In re Montanaro: The Fallout From In re Addison Continues

25 Dec In re Montanaro: The Fallout From In re Addison Continues

A December 10, 2008, ruling from the Missouri bankruptcy court shows that the fallout from the Eighth Circuit Court of Appeals’ ruling in In re Addison continues unabated. Addison held that exemption planning was still permissible under the 2005 Bankruptcy Reform Act, notwithstanding the new section 522(o). The recent Missouri decision from Bankruptcy Judge Federman, In re Montanaro, No. 08-60665 (Bky.W.D.Mo. Dec. 10, 2008), follows Addison, and holds that a debtor’s prebankruptcy conversion of nonexempt mutual funds into an exempt IRA was not fraudulent.

In Montanaro, the debtor transferred $5,500 from a nonexempt mutual fund to an exempt IRA account two months prior to filing a chapter 7 bankruptcy case. The debtor inadvertently omitted the IRA from his bankruptcy schedules, but he informed the trustee of the IRA’s existence at the section 341(a) meeting. The debtor amended his schedules, and then claimed the IRA as exempt under Missouri law.

The court in Montanaro noted that Missouri law allows exemption of IRA’s in a bankruptcy case, except to the extent that the IRA account contains funds transferred with fraudulent intent. The court observed that Addison required extrinsic evidence to establish fraud, and that under Addison, the mere conversion of nonexempt property into exempt property was insufficient to establish fraud, even if the purpose of the conversion was to place the property beyond the reach of creditors.

In Montanaro, the court held that because the amount involved was only $5,500, and the debtor did not use credit to obtain the funds deposited into the IRA, and the debtor voluntarily disclosed the IRA to the trustee, there were no grounds to conclude that the transfer of funds into the IRA was fraudulent. The debtor’s exemption of the IRA funds was therefore upheld, based upon the Eighth Cicuit Court of Appeals ruling in Addison.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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