Mickelson v. Anderson

• Decision Date: 23 March 1982
• Docket Number: Adv. No. 4-81-63(O),Bankruptcy No. 4-80-1964(O).
• Citation: 31 BR 635
• Parties: J.J. MICKELSON, Trustee of the bankrupt estate of Ralph Anderson and Myra Anderson, Plaintiff, v. Ralph K. ANDERSON, and Myra R. Anderson, Defendants. In re Ralph K. ANDERSON, and Myra R. Anderson, Debtors.
• Court: U.S. Bankruptcy Court — District of Minnesota

31 B.R. 635 (1982)

J.J. MICKELSON, Trustee of the bankrupt estate of Ralph Anderson and Myra Anderson, Plaintiff, v. Ralph K. ANDERSON, and Myra R. Anderson, Defendants.

In re Ralph K. ANDERSON, and Myra R. Anderson, Debtors.

Adv. No. 4-81-63(O), Bankruptcy No. 4-80-1964(O).

United States Bankruptcy Court, D. Minnesota.

March 23, 1982.

Edward W. Bergquist, Minneapolis, Minn., for plaintiff/trustee.

Philip G. Lind, Minneapolis, Minn., for defendants/debtors.

MEMORANDUM ORDER

KENNETH G. OWENS, Bankruptcy Judge.

Trial in the above adversary proceeding, and hearing on a related motion were held on July 6, 1981. Both attorneys have filed memorandums and the court has been further assisted by amicus briefs filed by William J. Kampf and Paul J. Scheerer, both prominent bankruptcy practitioners.

The trustee's complaint alleges that on the eve of bankruptcy, the debtors intending to defraud their creditors converted certain nonexempt assets into cash which was then used to enhance the value of their homestead property by paying and satisfying a real estate mortgage thereon, and the motion mentioned is that of the debtors in their Chapter 7 case for an order approving and allowing debtors' exemption in full of their homestead which the debtors valued at $85,000.00 in their bankruptcy schedules.

FACTUAL SETTING

The objective facts are not substantially disputed. As reflected at the hearing and as otherwise appears from the files, the debtor Ralph K. Anderson consulted an attorney on August 27, 1980 about his financial circumstances and the filing of bankruptcy. In the discussion, the debtor informed the attorney about his assets including several admittedly nonexempt assets. The attorney then advised the debtor that conversion of these assets into exempt assets was permissible under the Bankruptcy Code, and use of the proceeds to satisfy the mortgage on his homestead would not affect its exempt status. The attorney in this connection read to the debtor the assertion found in Historical and Revision Notes following Sec. 522 in the West Publishing Company pamphlet edition of the Code, the following:

"As under current law, the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition. The practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law."

The attorney further advised the debtor that the assets in question might otherwise go to the unsecured creditors.

The debtor in October 1980 sold to third parties, including one item to his father, the assets in question receiving cash in the following amounts:

                  1972 Corvette Automobile           $ 4,500.00
                  1977 or 1978 Ford truck              3,500.00
                  Port Authority Bond                  4,000.00
                  50% interest in MinncomCorp          1,000.00
                  An unimproved lot                      600.00
                                                     __________
                  Total                              $13,600.00
                

The debtor applied this cash fund, other nonexempt cash he had in hand and $1,000.00 borrowed from his father to payment and satisfaction of the existing long term installment mortgage on his homestead in Montevideo, Minnesota and described in Schedule B-4 attached to his petition in bankruptcy, in the sum of $19,188.00. Thus all except the $1,000.00 borrowing was from the nonexempt funds.

The debtors filed their voluntary Chapter 7 petition under the Bankruptcy Code on November 24, 1980. In the accompanying statement of affairs, the debtors disclosed the mentioned sales and the payment on the mortgage. In their case, they elected to claim the homestead as exempt under Minnesota law as permitted by 11 U.S.C. Sec. 522(b) which provides an exemption under "State or local law that is applicable on the date of filing of the petition". Minnesota law provides for the exemption of a homestead of limited area but without monetary limitation.

The plaintiff/trustee after his appointment permitted the general claim of exemption to stand under local practice but instituted this adversary proceeding to establish a lien on the homestead to the extent it had been enhanced by the application of nonexempt funds to payment of the mortgage. The debtor Ralph Anderson testified that his purpose in converting the nonexempt to exempt assets was to take full advantage of the exemption allowed to him in bankruptcy and that he did not finally decide to file bankruptcy until after the satisfaction of the mortgage. He admitted in his testimony that his attorney had advised him that his course of conduct might be subject to attack and his understanding that even if not so informed he would have assumed it would be subject to attack by the trustee or creditors.

THE COMMENT IN WEST

The course of the legislative proposals which eventually became the Bankruptcy Code was unusual with the result that even Committee Reports are often ambiguous and confusing, often contradictory and sometimes in total error when applied to the end legislative product. The comment quoted from West is subject to those frailties. Examination of the legislative proceedings pinpoints the source of the assertion to be in a letter addressed to Congressman Don Edwards by Bankruptcy Judge Phelps of the Central District of California calling attention to the law apparently prevailing in the Ninth Circuit which permitted such prebankruptcy planning and conversion of non-exempt assets into exempt assets as preliminary to his suggestion that such prebankruptcy planning and conversion of assets should be forfended in the proposed Code. The discussion at the hearing following receipt of the letter was cursory and with no positive indication that such rule of law was universal. Accordingly the West note lacks authority, and the text of the Code does not expressly deal with the question. Accordingly it is appropriate to look elsewhere for guidance. Since the exemption claimed is that afforded by the law of Minnesota, it seems appropriate that the search should be directed to existing Minnesota law.

DISCUSSION

Minnesota law permits a homestead exemption without limit as to value. Accordingly, if permitted, it could afford a receptacle into which the debtor could pour all of his otherwise nonexempt assets with the effect mentioned by Judge Phelps:

"here in California the amount of assets that a person contemplating bankruptcy can hide from his creditors with the assistance of a smart attorney is outstanding."

The letter then referred to the numerous possible exemptions under California law but even there the equity in a homestead is apparently limited to $20,000.00.

This court had occasion to consider the applicable Minnesota law in connection with certain cases commenced under the prior Bankruptcy Act and concluded that such transactions were defeasible if accomplished with actual fraudulent intent. In the unreported opinion of February 8, 1979 in the Matter of Donald J. McGlynn, et al., bankruptcy cases No. 4-74 BKY 925, 4-74 BKY 926, and 4-75 BKY 88, this court in a similar situation in addition to other remedies granted judgment constituting a lien on the otherwise exempt homestead. The canvas of Minnesota authorities will not be repeated here but a copy of that memorandum opinion will be appended to this order for the information of counsel and others.

The conclusion in McGlynn is reflected in the following short excerpt:

"The ultimate issue is whether McGlynn and Garmaker viewed in the totality of their relationships and activities did in fact intend to defraud their creditors by their actions in enhancing the value of the homestead which they already had, and in concealing other assets in the enhancement of the policies of insurance available to them at the beginning of 1974.

"I conclude that as suggested in Forsberg the showing of any fact or circumstance other than the mere conversion which bears on the motive and intent of the bankrupts in the activities leading up to and involving the conversion is relevant to the question, and the issue is simply whether it satisfactorily demonstrates that the bankrupt\'s intention was not the seeking merely of an exemption but motivated by the fraudulent purpose of removing non-exempt property from the reach of his creditors."

The ultimate question then here as in McGlynn is whether the debtor intended merely to obtain an exemption or whether he intended to remove previously nonexempt assets from the reach of creditors. The latter is the "fraudulent" intent mentioned in McGlynn there found sufficient to remove the shield of exemption.

In the context of the present case the advice of counsel is essentially irrelevant because counsel merely exhibited by way of the West Note an asserted but erroneous legislative history. And whether or not known to be erroneous the debtor as he conceded in his testimony here assumed his course of conduct would be attacked. Certainly fraud, if blatant, need not necessarily be secret. In the totality of this case, I am satisfied and find that the debtor in the course of conduct resulting in the conversion of nonexempt assets into an enhancement of his admitted homestead property had a fraudulent intent, and should not be permitted to remove the proceeds of the nonexempt assets from the reach of creditors. As in McGlynn, there is no warrant in Minnesota law for the loss of the homestead exemption but its shield may be penetrated to permit the relief sought by the plaintiff in this adversary proceeding, that is a judgment in the amount of the converted assets and the fixing of a lien therefore on the homestead real property.

There is no showing that the debtor Myra R. Anderson knowingly participated in the prebankruptcy planning or course of conduct and she should not be the subject of judgment, but being merely a volunteer beneficiary with respect to the enhancement of the homestead, she must suffer the effects of the lien.

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