In re Wilmoth, No. 08-6022 (8th Cir. 12/9/2008)
| Decision Date | 09 December 2008 |
| Docket Number | No. 08-6022.,08-6022. |
| Parties | In re: James Lewis Wilmoth, etc., et al., Debtor. William M. Clark, Jr., Trustee-Appellant, v. James L. Wilmoth, et al., Debtors-Appellees. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Appeal from the United States Bankruptcy Court for the Western District of Arkansas.
Before KRESSEL, Chief Judge, SCHERMER and McDONALD, Bankruptcy Judges.
William M. Clark, Jr., the chapter 7 trustee, appeals the bankruptcy court's1 order of May 23, 2008, overruling the trustee's objection to the debtors' claim of exemptions. We have jurisdiction over this appeal from a final order. 28 U.S.C. § 158(b). Because we conclude that the debtors' pre-bankruptcy planning was permissible under Addison v. Seaver (In re Addison), 540 F.3d 805 (8th Cir. 2008), we affirm.
James Wilmoth is a general contractor in Gentry, Arkansas. His business is primarily "dirt work": excavation and site preparation. James has worked in construction since 1977, when he started Wilmoth Backhoe. Over the years, his business grew as he expanded its scope and acquired more equipment until it encountered serious troubles in 2006, when the construction market began to bottom out.
In 2006, James went to the equipment dealers he had worked with for thirty years to see if he could refinance or sell his equipment because his cash flow was slowing to a trickle. At the time, the salesmen advised him to keep working with the finance companies. James could not collect his receivables, and his business went from being in the black into the red. He returned to the equipment dealers, most of which agreed to refinance or waive payments. None repossessed the equipment, perhaps due to the length of their relationships with James or because the abundance of equipment in the area meant there was no local market for the collateral. Construction companies all around him were folding and auctioning their equipment. As the days and weeks went by, however, it became clear to James that repossession was imminent.
Meanwhile, Dave and Linda Bisbee sued him for breach of contract over the construction of a subdivision. The Bisbees obtained a judgment against James for approximately $864,000.00. Facing an enormous judgment at a time when he could not even make payments on his equipment, James went to his lawyer, John Terry Lee, to discuss bankruptcy. Terry advised him to sell some of his property and pay down his mortgage to receive the protection of Arkansas's homestead exemption, but to leave a significant amount of assets available for creditors. James followed Terry's pre-bankruptcy planning advice.
In October or early November of 2007, James sold nine or ten pieces of equipment, most or all of which were subject to liens, to an equipment broker for fair market value and realized over $300,000.00 on the sales. Because James had been behind on his equipment payments, he had believed at the time of sale that unless he sold the equipment, most or all of it soon would have been repossessed. From the proceeds, he first paid off the companies that had liens against the equipment.
James and Jodie Wilmoth maintain a homestead on 22 acres in Gentry, Arkansas. The property contains two houses-the Wilmoths' residence and a "mother-in-law" structure where their daughter resides. The tract of land on which the Wilmoth residence is located was formerly a chicken farm that had been subdivided into three parcels. The monthly payments on the two mortgages (both held by First Horizon) are $1832.26 and $363.00. In November 2007, the Wilmoths paid down their first mortgage in the amount of $140,351.16 from the approximately $300,000.00 realized on the sale of the equipment. The $140,000.00 was divided into prepayments directed toward the next ten months and then toward principal. James testified that this was not done to hinder his creditors, nor was it done to delay his creditors or defraud them.
The Wilmoths filed their chapter 7 petition on November 29, 2007. At the time, one of James's companies, Phase I Turnkey, was still completing a job. The trustee permitted him to continue business operations long enough to finish the project. As a result, James was able pay to Phase I Turnkey's suppliers, vendors, and other bills. Ultimately, he paid Phase I Turnkey's creditors over $440,000.00 on unsecured debts of around $506,000.00.
The Wilmoths elected to use the Arkansas exemptions, and claimed their homestead as exempt. The chapter 7 trustee, William M. Clark, Jr., objected to the exemption because: 1) the identified property was two tracts with two dwellings, and 2) 11 U.S.C. § 522(o) provides for the reduction of value of an exemption where the value is the result of the debtor's intent to hinder, delay or defraud creditors. The bankruptcy court held a hearing on the trustee's objection on May 20, 2008 and overruled the objection on both bases. The trustee has not appealed that part of the court's decision which held that the property consisted of one parcel.
The court found that the trustee had not met his burden of proving that the Wilmoths acted with intent to hinder, delay, or defraud their creditors when they increased their homestead exemption value through the liquidation of equipment. The court noted that the addition of 11 U.S.C. § 522(o) to the Bankruptcy Code had not changed the legal analysis of whether the transformation of non-exempt property into exempt property was prudent pre-bankruptcy planning or fraudulent, and that the section was likely added to the Bankruptcy Code to extend the look-back period. It found the testimony of both Dave Bisbee and James Wilmoth to be credible, and that the differences in testimony were reconcilable and not material. The court found it significant that the Wilmoths had not liquidated all of their assets to increase their homestead exemption; that had James delayed the sale, the value of the assets would likely have diminished further, resulting in less value to the estate; that James sold the equipment for fair market value; that James paid off secured creditors, freeing up more assets for unsecured creditors; that James did not conceal his actions; and that the Wilmoths acted in good faith.
"The question of whether an individual acted with intent to defraud in converting non-exempt property into exempt property is a question of fact, on which the bankruptcy court's finding will not be reversed unless clearly erroneous." Jensen v. Dietz (In re Sholdan), 217 F.3d 1006, 1010 (8th Cir. 2000) (citing Hanson v. First Nat'l Bank in Brookings, 848 F.2d 866, 868 (8th Cir. 1988)).
The sole issue on appeal is: did the bankruptcy court err in finding no intent to hinder, delay or defraud and therefore allowing the debtors their full homestead exemption over the objection of the trustee, where the debtors had converted non-exempt assets on the eve of bankruptcy to increase the value of the homestead exemption? Debtors are allowed to "choose to exempt from property of the bankruptcy estate that property which is exempt under the applicable state or federal law." 11 U.S.C. § 522(b). The Wilmoths used the Arkansas exemptions, which provide an unlimited homestead exemption to "any resident of [Arkansas] who is married or the head of a family." Art. 9, § 3, Const. of Ark. (1874). The legal basis for the trustee's objection was 11 U.S.C. § 522(o), which was added to the Bankruptcy Code with the 2005 amendments and states in part,
[...] the value of an interest in—
(1) real or personal property that the debtor or a dependant of the debtor uses as a residence [... or]
(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 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.
It is not disputed that the debtors converted non-exempt property to increase their homestead exemption within the 10-year look-back period; rather, the parties dispute the issue of intent, and whether the addition of § 522(o) has changed the way pre-bankruptcy homestead exemption planning is treated in the Eighth Circuit. The trustee would have had the bankruptcy court reduce the debtors' homestead exemption by the extra payments they made shortly before their bankruptcy filing.
The presence of some badges of fraud is not enough for a finding of intent; there must also be extrinsic evidence.
The Eighth Circuit Court of Appeals has spoken in a long line of cases on the conversion of non-exempt assets to exempt assets on the eve of bankruptcy, and "intent to hinder, delay or defraud" in the context of allowing exemptions, avoiding fraudulent transfers, dismissing cases and denying discharges. See, e.g., Sholdan v. Dietz (In re Sholdan), 217 F.3d 1006 (8th Cir. 2008) (Sholdan I) (); Sholdan v. Dietz (In re Sholdan), 217 F.3d 1006 (8th Cir. 2000) (Sholdan II) (same); Kelly v. Armstrong, 206 F.3d 794 (8th Cir. 2000) (Armstrong IV) (); Panuska v. Johnson (In re Johnson), 880 F.2d 78 (8th Cir. 1989) (); Norwest Bank Neb. v. Tveten (In re Tveten), 848 F.2d 871, 874 (8th Cir.1988) (...
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