H. Wayne Ford v. C. Barney Poston, in Re H. Wayne Ford, Debtor, 773 F.2d 52, 4th Cir. (1985)
H. Wayne Ford v. C. Barney Poston, in Re H. Wayne Ford, Debtor, 773 F.2d 52, 4th Cir. (1985)
2d 52
13 Collier Bankr.Cas.2d 632, 13 Bankr.Ct.Dec. 882,
Bankr. L. Rep. P 70,742
The debtor, H. Wayne Ford, appeals from a decision of the United States
District Court for the Western District of Virginia denying a discharge in
bankruptcy because the debtor had fraudulently transferred a piece of real estate
to himself and his wife as tenants by the entirety with the right of survivorship.
The district court affirmed the decision of the United States Bankruptcy Judge
denying the discharge because of the debtor's fraudulent transfer of real estate.
We affirm the decision of the district court.
I.
2
Circuit Court for Smyth County. The following day, July 13, Ford executed and
recorded a Deed of Correction transferring a tract of land adjacent to his home
to himself and his wife as tenants by the entirety with the right of survivorship.
This property had originally been conveyed by Ford's parents to Ford alone on
December 30, 1981. At trial, Ford contended that, in changing the deed, he was
simply correcting a mistake that had been made in the prior deed from his
parents. Ford's action in transferring the property to himself and his wife had
the effect of removing the property from the reach of his creditors. Under
Virginia law, the creditors of one spouse may not attach real estate owned by
tenants by the entireties--only creditors of joint debts of both spouses may reach
such property. Vasilion v. Vasilion, 192 Va. 935, 66 S.E.2d 599, 602 (1951).
One year later, on July 11, 1983, Ford set aside the same tract of land in a
Homestead Deed pursuant to section 34-4 of the Virginia Code, thereby
indicating his intention to exempt this property from his creditors.* The next
day Ford filed for bankruptcy under Chapter 7 of the Bankruptcy Code. His
petition listed Poston as an unsecured creditor in the amount of $20,288.06.
3
Poston filed an objection to Ford's discharge, claiming that Ford had transferred
realty within one year of bankruptcy with the intent to defraud creditors in
violation of the Bankruptcy Code, 11 U.S.C. Sec. 727(a)(2)(A), which provides
as follows:
5* * *
6* * *
7
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of
the estate charged with custody of property under this title 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...
Following a trial, the Bankruptcy Judge concluded that the transfer of July 13,
1982, was in contravention of Section 727 and accordingly entered an order
denying Ford's discharge. 34 B.R. 93. The district court, in a very thorough
opinion, affirmed the order of the bankruptcy court.
II.
11
(2) whether he transferred the property with the intent to defraud his creditors.
12
We turn first to the issue of whether a claimed exemption may be the subject of
a Section 727 transfer and conclude that it may under certain circumstances.
Ford contends that exempt property can never come within the meaning of
Section 727. He argues that he was not committing a fraudulent act but was
simply doing what the law allows him to do--convert non-exempt property to
exempt property prior to bankruptcy.
13
Ford is correct to a certain extent. Mere conversion of property from nonexempt to exempt on the eve of bankruptcy--even though the purpose is to
shield the asset from creditors--is not enough to show fraud. First Texas
Savings Association v. Reed, 700 F.2d 986, 991 (5th Cir.1983). In fact, it is
clear from the legislative history of The 1978 Act that the debtor is to be
allowed to make full use of his exemptions. The House and Senate Reports
stated the following:
14 under current law, the debtor will be permitted to convert nonexempt property
As
into exempt property before filing a bankruptcy petition. The practice is not
fraudulent as to creditors, and permits the debtor to make full use of the exemptions
to which he is entitled under the law.
15
H.R.Rep. No. 595, 95th Cong., 1st Sess. 361 (1977), reprinted in 1978
U.S.Code Cong. & Ad.News 5963, 6317; S.Rep. No. 989, 95th Cong., 2d
Session 76, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5862
(emphasis added).
16
Significantly, however, both the House and Senate Reports used the phrase "
[a]s under current law." Under existing law prior to passage of the 1978 Act,
courts qualified this apparent blanket approval of conversion by denying the
discharge if there was extrinsic evidence of actual intent to defraud creditors.
First Texas Savings Association v. Reed, 700 F.2d 986, 990 (5th Cir.1983).
This qualification applies as well in cases arising under the 1978 Act. Id.;
Schmidt v. White (In re White), 28 B.R. 240 (Bankr.E.D.Va.1983). Thus, if the
transfer of property occurs within one year of the bankruptcy filing and there is
evidence to indicate a fraudulent purpose aside from the mere conversion of
18
AFFIRMED.