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Pre-bankruptcy planning is not fraud

Merely transferring funds from non-exempt assets to exempt ones on the eve of bankruptcy as part of “pre-bankruptcy planning” is not proof of fraud.

U.S. Bankruptcy Judge Thomas S. Utschig held in a recent opinion that extrinsic evidence is required to set aside the transfer as fraudulent.

Unfortunately for the debtor, though, Utschig held that one of the purportedly exempt assets, an EdVest account, was not exempt after all.

Just prior to filing bankruptcy in 2009, Leonard D. Bronk engaged in two transactions to shield assets from creditors.

First, he took out a loan on his mortgage-free home in the amount of $95,000, and used it to fund several EdVest College Savings Plans for his grandchildren. Second, he converted a certificate of deposit worth $42,000 to an annuity.

The bankruptcy trustee objected on the ground that the transfers were attempts to defraud the creditors.

But Judge Utschig disagreed, relying heavily on the 7th Circuit’s opinion in In re Smiley, 864 F.2d 562 (7th Cir. 1989). In Smiley, the court held that pre-bankruptcy planning does not bar discharge absent some act extrinsic to the conversion that indicates fraud.

Judge Utschig found, “Mr. Bronk … was attempting to take advantage of legally available exemptions. The Seventh Circuit has indicated that in this context, ‘evidence that the debtor is motivated by a desire to shield assets’ will not transform exemption planning into fraudulent conduct. Smiley, 864 F.2d at 567. … Likewise, Mr. Bronk has not conceded that he engaged in fraudulent conduct. He merely acknowledged that he engaged in exemption planning upon the advice of his attorney.”

Utschig continued, “On its own, the desire to protect assets in a legitimate way (i.e., through the use of properly claimed exemptions) is simply not evidence of fraudulent intent.”

However, Judge Utschig held that the assets in the EdVest accounts is not exempt under the exemption provided in sec. 815.18(3)(p).

The exemption protects “[a]n interest in a college savings account under sec. 14.64.”

But the court concluded that only the beneficiary of such an account can claim the exemption.

The annuity, however, did constitute an exempt asset, the court concluded, under sec. 815.18(3)(j), which provides an exemption for, “Assets held or amounts payable under any retirement, pension, disability, death benefit, stock bonus, profit sharing plan, annuity, individual retirement account, individual retirement annuity, Keogh, 401-K or similar plan or contract providing benefits by reason of age, illness, disability, death or length of service and payments made to the debtor therefrom.”

David Ziemer can be reached at david.ziemer@wislawjournal.com.

What the court held

Case: In re Bronk, No. 09-15224-7

Issues: Is the transfer of funds from non-exempt assets to exempt ones proof of intent to defraud

Are funds in an EdVest account exempt from the bankruptcy estate?

Holdings: No. Absent extrinsic evidence of fraud, pre-bankruptcy planning is not proof of fraud.

No. Only the beneficiary, not the owner, can claim the exemption.

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