In re Hill

• Decision Date: 03 February 1994
• Docket Number: Bankruptcy No. 92-04836.
• Parties: In re Elmer C. HILL, Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Florida

163 B.R. 598 (1994)

In re Elmer C. HILL, Debtor.

Bankruptcy No. 92-04836.

United States Bankruptcy Court, N.D. Florida, Pensacola Division.

February 3, 1994.

John Daniel and J. Nixon Daniel, Pensacola, FL, for creditor.

John E. Venn, Jr., Gulf Breeze, FL, for debtor.

Thomas Reed, Pensacola, FL, Trustee.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

LEWIS M. KILLIAN, Jr., Bankruptcy Judge.

THIS CAUSE was heard before the Court on the objection of Havoco of America, Ltd. ("Havoco"), a judgment creditor in this case, to certain assets claimed as exempt by the Debtor. In general, Havoco objects to three categories of assets claimed as exempt, those being an individual retirement account or "IRA", a home in Destin, Florida, and the Destin home furnishings. The Court having considered the testimony of witnesses, argument of counsel, and pleadings and related documents submitted in the cause, sustains the creditor's objection to the IRA and overrules its objections to the Destin home and furnishings.

The Debtor has engaged in the marketing and managing of coal production contracts throughout his professional life. In 1969, he formed a closely held corporation, Hilco, Inc., as a vehicle to provide brokerage and management services. In 1975, Hilco assisted in the financing of a contract between Havoco and the Tennessee Valley Authority ("TVA"). The Havoco-TVA contract required Havoco to provide the TVA with coal over a 10 year period. To fulfill its obligations under the TVA contract, Havoco entered into a contract with a coal producer, R & F Coal Company ("R & F Coal"). Following the execution of these contracts, the Debtor became an officer and director of Havoco, and was responsible for administering the TVA and related contracts.

From the start of the contract negotiations, the Debtor conspired with the president of R & F Coal and others to eliminate Havoco as the principal under the TVA contract.¹ The conspirators' plan involved the withholding of key information from Havoco and the negotiating in bad faith of periodic price re-negotiations as provided in the Havoco-TVA contract. As a direct result of the conspirators' actions, Havoco was unable to successfully re-negotiate the terms of the TVA contract, and was forced to assign its rights under the contract to R & F Coal. The Debtor then resigned his position with Havoco and assisted R & F Coal in successfully completing negotiations with the TVA. R & F Coal subsequently retained the Debtor's services as a contract administrator under a lucrative long-term contract ("services contract").² As a result of these actions, the Debtor was found liable for fraud, conspiracy, tortious interference with contractual relations, and breach of fiduciary duty.³ Judgment was entered in favor of Havoco in the amount of $15,000,000 on December 19, 1990 by the United States District Court for the Northern District of Illinois.⁴

The three classes of assets claimed as exempt by the Debtor were acquired at different times. In 1977, Hilco established a pension plan for its employees, including the Debtor, which was later rolled into the IRA.⁵ The pension was funded entirely by Hilco earnings. No other monies have been deposited into the IRA by the Debtor. The Debtor, a long-time resident of Tennessee, purchased with cash, a $650,000 home in Destin, Florida⁶ shortly after the entry of the $15,000,000 judgment by the Illinois district court. The Debtor intended to make the home his retirement residence. The Destin home furnishings were purchased by the Debtor's wife soon after the property was purchased. The furnishings were paid largely from monies deposited in a joint Florida bank account, although some funds from personal accounts in Florida and Tennessee banks were also used.

Havoco first makes a general objection to each of the claimed exemptions by asserting that the funds used to acquire these assets were generated through the dishonest actions of the Debtor. Havoco alleges the services contract was a benefit realized from the Debtor's wrongful actions, and that the services contract represented 85-100% of the gross revenues of Hilco, an entity controlled by the Debtor. Havoco specifically argues that the IRA should be denied exempt status because the tainted services contract represented the sole source of monies used to fund the IRA. The Debtor responds by asserting the services contract did not result from any wrongful act of the Debtor, but rather, a separate and legitimate contract under which the Debtor provided real services and for which he is entitled to reasonable compensation. The Debtor further asserts that the pension fund was a part of overall compensation package designed to be competitive in the marketplace at the time it was created.

Havoco also makes a similar argument that the funds used to acquire the Destin home and furnishings were derived from the tainted services contract. In addition, Havoco objects to the claimed exemptions for the Destin home and furnishings on the basis that the Debtor engaged in impermissible pre-bankruptcy planning by the conversion of non-exempt assets to exempt on the eve of the filing of a bankruptcy petition. Havoco argues that such conversion of assets on the eve of and in anticipation of the filing of a petition for relief under the Bankruptcy Code is sufficient to disallow the Debtor's right to claim as exempt those assets so converted. The Debtor contends that no illegitimate pre-bankruptcy conversion of non-exempt into exempt assets occurred in this case. The Debtor asserts that he had planned to retire in Florida for many years, and had delayed retiring to Florida due to business concerns requiring his attention and the pending Havoco litigation. The Debtor further points out that he and his wife purchased the Destin home in December 1990, more than year before the filing of a bankruptcy petition in July 1992. The Debtor lastly argues the Destin home furnishings are exempt from his individual debts because they are held in tenancy by the entireties.

If discharge is the fresh start afforded honest, but unfortunate debtor by the sweeping away of pre-petition liabilities, then exemptions provide the means with which a debtor can enjoy the fresh start by allowing the debtor to retain certain prepetition assets with which to support himself and his family. Exemptions, therefore, necessarily deprive creditors of assets which would otherwise be available to satisfy their claims. The purpose behind exemptions however is not to provide a windfall for the debtor, but rather, to protect the public from the burdens of supporting a destitute family. In re Swartz, 18 B.R. 454, 456 (Bankr.D.Mass.1982).

The Bankruptcy Code establishes a uniform scheme of exemptions, but also permits a state to "opt-out" of the federal scheme and apply its own scheme. 11 U.S.C. §§ 522(d) and (b). Florida has so opted-out of the federal scheme. Fla.Stat.Ann. § 222.20 (West 1989). Havoco makes no objection to the claimed exemptions for the IRA and the Destin home on the basis that the assets are not nominally entitled to exempt status as a matter of state statutory law. Rather, Havoco asserts that the Debtor has lost the right to claim these assets as exempt due to impermissible pre-bankruptcy conversion or because no debtor is permitted to use the exemption laws as a safe harbor for ill-gotten gain.

Havoco's objection with respect to the IRA based on its assertion that use of the exemption provisions of the Code to retain the benefits of illegal or fraudulent actions is improper is well founded, and therefore, sustained. There is established authority supporting the proposition that exemptions are not to be applied in such a way as to make them instruments of fraud, an imposition on creditors, or a means to escape honest debts. Matter of Felsinger, 17 B.R. 226, 228 (Bankr. M.D.Fla.1982); In re Gherman, 101 B.R. 369, 371 (Bankr.S.D.Fla.1989). See also, Ryskind v. Robinson, 302 So.2d 427 (Fla. Dist.Ct.App.1974); Slatcoff v. Dezen, 76 So.2d 792 (Fla.1955). The record before the Court indicates that the services contract directly resulted from the fraudulent actions of the Debtor during the course of the Havoco-TVA contract negotiation.⁷ Thus, all monies generated from the services contract represent ill-gotten gains derived from the Debtor's fraudulent acts. Furthermore, evidence produced at the hearing demonstrated that the pension plan which was later rolled into the IRA was entirely funded from the proceeds of the services contract. From this evidence the Court concludes that the IRA is a repository for ill-gotten monies which cannot be shielded from creditors through the application of exemption provisions.

The Debtor's argument that he is entitled to reasonable compensation for performing under the services contract is unavailing because the Debtor, in fact, was paid for his services. Evidence produced at the hearing indicated the Debtor received wages totalling $2,875,875 and dividends of $692,960 from Hilco after the assignment of the services contract. Neither party disputed the fairness of this compensation for the Debtor's services to Hilco during the life of the services contract. Accordingly, Havoco's objection to the Debtor's claim of exemption as to the IRA account is sustained.

Unlike the IRA situation, evidence produced at the hearing showed that monies from sources other than the tainted services contract funded the purchase of the Destin residence. The Debtor produced a summary of income from coal brokerage contract work with various parties as well as income derived from his Hilco employment from 1969 to 1991. This summary showed that the Debtor earned $5,158,056 from individual contracts and $3,850,935 in wages and dividends from Hilco over this 23 year period. Havoco produced no evidence to show that any of the individual contract money resulted from the Debtor's fraudulent actions. In addition, the Debtor received...