Another Homestead Limitation for Fraudulent Asset Conversions

Maybe it's just because the 522 amendments became effective in April, but there sure do seem to be a lot of opinions coming out on the new homestead limitations. Unlike those already reported on, including McNabb, Kaplan, and Virissimo, which deal with the $125,000 cap for homesteads purchased within 1,215 days of the petition date under 522(p), this latest opinion addresses the limitation under 522(o) imposed when non-exempt assets are used to increase the value of a homestead. In re Maronde, __ B.R. __, 2005 WL 3016196 (Bankr. D. Minn. 11/8/05).

In Maronde, the debtor in October 2003 took out a $50,000 home equity line of credit on his residence. He used most of the line to acquire a truck and trailer. By late 2004 he was in financial trouble, and in early 2005 came up with the idea of taking out balance transfers on newly obtained credit cards, and using the proceeds to pay down the line of credit. Over one week in February 2005, he made four transfers from different credit cards to pay down $31,500 on the home equity line (over the next several weeks he attempted six more such transfers, but apparently those wily credit card companies finally caught on). After consulting with a bankruptcy attorney in March, the following month he sold the truck and trailer (which would not be fully exempt) for about $20,000 and used the proceeds to pay off the remaining balance on the home equity line. He then filed a Chapter 13 petition on April 20, 2005, the effective date of the BAPCPA exemption amendments (woops!).

Mr. Maronde claimed equity in the homestead of $69,572 as exempt (ignoring for the sake of simplicity an issue as to the acreage of the property, Minnestoa law allows a debtor to claim a homestead exemption of up to $200,000), and the Trustee objected, relying on newly enacted 522(o), which provides that for purpoess of 522(b)(3)(A), "the value of an interest in [a homestead] shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of."

Judge Dreher, after reviewing the new amendments, concluded that the Congressional purpose is clear: "debtors seeking the protection of state exemptions must meet their state exemption provision requirements as limited by s. 522(o) and (p)." (Those following the debate on the applicability of the 522(p) cap in opt-out states may want to take notice). As a result, the question of whether Mr. Maronde's homestead exemption would be limited depended on whether he acted with the intend to hinder, delay or defraud creditors when he sold his truck and trailer and used the proceeds to pay off the home equity line (and thereby increase the equity in his homestead).

In answering this question, Judge Dreher concluded that the interpretation of the language "intent to hinder, delay, or defraud a creditor," as used in 522(o), should follow the established case law already in existence interpreting similar language in section 548 fraudulent conveyance and 727(a)(2) denial of discharge proceedings. Applying the traditional "badges of fraud," the court had no trouble concluding that the debtor was engaged in a scheme to defraud his creditors by transforming non-exempt assets (the truck and trailer) into exempt (equity in his homestead). As a result, the court denied the debtor's homestead exemption to the extent of the increased equity attributable to the truck and trailer proceeds used to pay off the equity line.