8th Circuit Bankruptcy Appellate Panel Upholds Pre-Bankruptcy Planning Decision

14 Feb 8th Circuit Bankruptcy Appellate Panel Upholds Pre-Bankruptcy Planning Decision

On December 8, 2008, the 8th Circuit Bankruptcy Appellate Panel upheld Judge Berry’s decision, In re Wilmoth. Judge Berry held and the Bankruptcy Appellate Panel agreed that without extrinsic evidence of fraud the mere fact that paying approximately $140,000 towards the debtors’ primary mortgage within weeks of filing bankruptcy was not intentional to delay, hinder or defraud the creditors.  If the action was found to be intentional to hinder, delay or defraud the creditors the unlimited homestead exemption would be reduced by the amount of fraudulent transfers in the last ten years.  Why is this case important?  The courts around the country continue to debate the question of whether one’s actions are reasonable pre-bankruptcy planning or the actual intent to defraud the creditors.

Mr. Wilmoth is an excavator in Arkansas.  Part of the tools of his trade are pieces of heavy equipment that he used to move dirt.  During 2007 business was not good enough to allow Mr. Wilmoth to pay his bills.  Although he was able to delay the creditors’ actions to reposes the heavy equipment as they held valid liens against the equipment, he was sinking financially.  In November 2007 Mr. Wilmoth felt that he could not hold on any longer and sought the advice of his attorney.

Mr. Wilmoth made the decision after speaking to his counsel to sell the heavy equipment and pay down the existing liens.  He sold the equipment for fair market value and walked away with $300,000 from the sale of the equipment after paying the remaining liens.  Mr. Wilmoth then decided to use approximately $140,000 towards paying down his primary mortgage.  This amount represents 10 months worth of mortgage payments.

The Chapter 7 Trustee in the case felt that the Wilmoths paid $140,000 towards their mortgage in order to avoid turning over the funds to the trustee to pay towards the unsecured creditors.  Both the Arkansas Bankruptcy Court and Bankruptcy Appellate Panel decided that the trustee did not meet his burden of proving the the payment was intentional to hinder, delay or defraud the creditors.  The judges found that Mr. Wilmoth’s actions were in good faith and therefore the trustee could not deny the homestead exemption under §522(o) for the approximate transfer of $140,000 to the primary mortgage within weeks of filing bankruptcy.

It appears that the 8th Circuit judges will allow one to seek pre-bankruptcy planning advice as long as it is not advice to intentionally hinder, delay or defraud the creditors.

Remember that knowledge is power and before you think about taking any actions before filing bankruptcy seek the advice of qualified bankruptcy attorney.

Written by Kansas City Missouri Bankruptcy Attorney, Rachel Lynn Foley.

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