Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-07-02064/USCOURTS-ca8-07-02064-0/pdf.json

Parties Involved:
Lance V. Addison
Appellant
Randall L. Seaver
Appellee

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

Nos. 07-2064/07-2727

___________

In re: Lance V. Addison, * 

* 

Debtor * 

*

-------------------- *

* 

Lance V. Addison, * 

*

Appellant, * Appeal from the United States 

* Bankruptcy Appellate Panel 

v. * for the Eighth Circuit.

* 

Randall L. Seaver, * 

* 

Appellee. *

___________

Submitted: March 10, 2008

Filed: August 7, 2008

___________

Before BYE, SMITH, and COLLOTON, Circuit Judges.

___________

SMITH, Circuit Judge.

Shortly before Lance Addison filed his bankruptcy petition, he converted a

portion of his nonexempt assets into exempt assets. After the bankruptcy trustee

("Trustee") filed an objection to Addison's claimed exemptions, the bankruptcy court

concluded that Addison converted the assets with the intent to hinder, delay, or

defraud a creditor. As a result, the bankruptcy court reduced Addison's homestead

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exemption by $11,500, and denied the exemption claimed in his Roth IRA. The

bankruptcy court also ruled that two college tuition savings accounts Addison had

established for his children were property of his bankruptcy estate and not exemptible.

Addison appealed the bankruptcy court's decision, and the Bankruptcy Appellate

Panel (BAP) affirmed.

Subsequently, the Trustee initiated an adversary proceeding objecting to

Addison's discharge. The bankruptcy court denied Addison's discharge, ruling as a

matter of collateral estoppel that Addison had acted with the intent to hinder, delay or

defraud one or more creditors when he converted his nonexempt assets to exempt

assets within one year prior to filing bankruptcy. Addison also appealed this decision

to the BAP and immediately requested that the BAP transfer the appeal to this court.

The BAP did so, and we now hear Addison's consolidated appeals. We affirm in part,

reverse in part, and remand for further proceedings.

I. Background

Addison, a part-owner of a cable company, had personally guaranteed some of

his company's debt. In early 2005 the business was unable to pay its debts, and JP

Morgan Chase ("Chase"), a company creditor, began to pursue Addison on a $1.3

million personal guarantee. Around June 2005, Addison first sought the advice of

bankruptcy counsel in an effort to protect himself from Chase's attempts to enforce the

guarantee. On or about July 21, 2005, Addison used $4,000 of his nonexempt funds

to establish a Roth IRA for himself and used another $4,000 of the nonexempt funds

to establish a Roth IRA for his wife. The funds came from a brokerage account that

contained $45,476.71 in nonexempt funds prior to these transfers.

On October 14, 2005, Addison instructed his wife to use $11,500 in nonexempt

funds to make a voluntary principal payment on their home mortgage. Addison's wife

transferred $9,000 of this payment from the brokerage account mentioned above, and

$2,500 came from a bank account at U.S. Bank. Later that same day, Addison filed

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1

The Roth IRA opened in Addison's wife's name is not at issue in this case.

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an individual Chapter 7 bankruptcy petition. He chose the Minnesota state exemptions

and claimed his Roth IRA1

 and the equity in the house as exempt.

In May 2004, Addison had established a college tuition savings account,

pursuant to 26 U.S.C. § 529 ("Section 529 accounts"), for each of his two children.

Section 529 account balances fluctuate with the equity markets, but on the date of his

bankruptcy filing, the accounts were worth approximately $22,000 combined.

Addison listed the Section 529 accounts on his bankruptcy schedules but claimed that

the accounts were owned by his children and thus were not property of his bankruptcy

estate. To the extent that the Section 529 accounts were property of the estate,

however, Addison claimed them as exempt.

The Trustee objected to Addison's homestead and Roth IRA exemptions, and

asserted that the Section 529 accounts were property of the estate not subject to any

exemption. The bankruptcy court held an evidentiary hearing on the Trustee's

objection and subsequently ruled in favor of the Trustee on all three issues. The court

found that Addison made the $11,500 house payment and the $4,000 Roth IRA

payment with the intent to hinder, delay, or defraud his creditors, and thus denied, in

full, Addison's claimed exemption in the Roth IRA and ordered that the homestead

exemption be reduced by $11,500. The bankruptcy court also ruled that the Section

529 plans were property of Addison's bankruptcy estate and that they were not subject

to any applicable exemption.

The BAP affirmed, ruling that the bankruptcy court's finding that Addison had

the intent to hinder, delay, or defraud his creditors when he converted the nonexempt

assets into exempt assets was not clearly erroneous. The BAP also affirmed the

bankruptcy court's determination that the Section 529 accounts were property of the

estate and not subject to exemption. Addison timely appealed to this court.

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After the bankruptcy court found that Addison intended to hinder, delay, or

defraud a creditor when he converted his nonexempt assets into his homestead and

Roth IRA, the Trustee initiated an adversary proceeding to deny Addison's discharge

under 11 U.S.C. § 727(a)(2). Because a debtor's discharge can be denied under §

727(a)(2) if "the debtor, with intent to hinder, delay, or defraud a creditor . . . has

transferred . . . property of the debtor, within one year before" his bankruptcy filing,

and the bankruptcy court had already concluded that Addison transferred nonexempt

property to exempt property with the intent to hinder, delay, or defraud a creditor

within a year before his bankruptcy filing, the court denied Addison's discharge under

§ 727(a)(2) on collateral estoppel grounds. Addison also appealed this ruling to the

BAP, which certified the appeal directly to this court. We now consider both of

Addison's appeals.

II. Discussion

Addison argues that the bankruptcy court erroneously found that he converted

nonexempt assets to exempt assets with the intent to hinder, delay, or defraud one or

more creditors. More specifically, Addison contends that the bankruptcy court's

disallowance of his Roth IRA exemption claim and its reduction of his homestead

exemption should be reversed along with the denial of his discharge. Further, Addison

asserts that the bankruptcy court erred in ruling that the Section 529 accounts that he

established for his children are property of his bankruptcy estate and in ruling that

they are not subject to any exemption. Like the BAP, we review the bankruptcy court's

conclusions of law de novo and its findings of facts for clear error. Official Comm. of

Unsecured Creditors v. Farmland Indus., Inc. (In re Farmland Indus., Inc.), 397 F.3d

647, 650 (8th Cir. 2005).

A. Disallowance of Claimed Exemptions

The bankruptcy court found that Addison acted with the intent to hinder, delay,

or defraud one or more of his creditors. Shortly before filing for bankruptcy, Addison

converted nonexempt funds from a brokerage account and a bank account to pay down

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2

At the time of Addison's bankruptcy filing, Minnesota law provided for a

homestead exemption (in a non-agricultural homestead) up to $200,000 in value.

Minn. Stat. § 510.02. Although it has no impact on this case, we note that the

maximum homestead exemption (for non-agricultural homesteads) was increased to

$300,000 when § 510.02 was rewritten in 2007.

3

Minn. Stat. Ann. § 550.37(24) allows a debtor to exempt his "right to receive

present or future payments, or payments received by the debtor, under a . . . Roth IRA

. . . up to a present value of $30,000 . . . ."

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the mortgage on his home thereby increasing his homestead exemption. Also, he

converted nonexempt funds from his brokerage account into an exemptible Roth IRA.

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) ("Sholdan

I"); 11 U.S.C. § 522(b). Here, Addison elected to use the Minnesota state exemptions,

and claimed a homestead exemption of $91,250 under Minn. Stat. Ann. § 510.022

 and

claimed his $4,000 Roth IRA as exempt under Minn. Stat. Ann. § 550.37(24).3

 These

claimed exemptions were within the permissible amounts as provided by Minnesota

law. See In re Sholdan, 217 F.3d 1006, 1008 (8th Cir. 2000) ("Sholdan II") ("The

scope of a state-created exemption is determined by state law"). However, under

Minnesota's enactment of the Uniform Fraudulent Transfers Act (UFTA), a debtor

may not claim an exemption in property obtained through a transfer made by the

debtor "with actual intent to hinder, delay, or defraud any creditor of the debtor."

Minn. Stat. Ann. § 513.44; see also Sholdan II, 217 F.3d at 1008 ("[U]nder section

513.44 of Minnesota's enactment of the Uniform Fraudulent Transfer Act (UFTA), a

debtor may not claim a homestead exemption when he or she transfers the property

'with actual intent to hinder, delay, or defraud' creditors"); In re Tveten, 402 N.W.2d

551, 556 (Minn. 1987) ("[I]t clearly appears that under Minnesota law a debtor in

contemplation of bankruptcy may convert nonexempt property into exempt property,

so long as the conversion does not violate the Uniform Fraudulent Conveyance Act").

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4

On April 20, 2005, President Bush signed BAPCPA into law. While the

majority of BAPCPA's provisions did not take effect until October 17, 2005, §

1501(b) of the Act provided that certain amendments, including the provisions of 11

U.S.C. § 522(o), (p), and (q), "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. 109-8 § 1501(b) (2005). Because Addison filed his bankruptcy petition on October

14, 2005—after BAPCPA was enacted—§ 522(o) applies to his case.

5

Section 522(o), in pertinent part, states that:

[T]he value of an interest in--

(1) real or personal property that the debtor or a dependent 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 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.

-6-

Section 513.44(b) "contains a lengthy list of factors or 'badges of fraud' which a court

may look to for help in determining actual intent." Sholdan II, 217 F.3d at 1008 (citing

Minn. Stat. Ann. § 513.44(b)). Thus, Addison's claimed exemptions in his homestead

and Roth IRA are not permitted if those assets were obtained by transfers made "with

actual intent to hinder, delay, or defraud any creditor." Minn. Stat. Ann. § 513.44(a).

Additionally, when Congress passed the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005 (BAPCPA),4

 it added, among other things,

subsection (o) to § 522 of the Bankruptcy Code ("Code").5

 Under § 522(o) of the

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11 U.S.C. § 522(o).

6

Addison asserts that § 522(o) should not reduce the amount of a state

homestead exemption because the scope of state exemptions have traditionally been

determined by state law, see Sholdan II, 217 F.3d at 1008. We must reject this

argument in light of the express language in § 522. See 11 U.S.C. § 522(b)(3)

(providing that debtors who use a state's exemptions do so "subject to subsection (o)

and (p)") (emphasis added). "The Congressional purpose is clear: debtors seeking the

protection of state exemptions must meet their state exemption provision requirements

as limited by § 522(o) and (p)." In re Maronde, 332 B.R. 593, 599 (Bankr. D. Minn.

2005) (emphasis added).

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Code, the amount of a state homestead exemption is reduced to the extent that the

value of the exemption is attributable to nonexempt property that the debtor converted

into the homestead within 10 years of filing for bankruptcy, if the conversion was

made "with the intent to hinder, delay, or defraud a creditor." 11 U.S.C. § 522(o).6

Thus, while the exemption Addison claimed in his Roth IRA is allowable unless it

violates Minn. Stat. Ann. § 513.44(a), the claimed homestead exemption is subject to

both 11 U.S.C. § 522(o) and Minn. Stat. Ann. § 513.44(a).

1. Homestead Exemption

The question here is whether the $91,250.00 that Addison claimed as his

homestead exemption must be reduced by $11,500, under either Minnesota law or §

522(o) of the Code, due to the day-of-filing mortgage payment. For purposes of §

522(o), the issue turns on whether Addison acted "with the intent to hinder, delay, or

defraud a creditor" when he transferred nonexempt funds to reduce the mortgage on

his homestead. Congress did not provide any guidance regarding the construction of

the phrase "with the intent to hinder, delay, or defraud" when it enacted § 522(o), but

the statutory language is similar, if not identical, to the language used in § 548 and §

727 of the Code, as well as Minn. Stat. Ann. § 513.44(a).

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Section 548 of the Code provides that a trustee may avoid a pre-petition transfer

of assets by the debtor if the debtor made the transfer "with actual intent to hinder,

delay, or defraud" any past or future creditor. 11 U.S.C. § 548(a)(1)(A). Similarly, §

727(a)(2) bars a debtor's discharge if he takes certain actions, including transferring,

concealing, or removing property of the estate within one year before filing, "with

intent to hinder, delay, or defraud a creditor." 11 U.S.C. § 727(a)(2). Due to the

similar wording of those statutes, numerous bankruptcy courts have looked to the

body of case law construing §§ 548(a)(1) and 727(a)(2) to determine the meaning of

"with intent to hinder, delay, or defraud a creditor" in § 522(o). See Maronde, 332

B.R. at 599 ("It is only logical to assume that Congress intended that by using

essentially the same phrase in § 522(o), cases construing the fraudulent conveyance

and discharge provisions also would apply to add body to the bare words of this new

Congressional language"); In re Fehmel, No. 07-60831, 2008 WL 2151797, at *7

(Bankr. W.D. Tex. May 22, 2008) ("The phrase 'with the intent to hinder, delay or

defraud a creditor' contained in § 522(o) is . . . not defined in the Bankruptcy

Code . . . . Therefore, in interpreting the meaning of the phrase as contained in §

522(o), it is appropriate to look to case law interpreting [§ 727(a)(2) and §

548(a)(1)(A)]"); In re Agnew, 355 B.R. 276, 284 (Bankr. D. Kan. 2006) (construing

the meaning of "intent to hinder, delay, or defraud a creditor" in § 522(o) from cases

construing the meaning of intent to hinder, delay, or defraud in §§ 722(a)(2) and

548(a)(1)); In re Lacounte, 342 B.R. 809, 814 (Bankr. D. Mont. 2005) (same); In re

Sissom, 366 B.R. 677, 691–92 (Bankr. S.D. Tex. 2007) (same). 

Because direct evidence of fraudulent intent is rarely available, our cases have

used the inferential "badges of fraud" approach to determine whether a debtor acted

with "intent to hinder, delay, or defraud," a creditor regardless of whether the intent

language came from a state fraudulent transfer statute or applicable bankruptcy law.

See Sholdan II, 217 F.3d at 1009 (approving badges of fraud approach to determine

whether debtor acted with "actual intent to hinder, delay, or defraud" under Minnesota

fraudulent transfer statute in ruling on objection to homestead exemption); Jackson

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7

We reject the Trustee's position that § 522(o) provides a new standard for

determining what type of evidence establishes a debtor's "intent to hinder, delay, or

defraud" a creditor when the debtor converts nonexempt assets into his homestead.

Rather, in our view, § 522(o) merely establishes a 10-year look-back period, from the

date of the bankruptcy filing, from which such evidence may be considered.

8

See also Coder v. Arts, 213 U.S. 223, 242 (1909) (explaining that "hinder,

delay, or defraud" is a "form of expression . . . familiar to the law of fraudulent

conveyances . . . and has always been held to require, in order to invalidate a

conveyance, that there shall be actual fraud").

-9-

v. Star Sprinkler Corp. of Florida, 575 F.2d 1223, 1237 (8th Cir. 1978) (using badges

of fraud analysis to determine whether debtor made transfers with intent to hinder,

delay, or defraud creditor under fraudulent transfer section of the then-applicable

Bankruptcy Act); see also Graven v. Fink (In re Graven), 936 F.2d 378, 383 (8th Cir.

1991) (comparing § 548(a)'s "actual intent to hinder, delay, or defraud" language with

"intent to hinder, delay or defraud" in Missouri's then-applicable state fraudulent

conveyance statute, noting that the two statutes use the "same standard"). Given the

similarity of the language among these statutes, we conclude that the badges of fraud

approach should also apply to determine a debtor's intent under § 522(o).7

Although both § 522(o) and Minn. Stat. Ann. § 513.44, like §§ 548(a)(1) and

727(a)(2), use the disjunctive "hinder, delay, or defraud," our circuit has been

reluctant to deny a homestead exemption without a finding of intent to defraud. See

Sholdan I, 108 F.3d at 888 (reversing bankruptcy court's finding that debtor converted

nonexempt property into exempt homestead with intent to hinder or delay, and

remanding for bankruptcy court to determine whether debtor acted with intent to

defraud); Panuska v. Johnson (In re Johnson), 880 F.2d 78, 80 n.1 (8th Cir. 1989)

(noting that courts "generally view" the phrase "hinder, delay, or defraud" as "a single

test" and refusing "to separate out the terms fraud, hinder and delay").8

 In Sholdan I,

a 90-year old debtor, who had been sued for injuries caused by an automobile

accident, sold substantially all of his nonexempt assets and used those proceeds to

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9

In granting the Trustee's motion to reduce Addison's homestead exemption the

court stated:

I find and conclude that the transfers to the mortgage holder through any

reduction of the mortgage debt were transfers of property made with the

intent to hinder, delay, or defraud. It doesn't have to be fraud. Everyone

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purchase a home with cash. Id. at 887. At all times while living in his new home,

Sholdan had the assistance of a nurse. Id. For approximately a year prior to purchasing

the house the debtor had been living in an assisted living facility, and on nights when

a nurse was not available to stay with him in his newly purchased home, the debtor

would return to the assisted living facility to spend the night. Id. Additionally, for the

13 years prior to residing at the assisted living facility, the debtor had not owned a

home, but had lived in an apartment. Id.

Three months after purchasing the new home the debtor filed for bankruptcy

and claimed his house as exempt. Id. The trustee objected to the homestead

exemption, asserting that the debtor had purchased the home with the intent to hinder,

delay or defraud a creditor. Id. The bankruptcy court sustained the trustee's objection

and disallowed the claimed homestead exemption, finding that the debtor had acted

with the intent to "hinder or delay" a creditor when he purchased the home. Id. The

bankruptcy court did not rule on whether the debtor acted with intent to defraud a

creditor. Id. at 887–88. The district court affirmed, holding that it was not necessary

to find an intent to defraud. Id. at 888. We then reversed and remanded for the

bankruptcy court to consider whether the debtor acted with the intent to defraud. Id.

In reversing, we stated that "we do not mean to say that the test of 'hinder or delay'

might not prevail under another set of facts," but ruled that the facts of that case "d[id]

not support such a finding." Id.

In the instant case, the bankruptcy court found sufficient evidence to establish

that Addison acted with the intent to hinder, delay, and defraud a creditor.9

 However,

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seems to focus on fraud, but hinder or delay is sufficient and I think all

of those are present here.

Hearing Tr. at 61–62 (emphasis added).

10Both Sholdan and Addison took steps to protect their assets after being sued,

but unlike Sholdan, Addison did not create an exempt asset by purchasing a home he

did not previously have; rather, Addison made an additional lump-sum payment

toward the mortgage on his existing home. Further, Addison did not convert

substantially all of his nonexempt assets into the home as Sholdan had done.

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Addison took less aggressive actions than those present in Sholdan10—wherein we

concluded that the facts did not support a finding of intent to hinder or delay.

Applying our precedent, we conclude that the record here does not support the

reduction of Addison's homestead exemption based on an intent to hinder or delay. Id.

Thus, we are left with the bankruptcy court's determination that Addison

converted $11,500 in nonexempt funds into his homestead with the intent to defraud

a creditor. "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." Sholdan

II, 217 F.3d at 1010 (citing Hanson v. First Nat'l Bank, 848 F.2d 866, 868 (8th

Cir.1988)). "It is well settled that the mere conversion of non-exempt assets to exempt

assets is not in itself fraudulent." Id.; see also Hanson, 848 F.2d at 868 ("It is well

established that . . . a debtor's conversion of non-exempt property to exempt property

on the eve of bankruptcy for the express purpose of placing that property beyond the

reach of creditors, without more, will not deprive the debtor of the exemption to which

he otherwise would be entitled"); Norwest Bank Nebraska, NA v. Tveten, 848 F.2d

871, 873–74 (8th Cir. 1988) ("It is well established that under the Code the conversion

of non-exempt to exempt property for the purpose of placing the property out of the

reach of creditors, without more, will not deprive the debtor of the exemption to which

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11Minn. Stat. Ann. § 513.44(b), provides a nonexclusive list of "badges of

fraud" that may be considered, among other things, in determining a debtor's intent to

defraud. These "badges" are whether:

(1) the transfer or obligation was to an insider;

(2) the debtor retained possession or control of the property transferred

after the transfer;

(3) the transfer or obligation was disclosed or concealed;

(4) before the transfer was made or obligation was incurred, the debtor

had been sued or threatened with suit;

(5) the transfer was of substantially all the debtor's assets;

(6) the debtor absconded;

(7) the debtor removed or concealed assets;

(8) the value of the consideration received by the debtor was reasonably

equivalent to the value of the asset transferred or the amount of the

obligation incurred;

(9) the debtor was insolvent or became insolvent shortly after the transfer

was made or the obligation was incurred;

(10) the transfer occurred shortly before or shortly after a substantial

debt was incurred; and

(11) the debtor transferred the essential assets of the business to a lienor

who transferred the assets to an insider of the debtor.

 Minn. Stat. Ann. § 513.44(b).

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he otherwise would be entitled"). Nevertheless, "[w]here the debtor acts with actual

intent to defraud creditors, his exemptions will be denied." Hanson, 848 F.2d at 868.

"Before actual fraudulent intent can be found 'there must appear in evidence

some facts or circumstances which are extrinsic to the mere facts of conversion of

non-exempt assets into exempt and which are indicative of such fraudulent purpose.'"

Sholdan II, 217 F.3d at 1010 (quoting Tveten, 848 F.2d at 875 (in turn quoting

Forsberg v. Security State Bank, 15 F.2d 499, 502 (8th Cir. 1926))). In finding that

Addison had the requisite intent to defraud, the bankruptcy court properly looked to

the badges of fraud enumerated in Minn. Stat. Ann. § 513.44(b),11 and found four

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badges of fraud resulting from Addison's day-of-filing mortgage payment: (1) the

transfer was to an insider; (2) Addison retained control of the property after the

transfer; (3) the transfer was made after Addison had been sued on his personal

guarantee; and (4) Addison was insolvent at the time he transferred the funds to his

homestead. Additionally, the bankruptcy court noted that Addison already had

significant equity in his home before he made the transfer and that the payment only

increased Addison's equity in the home, but did not reduce his monthly mortgage

payment. While the bankruptcy court noted that there were badges of fraud favoring

both sides, it found that the homestead transfer was made with the intent to hinder,

delay, or defraud Addison's creditors, as his intent was "to keep value away from

creditors." 

The bankruptcy court's underlying factual findings are themselves not clearly

erroneous; however, they do not identify any "extrinsic evidence of fraud." In the

absence of extrinsic evidence of fraud, we find clear error in the bankruptcy court's

ultimate determination of intent to defraud. As discussed above, "[i]t is well

established that . . . a debtor's conversion of non-exempt property to exempt property

on the eve of bankruptcy for the express purpose of placing that property beyond the

reach of creditors, without more, will not deprive the debtor of the exemption to which

he otherwise would be entitled." Hanson, 848 F.2d at 868. Rather, for fraudulent

intent to be found "there must appear in evidence some facts or circumstances which

are extrinsic to the mere facts of conversion of non-exempt assets into exempt and

which are indicative of such fraudulent purpose." Sholdan II, 217 F.3d at 1010

(quotations and citations omitted). 

Here, only the fact that Addison had been sued or threatened with suit prior to

making the mortgage payment was extrinsic to the fact of conversion—all of the other

facts cited relate to a debtor's simple conversion of nonexempt property to exempt

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12A debtor's conversion of his own nonexempt property into exempt property

also owned by him could always be viewed as a transfer to an insider. Likewise, after

that conversion, the debtor would continue to control the property after the

conversion. And, a debtor converting nonexempt property to exempt property "on the

eve of bankruptcy" will almost always be insolvent. Thus, these "badges of fraud,"

without more, cannot support a finding of intent to defraud. 

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property on the eve of bankruptcy, which we have long held to be permissible.12 If

these facts alone constitute extrinsic evidence of intent to defraud Hanson and

Johnson would have reached that same result. See Hanson, 848 F.2d at 867–68

(rejecting argument that extrinsic evidence established debtor's intent to defraud where

debtors, after defaulting on bank loans and talking to bankruptcy counsel, converted

approximately $20,000 into life insurance policies a couple of weeks prior to filing

and prepaid an additional $11,033 on their homestead mortgage two days before

filing); Johnson, 880 F.2d at 79 ("agree[ing] that there is no fraud as to [debtor's]

homestead exemption," where debtor, in contemplation of filing bankruptcy, talked

to bankruptcy attorney and paid off $175,000 in debts against his home after creditors

obtained judgments against him). Moreover, the bankruptcy court's finding that

Addison converted his nonexempt property to exempt property with the intent "to

keep value away from creditors" does not provide extrinsic evidence of fraud as such

an intent is not automatically impermissible. Hanson, 848 F.2d at 868; Tveten, 848

F.2d at 873–74.

This case resembles Hanson. The Hansons, married farmers, defaulted on

several bank loans when financial difficulties arose. 848 F.2d at 867. Before they filed

for bankruptcy, the Hansons consulted an attorney, and on the advice of counsel, they

sold several nonexempt items to family members for fair-market value. Id. A couple

of weeks before filing for bankruptcy, the Hansons took the proceeds from the sales

of the nonexempt assets and bought life insurance policies on each of them with a

cash-surrender value of approximately $10,000 each. Then two days prior to filing for

bankruptcy they prepaid $11,033 on their homestead mortgage. Id. Upon filing for

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bankruptcy, the Hansons claimed their life insurance policies and their homestead as

exempt. Id.

A creditor objected to these exemptions, claiming that the debtors had

converted nonexempt property to exempt property on the eve of bankruptcy with

intent to defraud their creditors. Id. The bankruptcy court denied the objection to the

exemptions, finding that the Hansons had done what was permissible under the law

and that their actions did not constitute extrinsic evidence of fraud. Id. at 868. After

the district court affirmed, the creditor appealed to this court. Id.

The Hanson panel focused on whether extrinsic evidence established that the

Hansons converted their property with the intent to defraud their creditors and

concluded that the bankruptcy court was not clearly erroneous in finding no fraudulent

intent by the Hansons. Id. at 869. In reaching this conclusion, we noted that the

bankruptcy court had found that the creditor did not establish any indicia of fraud and

further noted that "the Hansons did not borrow money to place into exempt properties;

they accounted for the cash they received from the sales; they had a preexisting

homestead; and they did not obtain goods on credit, sell them, and then place the

money into exempt property." Id. Concluding that the debtors "sold their [nonexempt]

property for its fair market value and then used this money to take advantage of some

of the limited exemptions available under South Dakota law on the advice of counsel,"

we held that the bankruptcy court was not clearly erroneous in finding that the debtors

lacked the intent to defraud and permitting the debtors to claim their full exemptions.

Id.

Similar to the Hansons, Addison became insolvent (albeit due to a personal

guarantee being called rather than defaulting on loans) and prior to filing for

bankruptcy he sought the advice of counsel. After discussing prebankruptcy planning

with his attorney, Addison transferred some of his nonexempt assets in a brokerage

account to fund Roth IRAs for himself and his wife in the amount of $4,000 each.

Appellate Case: 07-2064 Page: 15 Date Filed: 08/07/2008 Entry ID: 3458956
-16-

This mirrors the Hansons' conversion of non-exempt assets into life insurance policies,

except that Addison converted a lesser amount into the Roth IRAs than the Hansons

did for their life insurance policies. Additionally, Addison made an $11,500 principal

mortgage payment on the day he filed his bankruptcy petition—nearly identical to the

$11,033 mortgage payment the Hansons made two days prior to their bankruptcy

filing. As in Hanson, there has been no extrinsic evidence produced here that Addison

had any indicia of fraud other than the suit or threat of suit resulting from personal

liability on a defaulted loan: Addison did not borrow money to place into exempt

assets; he had a preexisting homestead; he did not obtain goods on credit, sell them,

then place the money into exempt property; and he did not attempt to conceal the

transfers in his bankruptcy filings.

"The sort of indicia of fraud necessary to find fraudulent use on an exemption

would be, inter alia, conduct intentionally designed to materially mislead or deceive

creditors about the debtor's position or use of credit to buy exempt property." Matter

of Armstrong, 931 F.2d 1233, 1237 (8th Cir. 1991) (citations omitted). Additionally,

"[c]onverting a very great amount of property could also be an indication of fraud,"

as could "[t]he existence of conveyances for less than adequate consideration." Id. In

the present case, the record contains no extrinsic evidence of any of these indicia of

fraud. The record only indicates that Addison's intent was to convert some of his

nonexempt property to exempt property on the eve of bankruptcy, something that is

"well established" in this circuit that he is allowed to do. Hanson, 848 F.2d at 868 ("It

is well established that . . . a debtor's conversion of non-exempt property to exempt

property on the eve of bankruptcy for the express purpose of placing that property

beyond the reach of creditors, without more, will not deprive the debtor of the

exemption to which he otherwise would be entitled"). Accordingly, we conclude that

it was clear error for the bankruptcy court to find that Addison had the requisite intent

to hinder, delay, or defraud a creditor when he converted some nonexempt property

into his homestead on the day he filed bankruptcy.

Appellate Case: 07-2064 Page: 16 Date Filed: 08/07/2008 Entry ID: 3458956
13As discussed above, the debtor in Sholdan was a 90-year old who, after being

sued, liquidated nearly all of his nonexempt assets and used the proceeds to purchase

a home in cash, just prior to filing for bankruptcy protection, even though the debtor

had been living in an assisted living facility for a year prior to the home purchase, and

in an apartment for the 13 years prior to that.

14Although Tveten dealt with the denial of discharge under § 727(a)(2) and not

the objection to exemptions, because both issues are governed by identical

language—intent to hinder, delay, or defraud a creditor—the standard applied to

determine whether a discharge should be denied on the basis of intent to hinder, delay,

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Additionally, circuit precedent upholding findings of fraudulent intent differ

factually from this case. For example, in our most recent decision on the issue,

Sholdan II, which came back before the court after our remand in Sholdan I, discussed

above, we upheld the bankruptcy court's finding of intent to defraud, stating: 

It is one thing to convert non-exempt assets into exempt property for the

express purpose of holding it as a homestead and thereby putting the

property beyond the reach of creditors. However, it is quite another thing

to acquire title to a house for no other reason than to defraud creditors.

Sholdan II, 217 F.3d at 1011.13

In the present case, however, Addison did not "acquire title to a house for no

other reason than to defraud creditors" as Sholdan had. Addison had owned his house

for years prior to his bankruptcy filing and merely converted nonexempt assets into

the homestead to protect it from the reach of creditors—the exact action that we

implied was permissible in upholding the finding of intent to defraud in Sholdan II.

Id.

Moreover, in Tveten, we upheld the finding of intent to defraud based on the

evidence surrounding the debtor's conversion of nonexempt assets to exempt assets

prior to bankruptcy.14 848 F.2d at 876. In that case, the debtor was a physician who

Appellate Case: 07-2064 Page: 17 Date Filed: 08/07/2008 Entry ID: 3458956
or defraud is the same as the determination in this case as to whether Addison's

exemption should be allowed. See Tveten, 848 F.2d at 874 ("Although the

determination as to whether a discharge should be granted or denied is governed by

federal law, the standard applied consistently by the courts 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").

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owed creditors nearly $19 million, mostly on personal guarantees. Id. at 872. When

a number of the debtor's investments declined in value, he met with a bankruptcy

attorney, and then, on counsel's advice, converted almost all of his nonexempt

property (approximately $700,000) into exempt life insurance policies and annuities,

through a series of 17 transactions on the eve of bankruptcy. Id. After Tveten filed for

bankruptcy, the trustee objected to his claimed exemptions in the property, and a

creditor moved to deny his discharge. Id. at 873. The bankruptcy court denied Tveten's

discharge, prior to ruling on the objection to exemptions, finding that he had

converted his nonexempt property to exempt property with the intent to defraud a

creditor. Id. We affirmed the denial of discharge, ruling that the finding of intent to

defraud was not clearly erroneous, noting that Tveten's attempt to shield $700,000

from creditors while attempting to discharge over $18 million in debt went well

beyond the purposes for which exemptions are permitted. Id. at 876. Although not

citing to specific extrinsic evidence of intent to defraud, we noted that "the entire

pattern of conduct" surrounding the conversions demonstrated fraudulent intent. Id.

Tveten differs markedly from the present case. Unlike Tveten, Addison did not

attempt to convert "almost his entire net worth" into exempt assets prior to

bankruptcy. Rather, Addison left substantial nonexempt assets for his creditors to

recover. In fact, the Trustee-initiated auction of some of Addison's nonexempt assets

brought in proceeds in excess of $10,000. Moreover, the total amount of converted

assets at issue in this case is less than $20,000, only a fraction of the amount present

in Tveten.

Appellate Case: 07-2064 Page: 18 Date Filed: 08/07/2008 Entry ID: 3458956
15Addison's stated reason for converting the nonexempt funds to the Roth IRA

was to provide for his retirement.

-19-

In sum, we conclude that the bankruptcy court clearly erred in finding that

Addison converted nonexempt property into his homestead with the intent to hinder,

delay, or defraud a creditor. On the record before us, there is no extrinsic evidence of

intent to hinder, delay, or defraud a creditor sufficient to uphold that finding. The

evidence only suggests that Addison was converting nonexempt assets to exempt

assets to place some (but not all or substantially all) of those assets beyond the reach

of creditors—something our precedent permits.

2. Roth IRA Exemption

The bankruptcy court also denied Addison's claimed exemption in his $4,000

Roth IRA, finding that Addison had transferred nonexempt funds into the Roth IRA

with the intent to hinder, delay, or defraud a creditor. Again, the determination of

intent is a finding of fact reviewed for clear error. Sholdan II, 217 F.3d at 1010.

The bankruptcy court found Addison acted with intent to hinder, delay, or

defraud regarding the transfer of funds to the Roth IRA "for the same reasons" as it

found intent to hinder, delay, or defraud regarding the payment on the home mortgage.

As discussed above, that finding of intent was clearly erroneous, and thus the

disallowance of the Roth IRA exemption must be reversed as well. Likewise, the

bankruptcy court's additional finding that Addison's real reason15 for converting

nonexempt assets into the Roth IRA was "just [to] keep the money out of the hands

of creditors," will not suffice to establish intent to hinder, delay, or defraud as a debtor

may intentionally convert nonexempt assets to exempt assets for the express purpose

of keeping the money out of the hands of creditors, unless there is extrinsic evidence

of fraud. See Hanson, 848 F.2d at 868 ("It is well established that . . . a debtor's

conversion of non-exempt property to exempt property on the eve of bankruptcy for

the express purpose of placing that property beyond the reach of creditors, without

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-20-

more, will not deprive the debtor of the exemption to which he otherwise would be

entitled").

B. Denial of Discharge

Following the bankruptcy court's ruling on the Trustee's objections to

exemptions, wherein it found that Addison had converted nonexempt assets into his

homestead and Roth IRA with the intent to hinder, delay, or defraud a creditor, the

Trustee filed an adversary proceeding objecting to Addison's discharge under §

727(a)(2) of the Code. Section 727(a)(2) of the Bankruptcy Code states, in relevant

part, that:

(a) The court shall grant the debtor a discharge, unless– 

. . .

(2) the debtor, with intent to hinder, delay, or defraud a creditor . . . has

transferred, removed, destroyed, mutilated, or concealed, or has

permitted to be transferred, removed, destroyed, mutilated, or

concealed--

(A) property of the debtor, within one year before the date of the filing

of the petition

. . .

11 U.S.C. § 727(a)(2) (emphasis added).

The Trustee's objection to discharge cited, among other things, Addison's

conversion of nonexempt assets into his homestead and Roth IRA. As there was no

dispute that Addison had made the transfers to his homestead and the Roth IRA within

one year before his bankruptcy filing and that the transfers were made from property

of the debtor, the only issue before the bankruptcy court was whether these transfers

had been made "with intent to hinder, delay, or defraud a creditor." Because the

bankruptcy court had already determined, in ruling on the Trustee's objections to

exemptions, that Addison had made the transfers to his homestead and Roth IRA with

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16"Although the determination as to whether a discharge should be granted or

denied is governed by federal law, the standard applied consistently by the courts 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." Tveten, 848 F.2d at 874.

17Section 529 of the Internal Revenue Code exempts certain qualified tuition

programs from taxation, and permits each State (or an agency or instrumentality

thereof) to establish and maintain such programs. 26 U.S.C. § 529. Pursuant to § 529,

Minnesota established its college savings plan, and set forth the rules of its plan by

statute. See Minn. Stat. Ann. § 136G.01 et seq.

-21-

the intent to hinder, delay, or defraud a creditor, the bankruptcy court granted the

Trustee's motion for summary judgment on collateral estoppel grounds and denied

Addison's discharge.

In this case, the same standard applies to determine whether a discharge should

be denied or whether a transfer of nonexempt property to exempt property should be

voided; both require proof that the debtor acted with the intent to hinder, delay, or

defraud a creditor. Tveten, 848 F.2d at 874.16 Because we reversed the bankruptcy

court's determination of intent to hinder, delay, or defraud a creditor on the exemption

issues, the denial of discharge based on the collateral estoppel effect of that finding

must also be reversed.

C. Section 529 Accounts

Lastly, the bankruptcy court ruled that the two Section 529 tuition savings

accounts17 that Addison opened in 2004 for the benefit of his children were property

of Addison's bankruptcy estate and not subject to any exemption. Whether the Section

529 accounts are property of the bankruptcy estate is a legal conclusion reviewed de

novo. See Drewes v. Vote (In re Vote), 276 F.3d 1024, 1026 (8th Cir. 2002) ("Whether

property is included in the bankruptcy estate is a question of law.") (citation omitted).

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-22-

Addison listed the Section 529 accounts in his amended bankruptcy schedules

with a notation that he believed that the accounts were owned by his children, and thus

not property of his bankruptcy estate. Nevertheless, in case the accounts were

determined to be property of the estate, Addison claimed them as exempt under Minn.

Stat. Ann. § 136G.09(12). We conclude that the Section 529 accounts are nonexempt

property of Addison's estate.

Section 541(a)(1) of the Code, which was unchanged by BAPCPA, states that

"[e]xcept as provided in subsections (b) and (c)(2) of this section" a debtor's

bankruptcy estate is comprised of "all legal or equitable interest of the debtor in

property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Addison asserts

that because he established the accounts for the benefit of his children, he had no legal

or equitable interest in the accounts. Addison relies on 26 U.S.C. § 529(c) to support

his position. That section, which regards tax treatment of designated beneficiaries and

contributors of Section 529 accounts, provides that "[a]ny contribution to a qualified

tuition program on behalf of any designated beneficiary . . . shall be treated as a

completed gift to such beneficiary which is not a future interest in property." 26

U.S.C. § 529(c). Because any contribution to a Section 529 account on behalf of a

beneficiary is treated as a completed gift to the beneficiary, Addison argues that the

accounts are property of the beneficiaries and not of the contributor or owner of the

account. We find this argument unavailing for several reasons. First, § 529(c) deals

with the "tax treatment" of contributions to Section 529 accounts, not ownership of

the accounts. Second, the accounts Addison established for his children list Addison

as the "owner" of the accounts and the Minnesota statutes governing the accounts

provide that the owner of the account—not the beneficiary—is the only person

entitled to select or change the beneficiary of the account or request distributions from

the account. Minn. Stat. Ann. § 136G.09(2). Third, contributions to the accounts

"made by persons other than the account owner become property of the account

owner," not the beneficiary. Id. at § 136G.09(1). Additionally, as the account owner

Addison "may request a nonqualified distribution from an account at any time . . .

Appellate Case: 07-2064 Page: 22 Date Filed: 08/07/2008 Entry ID: 3458956
18See Pub. L. 109-8 § 1501(a) (2005) ("EFFECTIVE DATE–Except as

otherwise provided in this Act, this Act and the amendments made by this Act shall

take effect 180 days after the date of enactment of this Act").

19See Pub. L. 109-8 § 1501(b)(1) (2005) ("Except as otherwise provided . . . the

amendments made by this Act shall not apply with respect to cases commenced under

title 11, United States Code, before the effective date of this Act").

-23-

subject to a federal additional tax" on the earnings portion of the nonqualified

distribution. Minn. Stat. Ann. § 136G.13(3). For all of these reasons, Addison retained

a legal and equitable interest in the Section 529 accounts. Therefore, the accounts are

property of his bankruptcy estate unless they are excluded from the estate under either

11 U.S.C. § 541(b) or (c)(2). 11 U.S.C. § 541(a)(1).

Section 541(b)(6), added by BAPCPA, expressly excludes, with certain

exceptions, Section 529 accounts from property of the estate. Section 541(b)(6),

however, did not take effect until October 17, 2005.18 Because Addison filed his

bankruptcy petition on October 14, 2005—three days before § 541(b)(6) became

effective—§ 541(b)(6) does not apply to his case.19 As no applicable provision in §

541(b) or (c)(2) excludes Section 529 accounts from property of the estate, the

accounts are property of Addison's bankruptcy estate. See In re Quackenbush, 339

B.R. 845, 848 (Bankr. S.D.N.Y. 2006) ("[I]t does not appear that the Bankruptcy

Code, as it existed prior to October 17, 2005[,] provided any rationale for excluding

[Section 529 accounts] from property of the estate"); In re Sanchez, No. 05-48721,

2006 WL 395225, at *1 n.1 (Bankr. D. Mass. Feb. 14, 2006) ("There is no basis for

determining that funds deposited into a Section 529 Plan are excluded from property

of the estate prior to the recent amendments to the Bankruptcy Code").

Property of the estate, however, may still be exempted from the reach of

creditors. 11 U.S.C. § 522(b). As noted above, Addison elected to use the Minnesota

state exemption scheme. Minnesota law provides no exemption for these accounts, yet

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-24-

Addison claimed the Section 529 accounts as exempt under Minn. Stat. Ann. §

136G.09(12). Section 136G.09(12) provides:

All assets of the plan, including contributions to accounts and matching

grant accounts and earnings, are held in trust for the exclusive benefit of

account owners and beneficiaries. Assets must be held in a separate

account in the state treasury to be known as the Minnesota college

savings plan account or in accounts with the third-party provider selected

pursuant to section 136G.05, subdivision 8. Plan assets are not subject

to claims by creditors of the state, are not part of the general fund, and

are not subject to appropriation by the state. Payments from the

Minnesota college savings plan account shall be made under sections

136G.01 to 136G.13.

Minn. Stat. Ann. § 136G.09(12).

This statute only protects Section 529 account assets from "claims by creditors

of the state." Id. It does not exempt the accounts from all creditors. Therefore, we

conclude that the Section 529 accounts are nonexempt property of Addison's

bankruptcy estate.

III. Conclusion

Accordingly, we affirm in part, reverse in part, and remand for further

proceedings consistent with this opinion.

______________________________

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