In re Maronde, 332 B.R. 593 (Bankr. D. Minn. 2005), (N. Dreher), is a recent decision that interprets and discusses new §522(o) of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The debtor, Kim Morande, a resident of Minnesota, on the eve of filing a chapter 13 bankruptcy, and while insolvent, planned to take cash advances on credit cards and then apply those funds to reduce his equity line of credit against his homestead, and thereby increase his exempt homestead. He planned to then sell a nonexempt truck and trailer to raise cash to offer his new creditors settlements at less than what he owed. Next, he took cash advances of $31,500 and used the money to pay down his equity line of credit, thereby increasing his exempt homestead property by that amount. He then attempted to take an additional $22,300 in credit card advances to further reduce his home mortgage debt, but those advances were denied. When the last-mentioned attempt failed, Mr. Morande sold his truck and trailer and applied $18,750 of the proceeds to further reduce his home mortgage lien (to zero). He then filed a chapter 13 bankruptcy petition.
Mr. Maronde unfortunately filed his petition on April 20, 2005, the day the president signed the BAPCPA. Therefore, his case was subject to 11 U.S.C. §522(o), which became effective on that day. However, at that time he was still able to seek an eventual discharge of the unpaid balances of his credit card debts obtained by fraud, since the addition of that exception to discharge under chapter 13 did not become effective until Oct. 17, 2005.
The Minnesota homestead exemption is limited to $200,000. The debtor claimed home equity of $69,572 as exempt homestead property and proposed a plan that would pay general unsecured creditors $13,678, less than half of what he owed them. The trustee objected to the debtor’s claim of homestead exemption based on §522(o), and also objected to confirmation of the debtor’s chapter 13 plan.
Section 522(o) provides that “the value of an interest in...property” the debtor “claims as a homestead” shall be reduced to the extent that “such value is attributable to” any property the debtor “disposed of” in the 10-year period ending on the date of the filing of the petition “with the intent to hinder, delay or defraud a creditor and that the debtor could not exempt...if on such date the debtor had held the property so disposed of.”
The court stated that the issue is “whether the debtor acted with intent to hinder, delay or defraud a creditor when he sold his truck and trailer and used the proceeds to increase the equity in his homestead by $18,750.” The court held that the debtor acted with the requisite intent, and sustained the trustee’s objections. In explaining its decision, The court stated that the words, “intent to hinder, delay or defraud a creditor” contained in §522(o) should be interpreted the same as in the fraudulent conveyance provisions [§548] and the denial of discharge provisions [§727(a)(2)] of the Code, as developed in the body of case law construing those sections. This intent may be inferred from the presence of several or more “badges of fraud.” There is no need to prove all of them and there is no weighing system applicable. The court then itemized 11 badges of fraud.
The court stated that in this case, the inference of intent to hinder, delay and defraud creditors is “inescapable” because (1) the debtor essentially transferred property to himself (2) at a time when he was insolvent and (3) the transfers constituted substantially all his nonexempt assets. The court acknowledged that debtors are permitted to convert nonexempt assets into exempt assets on the eve of bankruptcy, but indicated that the conversion must not be done with intent to defraud creditors, citing In re Holt, 894 F.2d 1005, 1008 (8th Cir. 1990). The court stated that although the conversion of the debtor’s truck and trailer into exempt homestead property, in and of itself, might not have been objectionable, it became objectionable in this case because it was “part and parcel” of his original scheme to defraud creditors, to wit: to take cash advances on credit cards and apply the funds to increase exempt equity in debtor’s homestead, to liquidate the truck and trailer to raise cash to offer to creditors to settle for less than he owed, and not to make an honest attempt to pay creditors in full. The fact that this original scheme did not work does not erase the original intent of the scheme.
Since the debtor’s conversion of vehicles into homestead property was done with intent to hinder, delay and defraud his creditors to the extent of $18,750, the debtor’s homestead exemption was therefore denied to that extent, and the trustee’s objection to claim of homestead exemption sustained. Having denied the claim of the homestead exemption, the debtor’s plan did not satisfy the best-interests-of-creditors test and confirmation was denied. This opinion raises some interesting questions.
The court’s comment that the debtor “transferred assets to himself” was in the context of finding the existence of a badge of fraud; however, neither a transfer of property to oneself nor a conversion of property is listed among the 11 badges of fraud mentioned in the opinion (or anywhere else, for that matter). So is a transfer of assets to oneself, or a conversion of nonexempt property into exempt property, a new badge of fraud? Can a person actually transfer property to himself? Could the transferor, who ends up owning the equivalent of the property transferred and who has therefore not altered his financial position, be said to have “disposed” of assets?
What is the requisite intent of §522(o)? There is only one reason to convert nonexempt property into exempt property on the eve of bankruptcy – to place it beyond the reach of creditors and enable the debtor to keep it. Placing property beyond the reach of creditors hinders and delays their collection efforts. Yet, as The court indicated, conversion is permitted. Therefore, an intent to hinder and delay creditors, which necessarily accompanies such a conversion, cannot be a forbidden motive. In fact, since conversion is legal and in the debtor’s best interests, it arguably ought to be the intent of a competent bankruptcy attorney preparing a client to file bankruptcy. So what is the forbidden motive? Is it fraud? Deception is universally regarded as an element of fraud. However, no deception is involved in the conversion of assets, and the conversion therefore could not have defrauded creditors. If there was no fraudulent intent involved in the conversion, does the conversion itself actually qualify as a ground for objection to the debtor’s homestead exemption under §522(o)?
Speaking of fraud, the debtor in this case clearly defrauded unsecured creditors by taking cash advances of $31,500 and using the funds to pay down his home mortgage debt, thus increasing his exempt homestead property by $31,500. According to the opinion, this was actual fraud (perhaps criminal, as well as tortious). Why then did these transactions not result in a reduction of the debtor’s allowed homestead exemption? If converting nonexempt vehicles and trailers into exempt homestead property qualifies under §522(o), why would converting nonexempt cash, obtained by fraud, into exempt homestead property not qualify?
How should debtor’s counsel advise his or her client insofar as pre-bankruptcy planning is concerned? Should counsel advise clients that they should not convert nonexempt assets into exempt assets? Not according to this case. In view of the Maronde rationale, perhaps good advice would be that although conversion of nonexempt property into exempt homestead property is permitted, the exemption may be denied or reduced if the debtor has engaged in other fraudulent activity in anticipation of the bankruptcy because, under those circumstances, The court may conclude that the conversion was tainted by an overall scheme to defraud creditors.