5) determination

to the district court, but the district court did not address whether Laughlin should be denied

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No. 09-10622

In an oral ruling, the bankruptcy court determined that, following Drye v.

United States, 528 U.S. 49 (1999), Laughlin’s renunciation of his interest in his

father’s estate was a fraudulent transfer under § 727(a)(2). Specifically, the

bankruptcy court concluded that Laughlin “had the power to channel [his

inheritance interest]” and he thus transferred that interest by renouncing his

inheritance; that Laughlin had the intent to delay, hinder, or defraud his

creditors when he made the transfer; and that Laughlin’s intent in transferring

this interest was sufficient to deny discharge under § 727(a)(2).2

Laughlin appealed the denial of his discharge under § 727(a)(2). The

district court determined that the bankruptcy court had not erred in making its

factual findings, agreed with the bankruptcy court that “federal law applies in

defining ‘transfer’ and ‘property’” under § 727(a)(2), and concluded that the

bankruptcy court appropriately denied discharge under § 727(a)(2). Laughlin

timely appealed to this court.

a discharge under § 727(a)(5), reasoning that examining that issue was “not necessary” in light

of its determination that the bankruptcy court correctly denied discharge under § 727(a)(2).

Nouveau does not re-urge its § 727(a)(5) arguments on appeal to this court.

2

The bankruptcy court made this determination despite finding that Laughlin’s intent

to transfer his interest in his father’s estate to his mother was “credible.” The bankruptcy

court reasoned that because Laughlin’s inheritance interest included a significant number of

shares of LPI and because Laughlin controlled LPI and was manipulating it to reduce its

exposure to creditors (by, inter alia, changing his and his wife’s salaries), Laughlin had

renounced his interest in his father’s estate with the intent to hinder and delay Nouveau. The

bankruptcy court reviewed indicators of fraud and found that Laughlin received no

consideration for his renunciation, that the “transfer” was made to a family member, that

Laughlin did not retain control or use of the property after its transfer, that Laughlin was in

bad financial shape at the time of the renunciation, that Laughlin had not been credible in his

testimony generally, and that the pattern and general chronology of the events suggested

fraud. On this point, the court recounted how Laughlin had manipulated LPI and his role in

the company, and that Laughlin had taken these actions shortly following the judgments

entered in favor of Nouveau. The court also referenced Louisiana case law and noted that it

would be “difficult” and costly for Nouveau to petition the Louisiana state courts to undo

Laughlin’s renunciation and that this also suggested that Laughlin transferred property with

the intent to hinder, delay, or defraud his creditors.

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No. 09-10622

II. DISCUSSION

A. Standard of Review

“We apply the same standard of review as the district court, reviewing the

bankruptcy court’s findings of fact for clear error and conclusions of law de novo.”

Cadle Co. v. Duncan (In re Duncan), 562 F.3d 688, 694 (5th Cir. 2009) (per

curiam).

B. The Bankruptcy Code, Transfer, and Interest in Property

1. Section 727(a)(2)

Section 727 provides, in relevant part:

(a) The court shall grant the debtor a discharge, unless--

...

(2) the debtor, with intent to hinder, delay, or defraud a

creditor or an officer of the estate charged with custody of

property under this title, has transferred, removed, destroyed,

mutilated, or concealed, or has permitted to be transferred,

removed, destroyed, mutilated, or concealed--

(A) property of the debtor, within one year before the

date of the filing of the petition; or

(B) property of the estate, after the date of the filing of

the petition[.]

11 U.S.C. § 727(a)(2). “A bankrupt’s violation of the provisions of 11 U.S.C. § 727

entirely bars discharge . . . .” Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550,

552 (5th Cir. 1987). “The debtor’s entitlement to a discharge must . . . be

determined by federal, not state, law.” First Tex. Sav. Ass’n v. Reed (In re Reed),

700 F.2d 986, 991 (5th Cir. 1983).

The creditor “bears the burden of establishing the elements that would

prevent discharge.” Cadle Co. v. Pratt (In re Pratt), 411 F.3d 561, 565 (5th Cir.

2005). “The exceptions [to discharge] are construed strictly against the creditor

and liberally in favor of the debtor.” Duncan, 562 F.3d at 695.

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No. 09-10622

To establish that discharge should be denied under § 727(a)(2)(A),

a creditor must show four elements: “(1) a transfer [or concealment]

of property; (2) belonging to the debtor; (3) within one year of the

filing of the petition; [and] (4) with intent to hinder, delay, or

defraud a creditor or officer of the estate.”

Pratt, 411 F.3d at 565 (alterations in original) (quoting Pavy v. Chastant (In re

Chastant), 873 F.2d 89, 90 (5th Cir. 1989)). Here, the parties dispute whether

the pre-petition renunciation of Laughlin’s succession rights constituted a

“transfer” of property for the purposes of § 727(a)(2) and, if a transfer of property

did occur, whether the transfer was done with intent to hinder, delay, or defraud

creditors.

2. Transfer and Interest in Property

The bankruptcy code defines “transfer” to include “each mode, direct or

indirect, absolute or conditional, voluntary or involuntary, of disposing of or

parting with-- (i) property; or (ii) an interest in property.” 11 U.S.C.

§ 101(54)(D). “‘What constitutes a transfer and when it is complete’ is a matter

of federal law . . . since . . . the statute itself provides a definition of ‘transfer.’”

Barnhill v. Johnson, 503 U.S. 393, 397 (1992) (quoting McKenzie v. Irving Trust

Co., 323 U.S. 365, 369 (1945)). However, “property” and “interest in property”

are not defined in the code. “In the absence of any controlling federal law,

[property and] interests in property are [ ] creature[s] of state law.” Simpson v.

Penner (In re Simpson), 36 F.3d 450, 452 (5th Cir. 1994) (per curiam) (citing

Barnhill, 503 U.S. at 398).

Property interests are created and defined by state law. Unless

some federal interest requires a different result, there is no reason

why such interests should be analyzed differently simply because an

interested party is involved in a bankruptcy proceeding. Uniform

treatment of property interests by both state and federal courts

within a State serves to reduce uncertainty, to discourage forum

shopping, and to prevent a party from receiving a windfall merely

by reason of the happenstance of bankruptcy.

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No. 09-10622

Butner v. United States, 440 U.S. 48, 55 (1979) (internal quotation marks

omitted).

3. Interests in Property under Simpson, Drye, and Costas

i. Simpson

We have previously looked to state law to determine whether a disclaimer

of an interest in an estate constituted a transfer of “property” under the

bankruptcy code. In Simpson, we considered whether, “under Texas law, a valid

disclaimer or renunciation of an inheritance is . . . a fraudulent transfer [under

11 U.S.C. § 548].”3 36 F.3d at 451. There, the debtor’s father passed away,

leaving a testamentary disposition to the debtor. Id. The debtor disclaimed this

inheritance, which then passed to the debtor’s children under Texas law. Id.

The next day, the debtor filed a voluntary petition under Chapter 7. Id. The

trustee appointed to oversee the debtor’s estate filed a petition to set aside the

disclaimer as a “fraudulent transfer” under 11 U.S.C. § 548(a). Id. The

bankruptcy court granted the trustee’s petition, but the district court reversed,

holding that a pre-petition disclaimer of inheritance is not a fraudulent transfer.

Id.

On appeal, we looked to Texas law to define any “interest in property” that

the debtor may have had. Id. at 452. We determined that, under Texas law, a

disclaimer of an inheritance “relates back” such “that a beneficiary never gains

3

Section 548 provides, in relevant part:

The trustee may avoid any transfer (including any transfer to or for the benefit

of an insider under an employment contract) of an interest of the debtor in

property, or any obligation (including any obligation to or for the benefit of an

insider under an employment contract) incurred by the debtor, that was made

or incurred on or within 2 years before the date of the filing of the petition, if the

debtor voluntarily or involuntarily-- made such transfer or incurred such

obligation with actual intent to hinder, delay, or defraud any entity to which the

debtor was or became, on or after the date that such transfer was made or such

obligation was incurred, indebted[.]

11 U.S.C. § 548(a)(1)(A) (emphasis added).

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No. 09-10622

possession of disclaimed property.” Id. We then looked to Jones v. Atchison (In

re Atchison), 925 F.2d 209 (7th Cir. 1991), where the Seventh Circuit “held that

after the execution of the disclaimer, the debtor did not have a property interest

to transfer [under Illinois law].” Simpson, 36 F.3d at 452. Following Atchison,

we determined that “[t]he law in Texas is similar to the law in Illinois in respects

to the relation back doctrine and the property interests of the beneficiaries. . . .

Both sets of laws hold that under the relation back doctrine, a beneficiary never

possessed renounced property.” Id. Accordingly, we “h[e]ld that under Texas

law a disclaimer is not a fraudulent transfer under 11 U.S.C. § 548.” Id. at 453.4

ii. Drye

Nouveau argues that we should not apply Simpson here, urging that it

was superseded by the Supreme Court’s decision in Drye. In that case, Drye was

insolvent and owed the Government a large tax debt, for which federal tax liens

had attached to all his assets. 528 U.S. at 52. Comparable to Simpson and the

instant case, Drye’s mother died intestate in Arkansas, leaving Drye as her sole

heir. Id. Drye disclaimed his interest in his mother’s estate, which then, under

Arkansas law, passed to his daughter. Id. Drye’s daughter then set up a

spendthrift trust,5 naming her parents as beneficiaries. Id. at 53–54. Under

Arkansas inheritance law, “[t]he disavowing heir’s creditors . . . may not reach

[disclaimed property].” Id. at 53.

4

In addition to the Seventh Circuit in Atchison, and the Ninth Circuit (discussed below),

the Tenth Circuit has “held that a disclaimer issued under Colorado law was also not a

fraudulent transfer.” Simpson, 36 F.3d at 453 (citing Hoecker v. United Bank of Boulder, 476

F.2d 838, 841 (10th Cir. 1973)). No other circuit court has held to the contrary, though a few

bankruptcy courts have held differently. See David A. Lander, Does the Supreme Court

Decision in Drye Mean that a Disclaimer of Inheritance is a Fraudulent Conveyance?, 12

NORTON BANKR. L. ADVISER 1, 3 (2002) (collecting cases).

5

That is, “[a] trust that prohibits the beneficiary’s interest from being assigned and

also prevents a creditor from attaching that interest . . . .” BLACK’S LAW DICTIONARY 1654 (9th

ed. 2009).

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No. 09-10622

The IRS then sought to foreclose on its liens and to levy against the trust,

and the trust brought an action against the Government for wrongful levy. Id.

at 54. The district court ruled that the Government had properly levied against

the trust because the disclaimed inheritance interest constituted “property”

under the Internal Revenue Code (IRC), and the Eighth Circuit affirmed,

reasoning that “state law determines whether a given set of circumstances

creates a right or interest; federal law then dictates whether that right or

interest constitutes ‘property’ or the ‘right to property’ under [26 U.S.C.]

§ 6321.”6 Id. The Court granted certiorari to address “whether Drye’s interest

as heir to his mother’s estate constituted ‘property’ or a ‘right to property’ to

which the federal tax liens attached . . . despite Drye’s exercise of the prerogative

state law accorded him to disclaim the interest retroactively.” Id. at 52

(alteration omitted).

In answering this question, the Court first considered the nature of

“property” under § 6321 and observed that “the language [of § 6321] is broad and

reveals on its face that Congress meant to reach every interest in property that

a taxpayer might have.” Id. at 56 (internal quotation marks omitted). The

Court noted that the IRC provided a list of “exclusive” exemptions to the broad

nature of property under § 6321. Id. at 56–57. Searching this list of exemptions,

the Court concluded that there was no recognition of “disclaimers” as an

exemption. Id. at 57.

6

Section 6321 provides:

If any person liable to pay any tax neglects or refuses to pay the same after

demand, the amount (including any interest, additional amount, addition to tax,

or assessable penalty, together with any costs that may accrue in addition

thereto) shall be a lien in favor of the United States upon all property and rights

to property, whether real or personal, belonging to such person.

26 U.S.C. § 6321.

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No. 09-10622

The Court then rejected Drye’s argument that it should look to state law

to determine whether his interest in his mother’s estate constituted “property”

under § 6321, citing previous tax cases in which it had held that “[t]he question

whether a state-law right constitutes ‘property’ or ‘rights to property’ is a matter

of federal law.” Id. at 58 (internal quotation marks omitted). Instead, the Court

agreed with the Eighth Circuit’s interpretation that, at his mother’s death, Drye

“had . . . a valuable, transferable, legally protected right to the property at issue”

and held that “in determining whether a federal taxpayer’s state-law rights

constitute ‘property’ or ‘rights to property,’ ‘the important consideration is the

breadth of the control the taxpayer could exercise over the property.’” Id. at 61

(alterations omitted) (quoting Morgan v. Comm’r, 309 U.S. 78, 83 (1940)).

Applying this consideration, the Court concluded that because “Drye had the

unqualified right to receive the entire value of his mother’s estate . . . , or to

channel that value to his daughter[, that control] rendered the inheritance

‘property’ or ‘rights to property’ [under the IRC]” and affirmed the Eighth

Circuit’s judgment. Id. at 60.

iii. Costas

Nouveau argues that Drye applies here, effectively overruling Simpson,

and that because Laughlin similarly had the power to channel his interest in his

father’s estate—either to himself or to a known successor—he thus transferred

property for purposes of § 727(a)(2). We have not had occasion to consider the

application of Drye as it relates to “property” or “interests in property” under the

bankruptcy code; however, the Ninth Circuit has considered whether Drye

applies under the bankruptcy code.7 In Gaughan v. Dittlof Revocable Trust (In

7

To date, no other circuit court has considered whether Drye applies in the bankruptcy

context. Several lower federal courts have considered whether Drye applies, with most

declining to extend its reasoning. Compare Lowe v. Sanflippo (In re Schmidt), 362 B.R. 318,

322–23 (Bankr. W.D. Tex. 2007) (questioning Simpson post-Drye) and In re Kloubec, 247 B.R.

246, 256 (Bankr. N.D. Iowa 2000) (“Debtors assert that as Drye involves tax liens, it is

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No. 09-10622

re Costas), 555 F.3d 790 (9th Cir. 2009), the Ninth Circuit determined that a

properly executed pre-petition disclaimer under Arizona law did not qualify as

a transfer for the purposes of 11 U.S.C. § 548, notwithstanding Drye.

In Costas, a settlor created a revocable trust,8 under Arizona law, that was

to be distributed to several of his children upon his death. Id. at 791–92. The

settlor died, and interests were distributed. Id. at 792. One of these children,

Costas, disclaimed her interest in this distribution and, shortly thereafter, filed

a Chapter 7 petition. Id. The Chapter 7 trustee sought to avoid Costas’s

disclaimer under 11 U.S.C. § 548, arguing that Drye overruled a previous Ninth

Circuit Bankruptcy Appellate Panel (B.A.P.) decision, Wood v. Bright (In re

Bright), 241 B.R. 664 (B.A.P. 9th Cir. 1999), which held that a validly effected

disclaimer did not constitute a transfer for purposes of § 548 due to the relation-

distinguishable from issues raised in the bankruptcy context. However, it is the conclusion of

this Court that, even though Drye was a tax lien case, the issue decided was identical to the

issue presented here, that is, whether the state doctrine of relationship-back can modify rights

created under Federal statutes.”), aff’d on other grounds 268 B.R. 173 (N.D. Iowa 2001) with

Garrett v. Bank of Okla. (In re Faulk), 281 B.R. 15, 20 (Bankr. W.D. Okla. 2002) (“Even though

Drye involved the construction of a tax lien statute, the trustee urges this court to apply the

Drye holding to the instant case. He asserts that the definition of “transfer” under [§] 541 of

the Bankruptcy Code is no less expansive than under [§] 6321 of the [IRC]. This court,

however, is not persuaded that Drye has application here for reasons both factual and legal.”)

and Grassmueck v. Nistler (In re Nistler), 259 B.R. 723, 726–27 (Bankr. D. Or. 2001) (“I

respectfully disagree with [Kloubec]. In Drye, the Supreme Court specifically relied on the

language of § 6321 of the [IRC]. All of the cases cited by the Drye Court involved tax liens.”).

A number of commentators have also confronted whether Drye applies in bankruptcy and have

equivocated about its applicability. See generally Jon Finelli, Comment, In re Costas: The

Misapplication of Section 548(a) to Disclaimer Law, 14 AM. BANKR. INST. L. REV. 567 (2006)

(criticizing the B.A.P.’s decision in In re Costas); Lander, supra note 4 (recommending that

courts that recognize state relation-back fiction reconsider those holdings post-Drye); Stephen

E. Parker, Can Debtors Disclaim Inheritances to the Detriment of their Creditors?, 25 LOY. U.

CHI. L.J. 31 (1993) (suggesting that courts should ignore the relation-back fiction); Kevin A.

White, Note, A Clash of Expectations: Debtors’ Disclaimers of Property in Advance of

Bankruptcy, 60 WASH. & LEE L. REV. 1049 (2003) (arguing that Drye does not apply and that

courts should not “defeat” pre-petition disclaimers).

8

That is, “[a] trust in which the settlor reserves the right to terminate the trust and

recover the trust property and any undistributed income.” BLACK’S LAW DICTIONARY at 1654.

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No. 09-10622

back doctrine. Costas, 555 F.3d at 792. The bankruptcy court found Drye

distinguishable, and the B.A.P. affirmed. The trustee appealed to the Ninth

Circuit. Id.

On appeal, the Ninth Circuit noted that, while the question “[w]hether a

particular action constitutes a ‘transfer’ is a matter of federal law,” “a ‘transfer’

cannot occur without ‘property’ or ‘an interest in property’” and that “in the

absence of any controlling federal law, ‘property’ and ‘interests in property’ are

creatures of state law.” Id. at 793 (internal quotation marks, modifications, and

citations omitted). Then, in looking to Arizona law, the Ninth Circuit

determined that Arizona treated a disclaimer as relating back to the date of

death of the decedent. Id. at 793–94. Similarly to Texas and Arkansas law

discussed above, the effect of such a transfer was that the “disclaimant [is

treated as] neither transfer[ring] nor possess[ing] an interest in disclaimed

property . . . .” Id. at 794. The Ninth Circuit then looked to cases post-Butner

and concluded that “[t]hough most courts have found that Butner principles

preclude avoidance of disclaimers under § 548, this line of authority has been

thrown into doubt by Drye[.]” Id.

Specifically, the trustee urged that the Ninth Circuit “extend Drye to the

bankruptcy context and recognize the ‘right to channel’ as an ‘interest . . . in

property’ for purposes of the [bankruptcy c]ode.” Id. at 795. However, the court

rejected such an extension, holding “that Drye is distinguishable, both factually

and legally, and that its adoption in the bankruptcy context would, in any event,

be inappropriate.” Id. First, the Ninth Circuit determined that Drye is factually

distinguishable, noting that the tax lien in Drye was already operative before the

disclaimer, while in Costas, the disclaimer occurred before the bankruptcy

petition. Id. at 795–96. Second, the court held that Drye is legally

distinguishable, concluding that the Court’s repeated reference to the scope of

the question presented in Drye suggested it was limited solely to the tax lien

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No. 09-10622

context. On this point, the Ninth Circuit recounted how the Court had

“repeatedly construed tax lien provisions to permit the government to reach

property beyond the grasp of other creditors.” Id. at 796 (citing references).

Finally, the court noted that the scope of exemptions under the bankruptcy code

is significantly broader than the exemptions allowed under the IRC and

concluded that this “highlights the key difference between ‘property’ for purposes

of tax collection and for bankruptcy: the former largely trumps state law, the

other tries to incorporate it.” Id. at 797.9

4. Conclusion

We find the reasoning of Costas persuasive, and we hold that Butner’s

deferential approach to state property law, rather than the rule of Drye, controls

when determining whether a debtor has transferred “property” or “interests in

property” by executing a pre-petition disclaimer under § 727(a)(2). The Ninth

Circuit’s reasoning is sound: the bankruptcy code defines “transfer,” but to effect

a transfer there must be “property” or an “interest in property.” And the

9

In Costas, the trustee also argued that, following Butner, there was a “federal interest”

exemption that should preclude state law deference. Specifically, the trustee argued that (1)

there was a federal interest in bankruptcy estate augmentation and that (2) § 548 created a

federal rule of avoidance. Id. at 798. The Ninth Circuit rejected these arguments, determining

that as to (1) “such a generic interest in expanding the debtor’s property would . . . interfere

with Butner’s three goals of avoiding uncertainty, forum shopping, and windfall recoveries,”

and thus the interest was insufficient; and as to (2) there was nothing in § 548 that suggested

a deviation from Butner, when Congress had used the generic terms “property” or “interest in

property” as it had in other sections of the bankruptcy code. Id. at 795–98. Accordingly, the

Ninth Circuit “[a]ppl[ied] Butner’s deferential approach to state law, rather than the rule of

Drye[, held that] a disclaimer, properly executed under Arizona law, does not qualify as the

‘transfer . . . of an interest of the debtor in property’ for purposes of § 548,” and affirmed the

B.A.P. Id. at 798.

Nouveau does not specifically urge that a comparable “federal interest” supersedes

deference to state law conceptions of property under Butner, but instead argues generally that

“[t]he Bankruptcy Code is a purely federal law creature” and that “discharge” is an issue of

federal law. However, to the extent that Nouveau’s argument presents a superseding federal

interest, we find the Ninth Circuit’s reasoning persuasive, and we decline to hold that the

generic “federal interests” in bankruptcy or discharge preclude deference to state property law

here.

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Supreme Court has repeatedly held that “[p]roperty interests are created and

defined by state law” in the absence of a controlling federal interest. Butner, 440

U.S. at 55. Drye is distinguishable here because its reasoning drew from the

particularities and structure of the IRC. Further, like in Costas, Laughlin

renounced his interest in his father’s estate pre-petition, which factually

differentiates the post-tax-lien disclaimer in Drye.10 Accordingly, Simpson

continues to be good law, post-Drye, and we must look to Louisiana law in order

to determine whether Laughlin transferred “property” or an “interest in

property” here.

C. Renunciation of Inheritance Rights under Louisiana Law

Under the Louisiana Civil Code, “[a] successor is not obligated to accept

rights to succeed [inheritance rights]. He may accept some of those rights and

renounce others.” LA. CIV. CODE ANN. art. 947 (West 2000). “To the extent that

a successor renounces rights to succeed, he is considered never to have had

them.” Id. art. 954 (emphasis added). “The rights of an intestate successor who

renounces accrete to those persons who would have succeeded to them if the

successor had predeceased the decedent.” Id. art. 964.

These provisions in the Louisiana Civil Code are comparable to the Texas

law at issue in Simpson and the Arizona law at issue in Costas because

Louisiana law also treats a renouncing successor as never having had an interest

in property. Cf. Simpson, 36 F.3d at 452 (“The effect of the relation back

doctrine is that a beneficiary never gains possession of disclaimed property.”);

Costas, 555 F.3d at 794 (“In short, Arizona’s relation-back rule says that a

10

It has been recognized by several courts and commentators that post-petition

disclaimers of inheritance are not valid under 11 U.S.C. § 541(a)(5). See, e.g., Parker, supra

note 7 at 38 (“[T]he language of [§ 541(a)(5)] evidences congressional intent to secure for the

trustee the power to accept the devise on behalf of the creditors and to preclude the debtor from

exercising the power to disclaim.” (collecting cases)). We do not confront this issue today given

that Laughlin renounced his interest pre-petition.

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disclaimant neither transfers nor possesses an interest in disclaimed property

. . . .”). As such, Laughlin urges that, as in Simpson, we should hold that

Laughlin’s pre-petition renunciation of his interest in his father’s estate was not

a “transfer” of “property” or an “interest in property” under § 727(a)(2).

Nouveau responds that the Louisiana law is different from the state laws

at issue in Costas and Simpson and urges that its differences are sufficient to

support the district court’s determination that Laughlin transferred property or

an interest in property for the purposes of § 727(a)(2). Specifically, Nouveau

argues that Louisiana law allows a creditor to reopen the succession to accept

a debtor’s renounced interest, with the result that there is a creditor’s “interest

in property” sufficient to support the denial of Laughlin’s discharge under

§ 727(a)(2). We disagree.11

Under Louisiana law:

11

Nouveau also argues that Louisiana Civil Code article 960 supports its argument that

Laughlin transferred property under § 727(a)(2). Article 960 provides that:

A renunciation shall be deemed to be an acceptance to the extent that it causes

the renounced rights to devolve in a manner other than that provided by law or

by the testament if the decedent died testate.

LA. CIV. CODE ANN. art. 960. Commentators have interpreted article 960 as pertaining to

situations where the successor, in the act of renunciation itself, tries to direct his interest in

a manner other than that provided by law (i.e., “I renounce in favor of X.”). See KATHRYN

VENTURATOS LORIO, 10 LA. CIV. L. TREATISE § 6:5 (discussing article 960 but recognizing that

a renunciation in favor of all coheirs may be valid); Matthew D. Simone, Comment, Louisiana

Post-Mortem Estate Planning—Alleviating the Burden of Double Taxation Imposed against a

“Renunciation in Favor of,” 54 LOYOLA L. REV. 905 (2008) (same); see also Aurienne v. Mt.

Olivet, Inc., 96 So. 29, 31 (La. 1922) (stating that a renunciation made in favor of only one

coheir would typically be problematic).

Where such a renunciation is made, article 960 deems that the successor has accepted

and then donated his interest, rather than renouncing it. However, Nouveau does not argue

that Laughlin, in his act of renunciation, directed his interest in his father’s estate in a manner

other than provided by law. Indeed, Nouveau admits that Laughlin’s renunciation was

formally valid, and argues instead that the scheme to transmit his inheritance interest to his

mother should be deemed an “acceptance” of his renounced interest. We are not persuaded.

Laughlin’s renunciation was formally valid and led to his interest passing to his daughter, by

operation of law. Though we conclude that our inquiry ends there, we note that Nouveau has

not alleged, much less shown evidence, that Laughlin’s daughter was somehow bound to

transmit the renounced interest so as to make Laughlin’s renunciation a “renunciation in favor

of” that triggers article 960.

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A creditor of a successor may, with judicial authorization, accept

succession rights in the successor’s name if the successor has

renounced them in whole or in part to the prejudice of his creditor’s

rights. In such a case, the renunciation may be annulled in favor of

the creditor to the extent of his claim against the successor, but it

remains effective against the successor.

LA. CIV. CODE ANN. art. 967. The Louisiana Supreme Court has interpreted this

article as requiring “a creditor [to] prove that an heir renounced his inheritance

fraudulently or with an intent to wrongfully deprive the creditor of his claim on

the debtor’s property in order for the creditor to have a right to have the

renunciation annulled and to accept the inheritance in the heir’s stead.”

Succession of Neuhauser, 579 So. 2d 437, 441 (La. 1991).12

We determine that, for the purposes of our inquiry today, Louisiana law

is indistinguishable from the Texas law at issue in Simpson, and we hold that,

under Louisiana law, a valid pre-petition renunciation of an inheritance interest

is not a transfer of the debtor’s property under § 727(a)(2). Section 727(a)(2)

denies a discharge to a debtor who has “transferred . . . property of the debtor,

within one year before the date of the filing of the petition,” 11 U.S.C.

§ 727(a)(2)(A) (emphasis added); Pratt, 411 F.3d at 565 (requiring that property

of the debtor be transferred). The question then is whether article 967

recognizes or creates rights in the renounced inheritance that disturb the

relation-back fiction. Absent such rights, the relation-back fiction controls and

the renouncing debtor is deemed never to have had rights in the renounced

inheritance. See LA. CIV. CODE ANN. art. 954.

12

Neuhauser dealt with differently numbered and worded civil code sections. In 2000,

the relevant civil code provisions were “simplified”; but there is no suggestion—either by case

law, commentators, or the parties here—that the “simplifications” abrogated Neuhauser’s

holdings. See LA. CIV. CODE ANN. art. 967 revision comment (“This Article clarifies the prior

rules and uses simpler terminology. As in prior law, judicial authorization for an acceptance

by a creditor in the name of a successor is required, and that principle is set forth in the

Article.”); LORIO, 10 LA. CIV. L. TREATISE § 6:8 (noting that nothing substantively changed with

the revisions and renumbering of article 967).

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To analyze this issue, we first look to the text of the Louisiana Civil Code.

Article 967 states that, even when a renunciation is “annulled in favor of the

creditor to the extent of his claim against the successor, [such a renunciation]

remains effective against the successor.” LA. CIV. CODE ANN. art. 967 (emphasis

added). As such, the article’s text suggests that an annulment action under

article 967, though it concerns the actions and intent of the renouncing

successor, resolves only the right to the renounced interest as between the

renouncing successor’s creditors and the substituted successors. The text does

not suggest that a renouncing successor gains an interest in the inheritance

because, even if the annulment action is successful, article 967 specifies that the

successor’s renunciation remains effective against him. Id. And though the

“creditor . . . accept[s] succession rights in the successor’s name,” id., we do not

think that this clause, read in context, suggests that it is the debtor’s rights that

the annulling creditor accepts. Instead, we interpret that provision as specifying

the prerequisite for the creditor bringing an action; the creditor must be a

creditor of the renouncing successor. In sum, we read article 967 together with

articles 954 and 947 to mean that a successful annulment of a renunciation does

not disturb the fiction that the renouncing successor predeceased the decedent

and thus never had rights in the inheritance interest. Thus, we do not think

that the text of article 967 clearly recognizes or creates rights in the renouncing

successor.

Second, the manner in which Louisiana courts have characterized the

renunciation annulment action does not disturb our interpretation of article 967.

Specifically, Louisiana courts have stated that the rights under article 967 are

creditor’s rights. See Aurienne, 96 So. at 30 (“Plaintiffs do not claim that they

have the right, which is given by article [967] . . . to creditors of a person who has

renounced an inheritance, to accept it to the extent of their claims.” (emphasis

added)); Succession of Andrews, 604 So. 2d 194, 198 n.2 (La. Ct. App. 1992) (“In

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the oblique action, the creditor exercises a right belonging to the debtor in the

debtor’s name. In the revocatory action, the creditor acts in his own name to

enforce his own rights. . . . We construe the [renunciation annulment action to

be] a revocatory action.”) (citations omitted; emphasis added).13 These

statements reinforce the notion that article 967 does not recognize or create

rights in the renouncing successor.

Third, the procedure of the article 967 action does not disturb our

interpretation of article 967. Louisiana courts require that the creditor who

seeks an annulment petition the court to reopen the succession. See Neuhauser,

579 So. 2d at 439 (“[The creditor] petitioned the court to reopen the succession

of the [decedent] alleging that the creditor was a judgment creditor of the

[renouncing successor].”); id. at 442 (“‘When the creditors wish to be authorized

to accept a succession, which their debtor . . . has renounced to their prejudice,

they must present a petition to the judge of the place where the succession is

opened . . . .’” (quoting former article 1071)); Succession of Wagner, 746 So. 2d

696, 697 (La. Ct. App. 1999) (creditor “filed petitions to annul [successor’s]

renunciation” in trial court and the trial court annulled the renunciation,

allowing creditor to accept the inheritance). The court overseeing the succession

13

The Louisiana Supreme Court has also analogized the renunciation annulment action

to a “revocatory action” under article 2036 of the Louisiana Civil Code. See Neuhauser, 579

So. 2d at 440; D.A. Pearce–Reggio, Note, Succession of Neuhauser: Death of a Creditor’s

Claim, 66 TUL. L. REV. 1101, 1109 (1992) (“[T]he [Louisiana Supreme C]ourt adhered to the

prevailing view that an action to annul a debtor’s renunciation falls within the ambit of the

revocatory action.”); see also LA. CIV. CODE ANN. art. 2036 (“An obligee has a right to annul an

act of the obligor, or the result of a failure to act of the obligor, made or effected after the right

of the obligee arose, that causes or increases the obligor’s insolvency.”). And we have noted

that “under Louisiana and federal bankruptcy law, the trustee may avoid [a debtor]’s transfers

. . . by stepping into the shoes of a[ ] . . . creditor who could have avoided those transfers by

means of a revocatory action.” Traina v. Whitney Nat’l Bank, 109 F.3d 244, 246 (5th Cir. 1997)

(emphasis added). We derived this authority from § 544(b) of the bankruptcy code which states

that a “trustee may avoid any transfer of an interest of the debtor in property or any obligation

incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured

claim.” 11 U.S.C. § 544(b)(1). Given the posture of the present case, however, we need not

consider whether the trustee has the power under § 544(b)(1) to bring an article 967 action.

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then determines whether the annulling creditor may accept the renounced

interest, in the debtor’s name. See Neuhauser, 579 So. 2d at 440 (“‘The creditors

of the heir who . . . renounces an inheritance . . . can be authorized by the judge

to accept it, in the name of the debtor and in his stead.’” (quoting predecessor

to article 967)); id. at 442 (“‘If . . . it is proved to the judge that the debtor . . . has

renounced [the succession] to the prejudice of his creditors, [the judge] is bound

to authorize the creditors to accept it in his stead.’” (quoting predecessor to

article 967)). To effect the acceptance, “the judge has the duty ‘to cause

immediately to be made an inventory of the effects of the succession, to appoint

an administrator to manage them, sell them, and pay the creditors.’” Id.

(quoting predecessor to article 967). Satisfaction of the creditors thus comes

from the succession estate, by petitioning the court, not the renouncing debtor,

for relief. This procedural form is consistent with the interpretation that the

renouncing successor does not have rights in the succession post-renunciation;

the renouncing successor has, by definition, renounced his interest and that

interest has “accrete[d] to those persons who would have succeeded to them if

the successor had predeceased the defendant.” LA. CIV. CODE ANN. art. 964. The

procedure of the article 967 action does not clearly suggest that the article

recognizes or creates rights for the renouncing successor in the renounced

inheritance interest.

Article 967 does not clearly recognize or create rights in the renouncing

successor. Thus, we cannot say that the relation back fiction is disturbed by that

article. Accordingly, we are not persuaded that the Louisiana law is

distinguishable from the Texas law at issue in Simpson, with respect to our

present inquiry. Given such ambiguity and the fact that we must construe the

§ 727(a)(2) exceptions to discharge strictly against the creditor and liberally in

favor of the debtor, we follow Simpson and hold that Laughlin did not transfer

property for the purposes of § 727(a)(2) by executing a pre-petition renunciation

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of his interest in his father’s estate. Accordingly, discharge was improperly

denied under that subsection.

III. CONCLUSION

For the foregoing reasons, we REVERSE the bankruptcy court’s judgment

denying Laughlin a discharge under 11 U.S.C. § 727(a)(2) and REMAND for

further proceedings consistent with this opinion.

REVERSED AND REMANDED.

20