United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

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No. 08-6022

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In re: *

 *

James Lewis Wilmoth, etc., et al., *

 *

Debtor. *

 * 

William M. Clark, Jr., * Appeal from the United States

 * Bankruptcy Court for the Western

Trustee-Appellant, * District of Arkansas

 *

v. *

 *

James L. Wilmoth, et al., *

 *

Debtors - Appellees * 

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Submitted: October 29, 2008

Filed: December 9, 2008 

(Corrected December 10, 2008)

(Corrected December 31, 2008)

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Before KRESSEL, Chief Judge, SCHERMER and McDONALD, Bankruptcy Judges.

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KRESSEL, Chief Judge.
1

 The Honorable Ben T. Barry, United States Bankruptcy Judge for the Eastern and

Western Districts of Arkansas.

2

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.

BACKGROUND

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.
3

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 “motherin-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 to pay Phase I Turnkey’s suppliers, vendors, and other bills.
4

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.
5

Standard of Review

“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)).

DISCUSSION

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 nonexempt 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
6

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 prebankruptcy 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) (trustee objected to

chapter 7 debtor’s claim of exemption where debtor had increased value of homestead

exemption on eve of bankruptcy); 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) (trustee challenged four property transfers by chapter 7 debtors on the

eve of bankruptcy that debtors had used to purchase exempt annuities); Panuska v.

Johnson (In re Johnson), 880 F.2d 78 (8th Cir. 1989) (creditor objected to chapter 7

debtor’s discharge where, on the eve of bankruptcy, debtor had converted $400,000

into exempt property); Norwest Bank Neb. v. Tveten (In re Tveten), 848 F.2d 871, 874

(8th Cir.1988) (creditor objected to chapter 11 discharge where, on the eve of

bankruptcy, debtor had converted $700,000 of non-exempt property into exempt

property); Forsberg v. Sec. State Bank of Canova, 15 F.2d 499 (8th Cir. 1926)
2

 “In finding that Addison had the requisite intent to defraud, the bankruptcy court

properly looked to the badges of fraud [...] and found four badges of fraud resulting

from Addison's day-of-filing mortgage payment [...]. 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.” Addison at 813-14 (footnote omitted).

7

(creditor objected to debtor’s discharge where, on the eve of bankruptcy, debtor had

traded non-exempt property for exempt property).

Between the time that the parties submitted their briefs and oral argument, the

Eighth Circuit Court of Appeals again addressed the issue of exemptions and prebankruptcy planning. In Addison v. Seaver (In re Addison), 540 F.3d 805 (8th Cir.

2008), the Eighth Circuit declined to define a bright-line rule on when the transfer of

value from non-exempt to exempt assets is egregious enough to be proscribed,

choosing instead to leave the discretion largely to the bankruptcy court. However, it

cautioned that the sort of pre-bankruptcy planning Addison engaged in is usually

permissible. The Eighth Circuit compared the language of § 522(o) to § 548, which

allows a bankruptcy trustee to avoid pre-petition transfers made “with actual intent to

hinder, delay or defraud” the debtor’s creditors, and § 727(a)(2), which directs the

court to grant a debtor’s discharge unless a debtor has transferred assets “with intent

to hinder, delay, or defraud a creditor or an officer of the estate.” Id. at 811. Based on

the nearly identical phrasing, the Eighth Circuit concluded that a debtor’s intent under

§ 522(o) should be determined under the badges of fraud approach. Id. at 813 (citing

Sholdan II at 1009; Jackson v. Star Sprinkler Corp. of Fla., 575 F.2d 1223, 1237 (8th

Cir. 1978); Graven v. Fink (In re Graven), 936 F.2d 378, 383 (8th Cir. 1991)).

However, there must be extrinsic evidence of fraud, other than the badges themselves,

to support a finding of intent to defraud.2 Addison at 814. “[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
8

deprive the debtor of the exemption to which he otherwise would be entitled.” Id. at

814 (quoting Hanson, 848 F.2d at 868).

The addition of § 522(o) to the Bankruptcy Code does not

establish any new law in the Eighth Circuit.

The trustee argues that the addition of § 522(o) changed the required analysis

of intent to hinder, delay or defraud in the context of pre-bankruptcy homestead

exemption planning. We disagree. More importantly, the Eighth Circuit disagrees. The

Eighth Circuit has determined that the traditional badges of fraud approach applies to

the analysis of the requisite intent under § 522(o). Addison at 813. Rather than

establishing a new evidentiary standard for pre-bankruptcy homestead exemption

planning, the addition of § 522(o) marks out a look-back period of ten years. Addison

at n. 7. It also extends what was the law in the Eighth Circuit and made it uniform

national law. After rejecting the argument that § 522(o) creates a new evidentiary

standard, the court stated that § 522(o) “merely establishes a 10-year look-back period

[...] from which such evidence may be considered”. Id. To the extent there was any

doubt about whether § 522(o) created new law, the Eighth Circuit resolved that

question in the negative.

The trustee argues that to read § 522(o) as merely defining the look-back period

would render it superfluous. As interpreted by the Eighth Circuit in Addison, the

addition does not establish any new law in this circuit. The Eighth Circuit had already

held that under some circumstances, shifting non-exempt assets into exemptions prebankruptcy would result in the denial of the exemption or discharge, but other courts

had not uniformly applied the same analysis and some had allowed the exemptions

almost regardless of intent. See, e.g., In re Farmer, 295 B.R. 322 (Bankr. W.D. Wis.

2003) (holding that debtors are entitled to “full use” of exemptions, regardless of their

source); In re Sumerell, 194 B.R. 818, 835 (Bankr. E.D. Tenn. 1996) (“this court is

not persuaded that even if the requisite showing of bad faith or fraud had been

established, that denial of exemptions, unrelated to the alleged fraud, is the appropriate

remedy”); Barker v. First Colony Life Ins. Co. (In re Barker), 168 B.R. 773 (Bankr.
9

M.D. Fla. 1994) (holding that Chapter 7 debtor was entitled to “full use” of

exemptions, regardless of whether debtor acted with intent to hinder, delay or defraud

creditors); In re Swift, 124 B.R. 475 (Bankr. W.D. Tex. 1991) (overruling objection

to exemption, because although “[t]here of course is great appeal to preventing a

perceived malfeasor from enjoying the fruits of his or her malfeasance”, the

Bankruptcy Code did not contain a statutory basis for that remedy).

Prior to the 2005 amendments, few other circuits had addressed whether a

debtor’s exemption could be denied or reduced on the basis that it was created or

increased by the conversion of non-exempt property with fraudulent intent. The Fifth,

Sixth, Ninth and Tenth Circuits had directly allowed the remedy. See, e.g., Latman v.

Burdette, 366 F.3d 774, 786 (9th Cir. 2004) (holding that “the bankruptcy court may

equitably surcharge a debtor's statutory exemptions when reasonably necessary both

to protect the integrity of the bankruptcy process and to ensure that a debtor exempts

an amount no greater than what is permitted by the exemption scheme of the

Bankruptcy Code”); Marine Midland Bus. Loans, Inc. v. Carey (In re Carey), 938

F.2d 107, 1073 (10th Cir. 1991) (affirming allowance of homestead exemption where,

although debtor paid down mortgage with non-exempt assets, her “other activities do

not bespeak of fraudulent intent”); Hardage v. Herring Nat’l Bank, 837 F.2d 1319

(5th Cir. 1988) (ordering lower court to reconsider debtor’s exemption claim and

evaluate it for bad faith, stating “concealment of an asset bars the exemption of that

asset”); Shanks v. Hardin, 101 F.2d 177 (6th Cir. 1939) (affirming denial of

homestead exemption where debtor had acquired additional property interests from

his siblings for the “purpose of converting non-exempt property into property in

which he would be entitled to a homestead and thus prevent his creditors from

reaching it”).

In an early case, the Second Circuit had contemplated denial of an exemption

as a remedy for abusive pre-bankruptcy exemption planning. Schwartz v. Seldon, 153

F.2d 334, 337 (2d Cir. 1945) (where debtor had borrowed against exempt insurance

policies and then repaid the debts shortly before bankruptcy, exemption was properly
10

allowed: “even the conversion of nonexempt property into exempt property by an

insolvent contemplating bankruptcy has been held a transaction not intended to

defraud creditors in the absence of evidence of extrinsic fraud”) (emphasis added)

(citing Forsberg v. Sec. State Bank, 15 F.2d 499 (8th Cir. 1926)). The Fourth and

Seventh Circuits had set limitations on pre-bankruptcy exemption planning but not

come to the conclusion that denial of the exemption was an appropriate remedy. See,

e.g., Smiley v. First Nat’l Bank of Belleville (Matter of Smiley), 864 F.2d 562, 569 (7th

Cir. 1989) (court affirmed denial of discharge for fraudulent use of exemptions, noting

that although the courts “should not prohibit a debtor's full use of exemptions within

the limits of the law” they should “look, however, for extrinsic signs of fraud”); Ford

v. Poston, 773 F.2d 52 (4th Cir. 1985) (affirming avoidance of transfer under 11

U.S.C. § 727 where debtor, with actual intent to defraud, had converted non-exempt

property into exempt property). The First, Third, and Eleventh Circuit Courts of

Appeals had not published any opinions on the propriety of pre-bankruptcy exemption

planning. In addition, although § 522(o)’s exemption abuse remedy did not change the

treatment of abusive or fraudulent exemptions in the Eighth Circuit, our courts have

not previously set a definite look-back period.

The court was not clearly erroneous in finding that although some

badges of fraud were present, there was no extrinsic evidence of

intent to hinder, delay or defraud.

At trial, the court found that some badges of fraud were present but others were

not. The common badges of fraud include, among others, “(1) actual or threatened

litigation against the debtor; (2) a transfer of all or substantially all of the debtor's

property; (3) insolvency on the part of the debtor; (4) a special relationship between

the debtor and the transferee; and (5) retention of the property by the debtor after the

transfer.” Armstrong IV at 798 (quoting Kelly v. Armstrong, 141 F.3d 799 (8th Cir.

1998) (Armstrong III). For instance, the court found that the transfer benefitted the

debtors and that they were in possession of the assets and that the transfer occurred

at the time of the Bisbee judgment, but that the Wilmoths did not liquidate

substantially all of their assets, fully disclosed their transfer, did not convey the
11

equipment for inadequate consideration, and relied on the advice of counsel. The court

gave significant weight to the fact that the Wilmoths’ Statement of Financial Affairs

fully disclosed the Wilmoths’ payments to their mortgagor, First Horizon. The record,

including the testimony and documentary evidence, supports the court’s finding that

some, but not all, of the badges of fraud were present. In addition, the debtors were

able to use some of the payments on their mortgage as advance payments of their

monthly contractual payments, enabling them to weather the period immediately

following the cessation of their business and save their home.

Although the court found the presence of some badges of fraud, it found no

extrinsic evidence that the Wilmoths acted with intent to defraud. The court noted in

particular that James was forthcoming with the trustee, received fair value for the

equipment, and acted upon the advice of counsel. The court found that the assets

would have continued to diminish in value or even be repossessed, and as a result, the

sale actually benefitted the estate. 

The trustee may not raise a new argument on appeal.

The trustee argues for the first time at oral argument on appeal that even if the

debtors’ conversion of exempt to non-exempt property was not fraudulent, it was an

attempt to hinder or delay creditors and that the disjunctive phrasing of the statute

allows the court to find intent to hinder even where there is no intent to defraud.

“Ordinarily, we do not consider an argument raised for the first time on appeal. We

consider a newly raised argument only if it is purely legal and requires no additional

factual development, or if a manifest injustice would otherwise result.” Henning v.

Mainstreet Bank, 538 F.3d 975, 979 (8th Cir. 2008) (quoting Orr v. Wal-Mart Stores,

Inc., 297 F.3d 720, 725 (8th Cir. 2002)); Stalnaker v. DLC, Ltd., 376 F.3d 819 (8th

Cir. 2004) (“We do not ordinarily review an issue on appeal if the parties did not first

raise it at trial unless it is a strictly legal question and manifest injustice would result

from our failure to review it”).
12

We decline to address the trustee’s new argument, except to note that the Eighth

Circuit “has been reluctant to deny a homestead exemption without a finding of intent

to defraud.” Addison at 812 (citing Sholdan I, 108 F.3d at 888; Panuska v. Johnson

(In re Johnson), 880 F.2d 78, 80 n. 1 (8th Cir. 1989); Coder v. Arts, 213 U.S. 223,

242, 29 S.Ct. 436, 53 L.Ed. 772 (1909)). 

CONCLUSION

For the foregoing reasons, the judgment of the bankruptcy court is affirmed.