In re Bronk

• Decision Date: 07 January 2011
• Docket Number: Adversary No. 10–44.,Bankruptcy No. 09–15224–7.
• Citation: 444 B.R. 902
• Parties: In re Leonard D. BRONK, Debtor.John M. Cirilli, Trustee, Plaintiff,v.Leonard D. Bronk, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

444 B.R. 902

In re Leonard D. BRONK, Debtor.John M. Cirilli, Trustee, Plaintiff,

v.Leonard D. Bronk, Defendant.

Bankruptcy No. 09–15224–7.

Adversary No. 10–44.

United States Bankruptcy Court, W.D. Wisconsin.

Jan. 7, 2011.

John M. Cirilli, Cirilli Law Offices, S.C., Rhinelander, WI, pro se.Jared Redfield, Redfield Law Offices, LLC, Stevens Point, WI, for Defendant.

MEMORANDUM DECISION

THOMAS S. UTSCHIG, Bankruptcy Judge.

The matters pending before the Court are the chapter 7 trustee's objection to the debtor's exemptions and the adversary proceeding in which the trustee seeks the denial of the debtor's discharge. At the final hearing the trustee represented himself and Jared Redfield appeared on behalf of the debtor. The parties stipulated to the facts and submitted both the exemption and dischargeability issues to the Court for determination. The Court took the matter under advisement. The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.

One of the most contentious aspects of bankruptcy law is the notion that by filing for relief debtors are getting away with something. This impression is only heightened when a debtor converts non-exempt assets into exempt property on the eve of bankruptcy in an attempt to protect them from creditors. Often innocuously described by debtors as “pre-bankruptcy planning,” this transformation of assets is frequently regarded by others as a shell game, easily manipulated by a clever operator into a vehicle for fraud.¹ In this case, the trustee takes exception to Mr. Bronk's pre-petition efforts to shield approximately $140,000.00 from his creditors. Resolution of the dispute requires consideration of not only the boundaries of permissible bankruptcy planning but also Wisconsin exemption law. For the reasons which follow, the Court concludes that Mr. Bronk is entitled to a discharge, but not to all of the exemptions he has claimed.

Mr. Bronk filed bankruptcy on August 5, 2009. Prior to the filing, he owned an unencumbered home in Stevens Point, Wisconsin. In May of 2009, he borrowed $95,000.00 from Citizens Bank and gave the bank a mortgage on his home. He used the mortgage proceeds to fund several EdVest College Savings Plans, ostensibly for the benefit of his grandchildren.² The debtor also had a certificate of deposit at Citizens Bank in the amount of $42,000.00. A few weeks before the petition date, the debtor converted the CD to an annuity with CM Life Insurance Company; the annuity was then claimed as exempt on the debtor's schedule C. Mr. Bronk admits that prior to the transfers he had incurred substantial debts relating to his wife's medical care. ³ He performed these transactions on the advice of an attorney, who told Mr. Bronk that they would accomplish his goal of defraying the educational expenses of his grandchildren while allowing him to remain in his own home. According to the trustee, these transfers effectively converted all of the debtor's non-exempt assets to exempt ones, leaving nothing for his creditors.

The trustee has objected to the debtor's exemptions and has also sought to deny the debtor's discharge on the theory that the debtor's pre-filing conduct strayed into that murky realm where overly aggressive asset protection only serves to hinder, delay, or defraud creditors, fresh starts become head starts, and pigs are safe but hogs are slaughtered.⁴ The trustee also objected to the specific exemption claims, and contends that even if the debtor did not engage in excessive (or fraudulent) bankruptcy planning, the exemptions should still be denied because the assets do not fit within the confines of the relevant statutory provisions.

Certain basic principles are applicable to these determinations. The purpose of the bankruptcy code is to provide an equitable distribution of a debtor's assets to creditors and to relieve the “honest debtor” from the weight of oppressive indebtedness. Village of San Jose v. McWilliams, 284 F.3d 785, 790 (7th Cir.2002) (citing Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 554–55, 35 S.Ct. 289, 59 L.Ed. 713 (1915)). Courts construe the bankruptcy code liberally in favor of the debtor and strictly against the creditor. McWilliams, 284 F.3d at 790 (citing Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th Cir.1997)); In re Scarlata, 979 F.2d 521, 524 (7th Cir.1992); see also In re Johnson, 98 B.R. 359, 367 (Bankr.N.D.Ill.1988) (“The denial of discharge is a harsh remedy to be reserved for a truly pernicious debtor.”). Consequently, the protection of the bankruptcy code's “fresh start” policy can only be denied a debtor who is something less than honest in dealing with creditors or the court. Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (the opportunity for a fresh start is limited to the “honest but unfortunate” debtor). And finally, the party objecting to the discharge bears the burden of proof. Kolodziej v. Reines (In re Reines), 142 F.3d 970, 973 (7th Cir.1998).

I. Hindering, Delaying, or Defrauding Creditors

The first issue for consideration is something of a two-for-one deal: i.e., whether the debtor's discharge should be denied and his exemptions disallowed because he transferred property with the intent to hinder, delay, or defraud creditors. In order to succeed on an objection to discharge under 11 U.S.C. § 727(a)(2)(A), the trustee must prove, by a preponderance of the evidence, that the debtor's actions occurred in the year prior to the bankruptcy filing, that the act (or acts) in question consisted of transferring, removing, destroying, or concealing the debtor's property, and that the debtor acted with the intent to hinder, delay, or defraud creditors. In re Smiley, 864 F.2d 562, 565 (7th Cir.1989); Lee Supply Corp. v. Agnew (In the Matter of Agnew), 818 F.2d 1284, 1287 (7th Cir.1987). Likewise, under Wis. Stat. § 815.18(10), an exemption may be denied if the court finds that the debtor “procured, concealed, or transferred assets with the intention of defrauding creditors.” See In re Vangen, 334 B.R. 241, 246 (Bankr.W.D.Wis.2005); In re Przybylski, 340 B.R. 624 (Bankr.E.D.Wis.2006).

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). Here, Mr. Bronk has claimed a variety of exemptions under Wisconsin law. In dispute are the exemption of the college savings plans under Wis. Stat. § 815.18(3)(p) and the annuity under Wis. Stat. § 815.18(3)(j).⁵ Mr. Bronk concedes that the pre-petition transfers occurred solely so that he could make these claims. While he did not give the money to a neighbor or hide it in his basement, the conversion of non-exempt property to exempt property can qualify as a “transfer” within the meaning of § 727(a)(2). Smiley, 864 F.2d at 565–66.⁶ There is also no argument that the transfers occurred within the year prior to the petition. Since the parties have acknowledged these facts, the only remaining dispute centers around Mr. Bronk's intent. In that regard, there must be evidence of more than simply the transfer itself; there must be proof that the conversion of assets was part of Mr. Bronk's scheme to hinder, delay, or defraud creditors.

As the Seventh Circuit observed in Smiley, “Conversions of assets from nonexempt to exempt forms within the year preceding a petition for bankruptcy are not necessarily fraudulent to creditors.” 864 F.2d at 566. ⁷ Since direct evidence of fraudulent intent is rarely available, courts frequently refer to the “badges of fraud” to determine whether a debtor acted with the requisite intent. Addison v. Seaver (In re Addison), 540 F.3d 805, 811 (8th Cir.2008); see also McWilliams, 284 F.3d at 790 (intent to defraud must be actual and cannot be constructive, but because it is “unlikely” the debtor will admit fraud, intent may be established by circumstantial evidence). As the parties noted in their arguments, courts have identified a number of factors that may be consulted in making this determination. Before proceeding further, however, two points should be made.

First, many of the relevant authorities deal with an objection to discharge or an objection to exemptions, but not necessarily both. Regardless, the same basic standard is applicable to denial of either an exemption or the discharge. As noted by the Eighth Circuit:

[T]he standard applied consistently by the courts [in discharge objection cases] is the same as that used to determine whether an exemption is permissible, i.e., absent extrinsic evidence of fraud, mere conversion of non-exempt property to exempt property is not fraudulent as to creditors even if the motivation behind the conversion is to place those assets beyond the reach of creditors.

Norwest Bank Nebraska, N.A. v. Tveten, 848 F.2d 871, 874 (8th Cir.1988). While the Seventh Circuit's decision in Smiley involved a question of discharge, Wisconsin bankruptcy courts have generally recognized that the same factors apply in the context of an objection to exemptions under Wis. Stat. § 815.18(10). For example, in In re Bogue, 240 B.R. 742, 750 (Bankr.E.D.Wis.1999), the court stated that “ Smiley dealt with the issue of whether such conduct on the part of the debtors gives rise to a basis for denial of discharge, but that same reasoning applies on the issue of exemption disallowance.” See also Przybylski, 340 B.R. at 629–30 (while the case involved an exemption dispute rather than a question of discharge, “[t]he test is the same”).

The second point to be made concerns the factors themselves, and the court's consideration of the amount of the claimed exemption. When considering whether to grant a discharge and allow a debtor to leave many obligations unpaid, the temptation is to place considerable weight on the amount of money a debtor...