Recent Bankruptcy Decisions within the First Circuit: May 2012 (Part 2 of 4).

Debtors changed residence from Mass. home being foreclosed upon to vacation home in Maine just days before filing Ch. 7 and claimed it as their homestead &homestead exemption; Court rejects trustee’s objection to this exemption:

In re: LAWRENCE, 2012 Bankr. LEXIS 1934 (Bankr. D. Mass 5/2/12)(Melvin S. Hoffman, Bankruptcy Judge).

PROCEDURAL POSTURE: Chapter 7 debtors, who had generally resided in Massachusetts, listed for exemption a condominium residence located in Maine for purposes of eligibility for the $21,625 per debtor exemption under 11 U.S.C.S. § 522(d)(1). The trustee filed an objection, arguing that the Maine residence was only a vacation home.
OVERVIEW: The trustee conceded that the Maine condominium would qualify for the "wild card" exemption under 11 U.S.C.S. § 522(d)(5), albeit in a considerably lower amount. The trustee claimed that neither the debtors nor any of their dependents used the Maine condominium as a residence on the petition date. Debtors asserted that foreclosure efforts with respect to the Massachusetts property had prompted them to relocate to Maine in the days just prior to their filing for bankruptcy relief. The court held that, on the petition date, debtors were "using" the Maine condominium, and it qualified for § 522(d)(1), and under Me. Rev. Stat. Ann. tit. 14, § 4422 (2003) for the exemption in issue.
OUTCOME: Debtors properly elected to exempt their condominium in. Maine. The trustee's objection to exemption was overruled.  In response to the trustee's objection, the Lawrences asserted that while they lived in the Groton property for many years, the foreclosure efforts with respect to that property prompted them to relocate to Maine in the days just prior to their filing for bankruptcy relief.
The Lawrences asserted that on the petition date they were actually using the Maine condominium as their residence and intended to reside there permanently. Their intent was manifested, they say, by hiring, just prior to filing bankruptcy, a moving and storage company to transport the contents of their Groton home to a storage facility in York, Maine for eventual delivery to the condominium.

Transfers due to Medicaid planning were not fraudulent transfers under Section 544(b) or UFTA in light of no actual loss to the bankruptcy estate due to the transfer/retransfer; property conveyed, then re-conveyed pre-petitions, re-conveyance being “curative” of the prior alleged fraudulent transfers allowed the debtor to assert a homestead exemption;

(In re PATTS) DONALD LASSMAN, CHAPTER 7 TRUSTEE v. PATTS, 2012 Bankr. LEXIS 1978 (Bankr. D. Mass. 5/4/12)(Joan N. Feeney, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff Chapter 7 trustee filed an adversary proceeding against defendant, a Chapter 7 debtor's wife, seeking a determination that he was entitled under 11 U.S.C.S. § 544(b) and the Massachusetts Uniform Fraudulent Transfer Act ("UFTA"), Mass. Gen. Laws ch. 109A, to avoid a transfer the debtor made to his wife. The trustee amended his complaint to add the debtor as a defendant, and the wife filed a motion for summary judgment.
OVERVIEW: The debtor and his wife owned a house as tenants by the entireties at the time the debtor began treatment for multiple medical conditions, including colon cancer, and during the debtor's rehabilitation they sought legal advice about Medicaid eligibility and based on that advice the debtor conveyed his interest in the house to his wife on January 9, 2009. With mounting debts caused primarily by the debtor's medical condition, the debtor sought advice from a bankruptcy attorney, and based on that advice his wife transferred title to the house back to herself and the debtor as tenants by the entireties and the debtor filed a Declaration of Homestead. Two days after the deed transferring title was recorded, the debtor declared bankruptcy. A trustee who was appointed to administer the debtor's bankruptcy estate filed an adversary proceeding against the debtor's wife, claiming that the transfer that occurred in 2009 was avoidable under 11 U.S.C.S. § 544(b) and the Massachusetts UFTA, and that the value of the amount transferred could be recovered for the debtor's bankruptcy estate pursuant to 11 U.S.C.S. § 550. The bankruptcy court disagreed.
OUTCOME: The court allowed the wife's motion for summary judgment. The trustee's action against the debtor's wife failed for want of actual loss to the debtor's bankruptcy estate, and in the absence of any loss to the estate sustained through the transfer or the retransfer of title, recovery by the trustee would have constituted a windfall to the estate and a prohibited double recovery under 11 U.S.C.S. § 550(d).

Discussion: The Debtor and Patts, who are both in their 80s, are husband and wife. Sometime in 1960, they acquired their residence at 47 Big Rock Lane, Hanson, Massachusetts (the "Property"). Except for a brief period between November 2000 and March 2002, the couple owned the Property as tenants by the entirety until January 9, 2009.  On May 19, 2008, Patts filed an Elderly Declaration of Homestead with respect to the Property. From September 11, 2008 through November 1, 2009, the Debtor was a patient at New England Sinai Hospital and Rehabilitation Center and then at South Shore Rehabilitation and Skilled Nursing Care, recovering from multiple illnesses, medical conditions and related surgeries, including colon cancer. During the Debtor's rehabilitation, the couple consulted a law firm specializing in elder care, to seek advice for Medicaid eligibility. Based on the advice of counsel, as part of their Medicaid planning, on January 9, 2009, the Debtor and Patts conveyed the Property to Patts individually (the "Transfer Deed"). With mounting debts caused primarily by the Debtor's medical condition, in June 2011, the Debtor sought advice from a bankruptcy attorney. That attorney advised the Debtor and Patts that, notwithstanding the advice of prior counsel, they should retransfer the Property from Patts back to the Debtor and Patts as tenants by the entirety. They effected that transfer by deed dated June 14, 2011 (the "Retransfer Deed"). The Debtor also filed on that date a Declaration of Homestead with respect to the Property. The Property has a current value of approximately $250,000 and is currently subject to a mortgage in the approximate amount of $127,000.  On July 27, 2011, the Trustee convened the meeting of creditors pursuant to 11 U.S.C. § 341. The deadline to object to the Debtor's claim of exemptions was August 26, 2011 and the deadline for filing complaints under 11 U.S.C. §§ 523(a) and 727(a) was originally set for September 26, 2011. See Fed. R. Bankr. P. 4003(b), 4004(a) and 4007(c). Neither the Trustee nor any other party objected to the Debtor's claim of exemptions. The Trustee filed three timely motions requesting extensions of time to object to the Debtor's discharge, all of which the Court granted. The current deadline for the Trustee to object to the Debtor's discharge is May 27, 2012.

Based upon the couple's conveyance of the Property to Patts and her subsequent reconveyance, the Trustee filed the amended complaint against the Debtor and Patts on December 1, 2011. The amended complaint contains five counts. The first three counts contain allegations that the January 9, 2009 Transfer Deed constitutes a fraudulent transfer avoidable pursuant to 11 U.S.C. § 544(b) and Mass. Gen. Laws ch. 109A, the Uniform Fraudulent Transfer Act ("UFTA") enacted in Massachusetts. Those counts are: fraudulent transfer for actual fraud (Count I); fraudulent transfer for debts arising after transfer (Count II); and fraudulent transfer for debts arising prior to transfer (Count III). Through the fourth count, the Trustee seeks a recovery from Patts pursuant to 11 U.S.C. § 550 as an initial transferee under the Transfer Deed (Count IV); and through the fifth count he seeks a recovery against the Debtor and Patts as immediate or mediate transferees by virtue of the Retransfer Deed (Count V). The amended complaint contains no count seeking avoidance of the Retransfer Deed. In paragraph 15 of the amended complaint, the Trustee alleges that the approximate value of the Property on the date of Transfer Deed was $250,000, an allegation admitted by Patts and the Debtor in their joint answer filed on December 20, 2011.

Patts asserts that summary judgment is warranted because, she contends, (1) there is no transfer to avoid and no value to recover pursuant to 11 U.S.C. § 550 because the Property was voluntarily retransferred prior to the petition date; and (2) the Property is subject to the valid homestead exemptions of both the Debtor and Patts and, thus, there can be no recovery for the estate.

The Trustee opposes summary judgment arguing that there are genuine issues of material fact to be tried. Additionally, he maintains that Patts is not entitled to summary judgment as a matter of law because: (1) 11 U.S.C. § 522(g) is inapplicable where the Debtor voluntarily executed the Transfer Deed; and (2) the "Debtor cannot exempt the estate['s] interest arising from the Transfer Deed to Helen Patts."

Although the validity of the Debtor's claim of homestead in the Property is not at issue in this avoidance and recovery action, Patts relies heavily on the decision of the United States Court of Appeals for the First Circuit in Stornawaye Fin. Corp. v. Hill, (In re Hill), 562 F.3d 29 (1st Cir. 2009), in which that court ruled on the ability of a creditor to defeat a debtor's homestead exemption pursuant to 11 U.S.C. § 522(g). Because § 522(g) is crucial to an understanding of Hill, it has no direct application in this matter.

Section 522(g)(1)(A), however, does not allow the exemption of property recovered by the trustee if the transfer was a voluntary transfer by the debtor. The Trustee concedes in his Opposition that he did not file a timely objection to the Debtor's claim of homestead exemption.

Although the Trustee's argument is less than clear, the Court distills it as follows: Notwithstanding the retransfer, the estate should be able to avoid the Transfer Deed and recover from Patts the value of what the Debtor conveyed to her, and there can be no homestead protection of that interest for the Debtor because the interest the Trustee seeks is owned and held by Patts. Moreover, 11 U.S.C. § 522(g) precludes a debtor's claim of exemption in property recovered by a trustee which was voluntarily transferred by the debtor. While Patts would maintain that the Retransfer Deed restored the Debtor's property interest to the estate and made it whole, the Trustee's position is presumably premised on the assumption that the retransfer actually diminished the estate because it permitted the Debtor to claim a homestead in the Property which the Trustee has no grounds to challenge. In other words, had the retransfer not occurred, the Trustee could have simply avoided the Transfer Deed and recovered the full value of the Debtor's interest in the Property without a claimed homestead exemption. The Court then is left to determine whether the Trustee can recover the value to the estate "lost" through the Debtor's declaration of homestead. As discussed below, the Court finds that the Trustee cannot achieve that recovery for a number of reasons.

First, the Court finds that the amended complaint against Patts fails on a conceptual level as a back-door challenge to the Debtor's claim of homestead and an effort to deprive the Debtor's spouse of the value of that exemption which was validly claimed by the Debtor for the benefit of his family. In Hill, 562 F.3d 29 (1st Cir. 2009), the First Circuit Court of Appeals upheld a debtor's ability to claim a homestead exemption in property that has been fraudulently transferred but voluntarily reconveyed prepetition. Although that case was determined in the context of a homestead objection under 11 U.S.C. § 522(g), it is factually similar to the instant case and is instructive here. In that case, Mr. Hill had personally guaranteed a $250,000 bank loan made to a corporation. Thereafter, Mr. and Mrs. Hill conveyed their residence to Mrs. Hill for $1.00. Soon thereafter, the holder of the bank loan and guaranty, Stornawaye (the "creditor") , sued the Hills to collect the balance owed on the guaranteed indebtedness. "The suit galvanized the Hills into corrective action. Acting on advice of counsel, Mrs. Hill re-transferred the Property to their joint names as tenants by the entirety." Id. at 31. Mr. Hill then recorded a declaration of homestead on the property and, two months later, filed a Chapter 7 bankruptcy. In the Bankruptcy Court, the creditor successfully objected to the debtor's homestead exemption, contending that the debtor was barred from claiming homestead exemption due to the original and fraudulent voluntary transfer under 11 U.S.C. § 522(g). On appeal, the creditor urged the court to interpret the phrase "property the trustee recovers" in that statute to include a pre-petition reconveyance of property effected through the efforts of a creditor. The Court of Appeals, affirming the decision of the Bankruptcy Appellate Panel for the First Circuit, which had reversed the Bankruptcy Court's ruling with respect to the homestead exemption, declined a "passive" interpretation and construed section 522(g) literally:

In the first place, giving force to [the creditor's] word play would eviscerate the meaning of "recovers." To "recover" ordinarily means to "get or win back." Webster's Third New Int'l Dict. 1898 (1993). Here, however, there was nothing to "get . . . back"-no loss to recoup: by the time that the bankruptcy estate came into existence, the Property had been reconveyed. Because there was never a loss to the estate, there could be no recovery. Id. at 33.  Further, the Hill court found no clear evidence that § 522(g) was intended by Congress to punish all dishonest debtors and that the second transfer- -the reconveyance was "curative, not fraudulent" and that the ensuing declaration of homestead was, therefore, "unexceptionable." Id. at 35.  Hill, however, makes clear that a declaration of homestead following a fraudulent transfer and a subsequent voluntary prepetition reconveyance is "unexceptionable" and that a reconveyance is curative of a prior fraudulent transfer. As the Debtor's prior conduct in executing the Transfer Deed did not affect his ability to claim a valid homestead in the Property, this Court will not confer viability on the Trustee's cause of action here to recoup the value of that exemption through an avoidance action commenced against the declarant's spouse.

Second, the Trustee's avoidance and recovery action against Patts fails for want of actual loss to the estate. The concepts of avoidance and recovery are distinct. A successful avoidance under § 544 will nullify a transfer, but it will not give a trustee control over the asset. Congress Credit Corp. v. AJC Int'l., 186 B.R. 555, 558 (D. P.R. 1995). As noted by the court in Santee v. Nw. Nat'l Bank (In re Mako, Inc.), 127 B.R. 471 (Bankr.E.D.Okl.1991): [Section] 550(a) is a secondary cause  [*24] of action after a properly appointed representative has prevailed pursuant to the avoidance sections of the Code. Section 550(a) stands as a recovery statute only and not as a primary avoidance basis for an action, as it will only survive when coupled with the transfer avoidance sections of the Code.  Id. at 473(citation omitted)(emphasis added). Section 541(a)(1) of the Bankruptcy Code provides that, except as provided in Section 541(b) and (c)(2), a debtor's bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case. . . ." 11 U.S.C. § 541(a)(1)(emphasis added). These sections of the Bankruptcy Code must be read in conjunction when assessing a trustee's avoidance and recovery action, the purpose of which is to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.

A collective reading of the statutes reveals the foundational defects in the Trustee's claims. The asset the Trustee seeks to recapture, namely the interest in the Property the Debtor conveyed to Patts or its equivalent value, was part of the Debtor's bankruptcy estate on the date the estate was created, having been reconveyed to the Debtor through the Retransfer Deed. See 11 U.S.C. § 541(a). Notably, the Trustee does not allege in the amended complaint or anywhere else in the summary judgment record that the value of what the Debtor received in the retransfer was less than the value of what he conveyed out in the initial transfer. Indeed, the Trustee alleged in the amended complaint that the Property had a value of approximately $250,000 on the date the parties executed the Transfer Deed and alleged no facts to support a decreased valuation on the date of the Retransfer Deed. Patts asserted the identical current value, $250,000, as of the date of her affidavit. Based upon the averments in the amended complaint and the Patts affidavit, there was no economic loss to the estate following the transfers. Simply stated, the transfer the Trustee seeks to avoid has already been undone and the undiminished value of the transferred asset has been restored to the bankruptcy estate. Accordingly, any "recovery" for the benefit of the estate has already been completed, albeit by the Debtor and Patts. The Trustee's stated premise: "[t]he estate's interest springs from Helen Patts, not the Debtor. . ."  [is faulty. The estate's interest "springs" from the legal and equitable interests of the Debtor in property owned by him as of the commencement of the case, which in this case included a 50% undivided interest in the Property. See 11 U.S.C. § 541(a). This result is not altered by the Debtor's valid homestead which prevents the estate from recovering any value as a result of the transfers.

As stated above, a debtor's claim of homestead following a reconveyance of a fraudulently transferred property is permissible in this Circuit, and this Court, accordingly, will not characterize a validly claimed homestead as a "loss" to the estate.

Moreover, in the absence of any demonstration of a loss to the estate sustained through the Transfer and Retransfer Deeds, the Court finds that a recovery by the Trustee under the facts of this case would constitute a windfall to the estate and a prohibited double recovery under 11 U.S.C. § 550(d).

Trustee’s objection to exemption of inherited IRA overruled:

In re: HOLLY ANNE SEELING, 2012 Bankr. LEXIS 2337 (Bankr. D. Mass. 5/24/12)(Henry J. Boroff, Bankruptcy Judge).

PROCEDURAL POSTURE: Before the court was the Trustee's objection to debtor's exemption in an inherited Individual Retirement Account (IRA).
OVERVIEW: The court needed to decide whether a debtor could employ 11 U.S.C.S. § 522(d)(12) to exempt an individual retirement account whose proceeds had been inherited. To qualify for this exemption, the relevant property (1) must constitute retirement funds; and (2) be held in an account exempt from taxation under I.R.C. § 401, I.R.C. § 403, I.R.C. § 408, I.R.C. § 408A, I.R.C. § 414, I.R.C. § 457, or I.R.C. § 501(a). The validity of a claimed exemption was presumed. Therefore, it was the Trustee's burden to prove otherwise. The court found itself in agreement with what appeared to be a consensus. IRAs were tax exempt under I.R.C. § 408 and accordingly were exempt under the Bankruptcy Code, pursuant to § 522(d)(12). The Bankruptcy Code required no forensic analysis in order to determine from where those funds arose. All that the Bankruptcy Code required was that the funds sought to be invested have been placed in a particular form of a retirement investment vehicle in order to be exempt from taxation. The subject IRA being among the kinds of investment vehicles referenced in § 522(d)(12), there was no statutory basis for imposing additional conditions for its bankruptcy exemption.
OUTCOME: The Trustee's objection was overruled. Debtor could exempt the full value of the IRA pursuant to 11 U.S.C.S. § 522(d)(12).
DISCUSSION:  Before the Court is the "Trustee's Objection to Debtor's Exemption in an Inherited IRA" (the "Trustee's Objection"). The Court must here decide whether a debtor may employ 11 U.S.C. § 522(d)(12) to exempt an individual retirement account whose proceeds have been inherited - a question that appears to be one of first impression in this Circuit.  [R]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.  11 U.S.C. § 522(d)(12).  Thus, to qualify for this exemption, the relevant property (1) must constitute retirement funds; and (2) be held in an account exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the IRC. The validity of a claimed exemption is presumed. See § 522(l). Therefore, as the objecting party, it is the Trustee's burden to prove otherwise. See Fed. R. Bankr. P. 4003(c).  The Trustee maintains that the funds comprising the Annuity lost their character as "retirement funds" when they were rolled over into the IRA and no longer "set apart" for Carroll's retirement. The Debtor disagrees, noting that § 522(d)(12) does not require that the retirement funds originally have been set apart by the Debtor in contemplation of the Debtor's retirement, and pointing out that § 522(b)(4)(C) specifically provides that transfers of this very type do not disqualify IRAs from eligibility for exemption under § 522(d)(12).  Indeed, the Fifth Circuit Court of Appeals has recently noted that [m]ost of the courts that have analyzed this issue have concluded that inherited IRAs are 'retirement funds' as that phrase is used in § 522(d)(12)," In re Chilton, 674 F.3d 486, 489 (5th Cir. 2012) (citing In re Nessa, 426 B.R. 312, 314 (8th Cir. BAP 2010); accord,  [*7] In re Kuchta, 434 B.R. 837, 843-44 (Bankr. N.D. Ohio 2010); In re Tabor, 433 B.R. 469, 476 (Bankr. M.D. Pa. 2010); In re Thiem, 443 B.R. 832, 843-44 (Bankr. D. Ariz. 2011); In re Weilhammer, No. 09-15148-LT7, 2010 Bankr. LEXIS 2935, 2010 WL 3431465, at *4-*6 (Bankr. S.D. Cal. August 30, 2010); In re Stephenson, 2011 U.S. Dist. LEXIS 142360, 2011 WL 6152960, at *2-*3); See also In re Hamlin, 465 B.R. 863, 872 (9th Cir. BAP (Ariz.) 2012). Those cases which have decided otherwise have not survived appellate review. See In re Chilton, 426 B.R. 612, 616 (Bankr. E.D. Tex. 2010), rev'd, 444 B.R. 548 (E.D. Tex. 2011), aff'd, 674 F.3d 486; In re Clark, 450 B.R. 858 (Bankr. W.D. Wis. 2011), rev'd, 466 B.R 135 (W.D. Wis. 2012) (interpreting analogous provision 11 U.S.C. § 522(b)(3)(C)); In re Stephenson, 2011 U.S. Dist. LEXIS 142360, 2011 WL 6152960 (E.D. Mich. Dec. 12, 2011).  This Court finds itself in agreement with what appears to be a consensus. Individual retirement accounts are tax exempt under 26 U.S.C. § 408 and accordingly are exempt under the Bankruptcy Code, pursuant to § 522(d)(12). The Bankruptcy Code requires no forensic analysis in order to determine from where those funds arose. All that the Bankruptcy Code requires is that the funds sought to be invested have been placed in a particular form of a retirement investment vehicle in order to be exempt from taxation. The subject IRA being among the kinds of investment vehicles referenced in § 522(d)(12), there is no statutory basis for imposing additional conditions for its bankruptcy exemption.  The Debtor's IRA meets the two requirements necessary to claim an exemption under § 522(d)(12). The Trustee has failed to persuade to the contrary. Accordingly, the Debtor may exempt the full value of the IRA pursuant to § 522(d)(12); the Trustee's Objection is, accordingly, OVERRULED.