Exemption Allowed Where No Intent to Defraud

Posted by NCBRC - January 6, 2014

Actual intent to hinder, delay, or defraud a creditor is a required element for a reduction of homestead exemption under section 522(o). In re Halinga, No. 13-925 (Bankr. Idaho Nov. 27, 2013). In that case, the debtors, Romanian immigrants with limited financial sophistication and English skills, received their income through ownership of a restaurant. The restaurant ran into financial trouble and, at approximately the same time, an ex-employee sued the restaurant and the debtor/husband in state court. In need of cash, in January, 2012, the debtors sold their liquor license. In March, 2012, the ex-employee obtained a default judgment in the state lawsuit. Three days later, the debtors deposited the cashier’s check from the sale of the liquor license, and the debtor/wife used almost $100,000.00 of the money to pay down their home mortgage. When they later sought bankruptcy relief and claimed a homestead exemption under Idaho law, the trustee objected on the grounds that the transfer of funds from a non-exempt asset to an exempt asset was improper under section 522(o).

Section 522(o) provides that an exemption for residential property shall be reduced by the amount transferred within a ten-year period prior to the filing of the bankruptcy petition, where such transfer was made from a non-exempt asset with intent to “hinder, delay, or defraud a creditor.” The debtors conceded all the elements of improper transfer from non-exempt to exempt asset except the element of fraudulent intent. At the hearing on the trustee’s objection, the debtors testified that the mortgage payment was not made with the intent to hinder, delay or defraud the creditor. They maintained that they were unaware of the default judgment at the time they made their mortgage payment and cited other reasons for the delay in using the money.

Though the phrase, “intent to hinder, delay, or defraud” is not defined, the court found that Congress’s use of the identical phrase in other sections of the Code indicates that the phrase should be interpreted the same way in all contexts. Section 548(a)(1) allows a trustee to avoid a transfer upon a showing of “actual” fraudulent intent, and section 727(a)(2), which denies discharge to a debtor who has improperly transferred funds, has also been interpreted to require actual intent. Thus, the court concluded that section 522(o) should likewise require a showing of actual intent.

The court then looked to the so-called “badges” of intent, as listed in Retz v. Samson (In re Retz), 606 F.3d 1189, 1200 (9th Cir. 2010), including:

1) a close relationship between the transferor and the transferee; 2) that the transfer was in anticipation of a pending suit; 3) that the transferor Debtor was insolvent or in poor financial condition at the time; 4) that all or substantially all of the Debtor’s property was transferred; 5) that the transfer so completely depleted the Debtor’s assets that the creditor has been hindered or delayed in recovering any part of the judgment; and 6) that the  Debtor received inadequate consideration for the transfer.

The court noted that these “badges” should be weighed according to the facts and may, in appropriate circumstances, be given no weight at all.

The court then turned to analysis of the facts as educed at the hearing. Without deciding whether the debtors had actual notice of the default judgment against them at the time they made the mortgage payment, the court found the key issue to be whether they made the mortgage payment with the intent to hinder, delay or defraud creditors. The court found that the trustee failed to sustain his burden of demonstrating that element.

The court credited the debtors’ testimony to the effect that they were not aware of the impact in bankruptcy of the transfer. Therefore, they did not understand that by paying the mortgage down, they were also protecting assets in bankruptcy. This factual conclusion was supported by the testimony of the husband/debtor that he would have chosen to put the money back into the restaurant rather than pay down the mortgage. The debtors’ demonstrated lack of business and financial acumen further supported their position that the benefit they received from Mrs. Halinga’s payment of the mortgage was serendipitous rather than nefarious.

Halinga opinion


Post a Comment

Your email is never shared. Required fields are marked *