In re Bossart, Case No. 05-34015-H4-7 (Bankr. S.D. Tex. 12/21/2007)
| Decision Date | 21 December 2007 |
| Docket Number | Adversary No. 06-3540.,Case No. 05-34015-H4-7. |
| Parties | In re: WILLIAM C. BOSSART AND MARILYNN W. BOSSART, Chapter 7, Debtors. KENNETH R. HAVIS, CHAPTER 7 TRUSTEE, Plaintiff, v. AIG SUNAMERICA LIFE ASSURANCE COMPANY, Defendant, v. WILLIAM C. BOSSART AND MARILYNN W. BOSSART, Intervenor-Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
This Adversary Proceeding concerns a dispute over an annuity purchased by William C. Bossart and Marilynn W. Bossart (the Debtors) on the eve of bankruptcy. Kenneth R. Havis, the Trustee (the Trustee) in this Chapter 7 case, initiated this lawsuit against AIG SunAmerica Life Assurance Company (AIG) to recover proceeds that the Debtors had transferred to AIG to purchase an annuity (the Annuity). AIG, not wanting to become embroiled in litigation, converted the Annuity into cash (the Funds) and deposited the Funds into the registry of the Court. Meanwhile, the Debtors intervened, taking the position that they had purchased the Annuity on the advice of their attorney and the Funds properly belong to them as exempt property. The Trustee has asserted that the Debtors' transfer to AIG is avoidable under 11 U.S.C. § 5481 as a fraudulent conveyance and that the estate, not the Debtors, is entitled to the Funds. The Court has decided to issue a memorandum opinion on this dispute because it involves an important pre-bankruptcy planning issue: to what extent may a debtor assert that a challenged transfer is not fraudulent if it is made in reliance on an attorney's advice?
As a preliminary matter, the Court observes that the case at bar was filed before the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), and under the pre-BAPCPA Code, pre-petition planning to enhance exemptions was considered appropriate. Indeed, even a debtor's conversion of nonexempt assets into an exempt annuity on the eve of bankruptcy was not necessarily fraudulent as to creditors. See NCNB Texas Nat'l Bank v. Bowyer (In re Bowyer), 932 F.2d 1100, 1102 (5th Cir. 1991). The Debtors did much more than purchase an annuity on the eve of bankruptcy, however. They also failed to disclose all the transactions relating to the purchase of the annuity as well as all of their personal property. Additionally, they failed to disclose all of their actions to their own bankruptcy attorney, and they kept or spent all of their nonexempt property. The Debtors defend their actions by saying all of their mistakes were innocent, made in ignorance, or committed due to poor attorney advice. As discussed in detail below, the Court disagrees. The Debtors may have received some bad advice from their bankruptcy attorney, but they were more than ready to hear it.
The Court conducted a two-day trial on this adversary proceeding. The Court admitted exhibits, heard testimony and also heard oral arguments from counsel for the Debtors and counsel for the Trustee. The Court then took the matter under advisement. The Court now makes the following Findings of Fact and Conclusions of Law under Federal Rule of Civil Procedure 52 as incorporated into Federal Rule of Bankruptcy Procedure 7052. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.
1. On March 9, 2005, the Debtors retained Harlan Guettermann (Guettermann) as their bankruptcy counsel. Guettermann's employment contract specifically provided that the Debtors were to pay him $2,500.00 for pre-bankruptcy planning and $1,500.00 for filing the bankruptcy. [Adversary Docket No. 44 ¶ 10; Trustee's Ex. 2.]
2. On March 11, 2005, based upon pre-bankruptcy planning advice from Guettermann, the Debtors used the balance of a non-exempt bank account held jointly by Ms. Bossart and her brother to purchase a cashier's check in the amount of $90,915.37. [Adversary Docket No. 44 ¶ 11; May 29, 2007 Hr'g Tr. 29; Trustee's Ex. 5-6.] The cashier's check was deposited into the Debtors' account at Edward Jones (the Edward Jones Account) on March 15, 2005. [Adversary Docket No. 44 ¶ 11; Trustee's Ex. 9.]
3. Guettermann directed the Debtors to annuity products sold by AIG. [May 29, 2007 Hr'g Tr. 146-48; Trustee's Ex. 10.] In an email communication on March 13, 2005 between Guettermann and Ms. Bossart, Ms. Bossart stated that "with your approval, an annuity is the way to handle things." [Trustee's Ex. 11.]
4. On March 15, 2005, the Debtors sold a non-exempt trailer to Ted Sims for $12,000.00. [Adversary Docket No. 44 ¶ 12; May 29, 2007 Hr'g Tr. 49-50; Trustee's Ex. 7.] The funds from this sale were deposited into the Edward Jones Account on March 15, 2005. [Adversary Docket No. 44 ¶ 12; Trustee's Ex. 9.]
5. On March 16, 2005, Ms. Bossart purchased a single premium annuity from AIG for $102,915.37 (the Annuity). Less the 3.5% sales charge of $3,602.03, the value of the Annuity at the time of purchase was $99,313.34. Under the terms of the Annuity, Ms. Bossart would not begin receiving payments until August 3, 2033, when both of the Debtors would be in their 90s. The terms of the Annuity also provided that Ms. Bossart could make withdrawals from the Annuity at any time and in any amount, without penalty. [Trustee's Ex. 12.]
6. Ms. Bossart testified that she knew she could cash out the annuity or "withdraw from it at any time," and in fact intended to withdraw money from the Annuity "bit by bit" to provide for medical costs and other post-petition expenses as needed. [May 29, 2007 Hr'g Tr. 59, 63.]
7. On March 17, 2005, the Debtors withdrew $5,500.00 from their checking account at Wells Fargo Bank (the Wells Fargo Account) and purchased a cashier's check in the same amount. The Debtors then deposited this $5,500.00 cashier's check into the Edward Jones Account. [Jun. 11, 2007 Hr'g Tr. 48-49; Adversary Docket No. 16.]
8. On March 18, 2005, the Debtors transferred $5,500.00 from the Edward Jones Account to AIG, thereby making an additional $5,500.00 contribution to the Annuity. [Jun. 11, 2007 Hr'g Tr. 53; Adversary Docket No. 16.]
9. The parties agree that the Debtors' collective payments to AIG constituted a transfer as defined in 11 U.S.C. § 101(54). [Adversary Docket No. 44 ¶ 21.2]
10. On March 18, 2005, the Debtors filed a voluntary Chapter 7 petition along with their schedules. The Debtors' largest creditor is the IRS. In their Schedule C, the Debtors claimed the Annuity as exempt under § 1108.051 of the Texas Insurance Code. [Docket No. 1.] The Trustee did not object to the Debtors' exemptions, and the Debtors' exemptions were therefore allowed. [Adversary Docket No. 44 ¶ 14.]
11. The Debtors admitted that the funds they used to purchase the Annuity constituted substantially all of their nonexempt property. [Adversary Docket No. 51 ¶ 67.]
12. The Debtors admitted that they were insolvent at the time of the purchase of the Annuity. [Adversary Docket No. 44 ¶ 16.]
13. The Debtors admitted that they purchased the Annuity just prior to filing their Chapter 7 petition. [Adversary Docket No. 51 ¶ 70.]
14. The Debtors admitted that their purpose in purchasing the Annuity was to place the Funds beyond the reach of their creditors and the Trustee. [May 29, 2007 Hr'g Tr. 38-39, 85-87.]
15. The Debtors failed to file their personal tax returns (Form 1040) for the years 1995, 1996, 1997, 1998, and 1999. [May 29, 2007 Hr'g Tr. 23, 85; Trustee's Ex. 3.] Prior to the filing of the Debtors' Chapter 7 petition, the IRS had placed a tax lien on the Debtors' homestead for their failure to pay taxes. [May 29, 2007 Hr'g Tr. 33-34.]
16. Mr. Bossart testified that he was [May 29, 2007 Hr'g Tr. 74-75.] He added that their objective was to get away from the IRS. [May 29, 2007 Hr'g Tr. 82.] Mr. Bossart further testified that the Debtors' pre-bankruptcy planning only commenced after their negotiations with the IRS regarding payment of back taxes had collapsed. [May 29, 2007 Hr'g Tr. 83.]
17. The Debtors admitted that the IRS' action against them was equivalent to being threatened with a lawsuit. [Adversary Docket No. 51 ¶ 66.]
18. Although the IRS held a tax lien on the Debtors' homestead, the Debtors did not list the IRS as a secured creditor in their Schedule D; instead, the Debtors listed the IRS as an unsecured creditor in their Schedule E. [Docket No. 1.]
19. In their answer to Question 10 ("Other Transfers"), the Debtors' Statement of Financial Affairs (SOFA) disclosed only one transfer: the March 15, 2005 sale of a trailer to Ted Sims for the sum of $12,000.00. The Debtors did not disclose that on March 15, 2005, they deposited these proceeds into the Edward Jones Account. They also did not disclose that they used these proceeds the next day in their purchase of the Annuity. [Docket No. 1.]
20. Guettermann advised the Debtors to sell the trailer, counseling that if they kept it and filed a bankruptcy petition, the trailer would become part of the estate. [May 29, 2007 Hr'g Tr. 51, 151-53.]
21. In their answer to Question 11 ("Closed Financial Accounts"), the Debtors' SOFA disclosed that on March 7, 2005, they closed a savings account at Fifth Third Bank (the Fifth Third Account) containing a balance of $90,772.44. The Debtors did not disclose that they used these monies, together with the $12,000.00 proceeds from the sale of the trailer, to purchase the Annuity on March 16, 2007. [Docket No. 1.]
22. In their schedules and SOFA, the...
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