In re Maronde

• Decision Date: 08 November 2005
• Docket Number: No. 05-42535.,05-42535.
• Citation: 332 B.R. 593
• Parties: In re Kim G. MARONDE, Debtor.
• Court: U.S. Bankruptcy Court — District of Minnesota

332 B.R. 593

In re Kim G. MARONDE, Debtor.

No. 05-42535.

United States Bankruptcy Court, D. Minnesota.

November 8, 2005.

COPYRIGHT MATERIAL OMITTED

Robert J. Hoglund, Roseville, MN, for Debtor.

MEMORANDUM ORDER SUSTAINING OBJECTION TO EXEMPTION UNDER 11 U.S.C. § 522(o) AND OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN

NANCY C. DREHER, Bankruptcy Judge.

At Minneapolis, Minnesota, November 8, 2005.

The above entitled matter came for hearing before the undersigned on November 3, 2005, on the objection of the standing Chapter 13 Trustee to Debtor's claim to exemption and objection to confirmation of Debtor's modified Chapter 13 plan dated October 21, 2005. Appearances were noted on the record. Having heard and considered the evidence and the arguments, I make the following:

FINDINGS OF FACT

This matter involves application of new § 522(o) to Debtor's claim of exemption to a home purchased by Debtor and his spouse on June 27, 2003. See 11 U.S.C. § 522(o) (2005). Debtor and his spouse purchased the home for $334,900 with the proceeds of a first mortgage in the amount of $200,000 and cash which was derived from the sale of their prior home. The property consists of .83 acres of land and is within the laid out or platted portion of a city. Thus, only .5 acres of the property is exempt under Minnesota's homestead exemption provision. Minn. Stat. § 510.02. The parties have stipulated that the value of the non-exempt .33 of an acre is $9,275.

On October 20, 2003, Debtor took out a $50,000 home equity line of credit, in his name only, with U.S. Bank National Association, N.D., which was secured by a second mortgage against the homestead. In October 2003, December 2003, and January 2004, Debtor drew on that line of credit in the total amount of $43,335.40 and used all but approximately $3,500 of that amount to purchase a 2001 Ford F-150 Truck and a 2004 Pace Trailer. He thus owned the vehicles free and clear of liens. On February 9, 2004, Debtor drew the remaining available credit, $5,888.54, on the equity line which he used to pay down a credit card debt to MBNA. These draws left Debtor with approximately $50,000 in additional debt by way of a second mortgage on his home. The equity line was an interest only mortgage and Debtor made only interest payments through February 4, 2005.

By late 2004, at the latest, Debtor was in financial difficulty and was unable to pay his debts. During 2004 he liquidated the assets in a Roth IRA to pay living expenses. His income from self-employment and that of his wife, who had secured a job when finances got desperate, was insufficient to pay the couple's debts, including the interest on the second mortgage. Debtor had several old credit cards and accumulated more. Although the record, including the claims register of which the court has taken judicial notice,¹ is somewhat unclear, it is clear that Debtor opened at least one new credit card account in November 2004 and three new card accounts in February 2005. At the time he filed for bankruptcy relief on April 20, 2005, Debtor owed money to at least seven credit card companies totaling approximately $60,000. Approximately half of that amount had been incurred on credit cards in the first part of 2005, much of it on the new accounts.

Debtor testified that sometime prior to these February 2005 transactions he spoke with a friend who told Debtor how he had reorganized his debt by selling some of his assets and using the proceeds to make a cash settlement with his creditors for 50% of the debt. Without the advice of counsel, and based on this information from his friend, Debtor proceeded to try to do just that, except that instead of attempting to settle old debt with cash, he undertook to acquire new unsecured debt to pay old secured debt, and then schemed to settle the new unsecured debt with cash. With his new and old credit cards he commenced making balance transfers from those credit cards to pay down his second mortgage. He made the following payments on his equity line account using funds transferred from several credit cards:

                February 4, 2005      $ 1,500
                February 8, 2005      $21,000
                February 9, 2005      $ 5,000
                February 11, 2005     $ 4,000
                

At the time he opened the accounts and made the transfers Debtor knew that he did not have ability to pay the debt he was incurring. He also made the withdrawals from separate accounts in each instance. Debtor did not disclose these transfers in his Statement of Financial Affairs appended to his later bankruptcy petition. Between February 15, 2005, and March 9, 2005, Debtor attempted 6 additional transfers from credit card accounts to his second mortgage account in the total amount of $22,300, but each of these attempted transfers was reversed by the card companies which had apparently detected the activity. Once again, each of these attempts was made on a separate credit card account, and once again Debtor knew that he did not have the capacity to pay back the sums he was attempting to transfer. Had Debtor been successful in his attempts to make the remaining last 6 transfers from credit cards to his home equity line he would have succeeded in paying off his second mortgage and left unsecured credit card debt of an additional $22,300.

Approximately one month before meeting with his current attorney, Debtor consulted with another attorney about the possibility of filing bankruptcy in a brief five-minute phone call. Debtor first met with his current bankruptcy attorney on March 14, 2005. Debtor met a second time with his attorney and signed a retainer agreement with the attorney's firm to represent him in connection with a bankruptcy filing on or about March 20, 2005. Debtor and his attorney discussed the issue of Debtor selling the truck and trailer. Debtor and his attorney also discussed the concept of exempt property, and Debtor knew that the truck and trailer would not be entirely exempt in a bankruptcy case but that his home equity would be. On March 29, 2005, Debtor sold the trailer, in an arms length transaction, to a third party for $7,500. On April 2, 2005, the Debtor traded in the truck for a 1996 Pontiac Bonneville and received $13,708.25 in cash back from the dealership as part of the trade. On April 11, 2005, the Debtor used the funds from the sale of the truck and trailer to make a payment of $19,130.42 on the equity line, which brought the balance on this account down to zero. Debtor filed for Chapter 13 relief on April 20, 2005. The equity line is still open to Debtor, but carries a zero balance. Between the time he sold the truck and trailer and the time he filed the bankruptcy petition Debtor made no attempt to negotiate with his unsecured creditors.

Debtor filed a Chapter 13 petition and Plan. His modified Chapter 13 plan proposed to pay $215 for 5 months and $279 over 55 months for a total of $16,420.00. Of this amount, his unsecured creditors would receive approximately $13,678. Debtor claimed the equity in his home as exempt in the amount of $69,572. He listed non-exempt assets valued at a total of $3,375. Debtor also paid his mother $1,000 in January 2005 on an unsecured obligation that the parties agree would be an avoidable preference under 11 U.S.C. § 547.

CONCLUSIONS OF LAW

I. BURDEN OF PROOF

"The objecting party has the burden of proving that the exemptions were not properly claimed." Fed. R. Bankr. P. 4003(c). Therefore, the Trustee must establish that Debtor's claim of exemption to his homestead is improper or limited under 11 U.S.C. § 522(o). See Gagne v. Bergquist, 179 B.R. 884, 885 (D.Minn.1994) (To meet this burden, the Trustee must produce evidence which rebuts the prima facie effect of the claimed exemption). Specifically, the Trustee must show that Debtor made the transfer of property with the intent to hinder, delay or defraud a creditor.

Debtor has the burden of proving that the conditions for confirmation have been satisfied. See, e.g., In re Smith, 328 B.R. 797, 801 (Bankr.W.D.Mo.2005) (citing Keith M. Lundin, Chapter 13 Bankruptcy 3D, § 217.1 (2000 & Supp.2004)); see also e.g., Smyrnos v. Padilla (In re Padilla), 213 B.R. 349, 352 (9th Cir. BAP 1997); First Nat'l Bank of Boston v. Fantasia (In re Fantasia), 211 B.R. 420 (1st Cir. BAP 1997).

II. 11 U.S.C. § 522(o)

The first issue is whether Debtor may exempt that portion of his homestead equity that he acquired when, days before he filed his bankruptcy petition, he sold his truck and trailer and applied the proceeds to his equity line of credit. The Trustee rests her objection on new § 522(o) of the Bankruptcy Code which was added by the Bankruptcy Abuse Prevention and Consumer Protection Act (The 2005 Act). Pub.L. No. 109-8, § 308, 119 Stat. 23, 81-2 (2005). On the date the President signed the bill, April 20, 2005, Debtor filed a petition under Chapter 13 of the Bankruptcy Code. Section 1501(b)(2) of the 2005 Act states that § 522(o) "shall apply with respect to cases commenced under Title 11, United States Code, on or after the date of the enactment of this Act." Pub.L. No. 109-8, § 1501(b), 119 Stat. 23, 216. Debtor agrees that § 522(o) is applicable in this case.

11 U.S.C. § 522(o) states, in pertinent part:

For purposes of subsection (b)(3)(A), and notwithstanding subsection (a), the value of an interest in —

(1) real or personal property that the debtor or a dependent of the debtor uses as a residence;

* * * * * *

(4) real or personal property that the debtor or a dependent of the debtor claims as 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 the filing 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.

11 U.S.C. § 522(o)(2005).

The Bankruptcy...