In re Addison

• Decision Date: 07 August 2008
• Docket Number: No. 07-2727.,No. 07-2064.,07-2064.,07-2727.
• Citation: 540 F.3d 805
• Parties: In re Lance V. ADDISON, Debtor Lance V. Addison, Appellant, v. Randall L. Seaver, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

540 F.3d 805

In re Lance V. ADDISON, Debtor

Lance V. Addison, Appellant, v. Randall L. Seaver, Appellee.

No. 07-2064.

No. 07-2727.

United States Court of Appeals, Eighth Circuit.

Submitted: March 10, 2008.

Filed: August 7, 2008.

Rehearing and Rehearing En Banc Denied September 11, 2008.

Kenneth Corey-Edstrom, Minneapolis, MN, argued, for appellant.

Michael Sherwood Dove, New Ulm, MN, argued (Bridget L. Bailey, New Ulm, MN, on the brief), for appellee.

Before BYE, SMITH, and COLLOTON, Circuit Judges.

SMITH, Circuit Judge.

Shortly before Lance Addison filed his bankruptcy petition, he converted a portion of his nonexempt assets into exempt assets. After the bankruptcy trustee ("Trustee") filed an objection to Addison's claimed exemptions, the bankruptcy court concluded that Addison converted the assets with the intent to hinder, delay, or defraud a creditor. As a result, the bankruptcy court reduced Addison's homestead exemption by $11,500, and denied the exemption claimed in his Roth IRA. The bankruptcy court also ruled that two college tuition savings accounts Addison had established for his children were property of his bankruptcy estate and not exemptible. Addison appealed the bankruptcy court's decision, and the Bankruptcy Appellate Panel (BAP) affirmed.

Subsequently, the Trustee initiated an adversary proceeding objecting to Addison's discharge. The bankruptcy court denied Addison's discharge, ruling as a matter of collateral estoppel that Addison had acted with the intent to hinder, delay or defraud one or more creditors when he converted his nonexempt assets to exempt assets within one year prior to filing bankruptcy. Addison also appealed this decision to the BAP and immediately requested that the BAP transfer the appeal to this court. The BAP did so, and we now hear Addison's consolidated appeals. We affirm in part, reverse in part, and remand for further proceedings.

I. Background

Addison, a part-owner of a cable company, had personally guaranteed some of his company's debt. In early 2005 the business was unable to pay its debts, and JP Morgan Chase ("Chase"), a company creditor, began to pursue Addison on a $1.3 million personal guarantee. Around June 2005, Addison first sought the advice of bankruptcy counsel in an effort to protect himself from Chase's attempts to enforce the guarantee. On or about July 21, 2005, Addison used $4,000 of his nonexempt funds to establish a Roth IRA for himself and used another $4,000 of the nonexempt funds to establish a Roth IRA for his wife. The funds came from a brokerage account that contained $45,476.71 in nonexempt funds prior to these transfers.

On October 14, 2005, Addison instructed his wife to use $11,500 in nonexempt funds to make a voluntary principal payment on their home mortgage. Addison's wife transferred $9,000 of this payment from the brokerage account mentioned above, and $2,500 came from a bank account at U.S. Bank. Later that same day, Addison filed an individual Chapter 7 bankruptcy petition. He chose the Minnesota state exemptions and claimed his Roth IRA¹ and the equity in the house as exempt.

In May 2004, Addison had established a college tuition savings account, pursuant to 26 U.S.C. § 529 ("Section 529 accounts"), for each of his two children. Section 529 account balances fluctuate with the equity markets, but on the date of his bankruptcy filing, the accounts were worth approximately $22,000 combined. Addison listed the Section 529 accounts on his bankruptcy schedules but claimed that the accounts were owned by his children and thus were not property of his bankruptcy estate. To the extent that the Section 529 accounts were property of the estate, however, Addison claimed them as exempt.

The Trustee objected to Addison's homestead and Roth IRA exemptions, and asserted that the Section 529 accounts were property of the estate not subject to any exemption. The bankruptcy court held an evidentiary hearing on the Trustee's objection and subsequently ruled in favor of the Trustee on all three issues. The court found that Addison made the $11,500 house payment and the $4,000 Roth IRA payment with the intent to hinder, delay, or defraud his creditors, and thus denied, in full, Addison's claimed exemption in the Roth IRA and ordered that the homestead exemption be reduced by $11,500. The bankruptcy court also ruled that the Section 529 plans were property of Addison's bankruptcy estate and that they were not subject to any applicable exemption.

The BAP affirmed, ruling that the bankruptcy court's finding that Addison had the intent to hinder, delay, or defraud his creditors when he converted the nonexempt assets into exempt assets was not clearly erroneous. The BAP also affirmed the bankruptcy court's determination that the Section 529 accounts were property of the estate and not subject to exemption. Addison timely appealed to this court.

After the bankruptcy court found that Addison intended to hinder, delay, or defraud a creditor when he converted his nonexempt assets into his homestead and Roth IRA, the Trustee initiated an adversary proceeding to deny Addison's discharge under 11 U.S.C. § 727(a)(2). Because a debtor's discharge can be denied under § 727(a)(2) if "the debtor, with intent to hinder, delay, or defraud a creditor ... has transferred ... property of the debtor, within one year before" his bankruptcy filing, and the bankruptcy court had already concluded that Addison transferred nonexempt property to exempt property with the intent to hinder, delay, or defraud a creditor within a year before his bankruptcy filing, the court denied Addison's discharge under § 727(a)(2) on collateral estoppel grounds. Addison also appealed this ruling to the BAP, which certified the appeal directly to this court. We now consider both of Addison's appeals.

II. Discussion

Addison argues that the bankruptcy court erroneously found that he converted nonexempt assets to exempt assets with the intent to hinder, delay, or defraud one or more creditors. More specifically, Addison contends that the bankruptcy court's disallowance of his Roth IRA exemption claim and its reduction of his homestead exemption should be reversed along with the denial of his discharge. Further, Addison asserts that the bankruptcy court erred in ruling that the Section 529 accounts that he established for his children are property of his bankruptcy estate and in ruling that they are not subject to any exemption. Like the BAP, we review the bankruptcy court's conclusions of law de novo and its findings of facts for clear error. Official Comm. of Unsecured Creditors v. Farmland Indus., Inc. (In re Farmland Indus., Inc.), 397 F.3d 647, 650 (8th Cir.2005).

A. Disallowance of Claimed Exemptions

The bankruptcy court found that Addison acted with the intent to hinder, delay, or defraud one or more of his creditors. Shortly before filing for bankruptcy, Addison converted nonexempt funds from a brokerage account and a bank account to pay down the mortgage on his home thereby increasing his homestead exemption. Also, he converted nonexempt funds from his brokerage account into an exemptible Roth IRA.

Under § 522(b) of the Bankruptcy Code, "a debtor can choose to exempt from property of the bankruptcy estate that property which is exempt under the applicable state or federal law." Sholdan v. Dietz, 108 F.3d 886, 888 (8th Cir.1997) ("Sholdan I"); 11 U.S.C. § 522(b). Here, Addison elected to use the Minnesota state exemptions, and claimed a homestead exemption of $91,250 under Minn.Stat. Ann. § 510.02² and claimed his $4,000 Roth IRA as exempt under Minn.Stat. Ann. § 550.37(24).³ These claimed exemptions were within the permissible amounts as provided by Minnesota law. See In re Sholdan, 217 F.3d 1006, 1008 (8th Cir. 2000) ("Sholdan II") ("The scope of a state-created exemption is determined by state law"). However, under Minnesota's enactment of the Uniform Fraudulent Transfers Act (UFTA), a debtor may not claim an exemption in property obtained through a transfer made by the debtor "with actual intent to hinder, delay, or defraud any creditor of the debtor." Minn.Stat. Ann. § 513.44; see also Sholdan II, 217 F.3d at 1008 ("[U]nder section 513.44 of Minnesota's enactment of the Uniform Fraudulent Transfer Act (UFTA), a debtor may not claim a homestead exemption when he or she transfers the property `with actual intent to hinder, delay, or defraud' creditors"); In re Tveten, 402 N.W.2d 551, 556 (Minn.1987) ("[I]t clearly appears that under Minnesota law a debtor in contemplation of bankruptcy may convert nonexempt property into exempt property, so long as the conversion does not violate the Uniform Fraudulent Conveyance Act"). Section 513.44(b) "contains a lengthy list of factors or `badges of fraud' which a court may look to for help in determining actual intent." Sholdan II, 217 F.3d at 1008 (citing Minn.Stat. Ann. § 513.44(b)). Thus, Addison's claimed exemptions in his homestead and Roth IRA are not permitted if those assets were obtained by transfers made "with actual intent to hinder, delay, or defraud any creditor." Minn.Stat. Ann. § 513.44(a).

Additionally, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),⁴ it added, among other things, subsection (o) to § 522 of the Bankruptcy Code ("Code").⁵ Under § 522(o) of the Code, the amount of a state homestead exemption is reduced to the extent that the value of the exemption is attributable to nonexempt property that the debtor converted into the homestead within 10 years of filing for bankruptcy, if the conversion was made "with the intent to hinder, delay, or defraud a creditor." 11 U.S.C. § 522(o).⁶ Thus, while the exemption Addison claimed in his Roth IRA is allowable unless it violates Minn.Stat. Ann. § 513.44(a), the claimed homestead exemption is subject to both 11 U.S.C. § 522(o) and Minn. Stat. Ann. § 513.44(a).

1. Homestead Exemption

The question here is whether...