In Re Reed

12 B.R. 41 (1981)

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Nature of the Case

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Facts

Reed (D) filed a petition for an order for relief under Chapter 7. Two weeks preceding the filing D engaged in prebankruptcy planning and sold nonexempt personal property for approximately 50% of the value which they had assigned to those properties and applied the proceeds of $34,500.00 towards the liquidation of liens against their residence homestead. The trustee (P) filed a complaint challenging entitlement to the exemptions. D had collected approximately 35 guns. On a financial statement dated April 1, 1979, he had valued the gun collection at $20,000.00. On December 11, 1979, ten days prior to filing the petition in bankruptcy, he sold the entire gun collection to a friend, Steve Gallagher, for $5,000.00 cash. On the April 1, 1979, financial statement he had valued his antiques at $3,000.00. Three months later, in August 1979, D purchased additional antiques from an estate for $11,000.00. In late November 1979, he sold three items from the antique collection to an acquaintance, Charles Tharpe, for $3,500.00, applying the proceeds to the payment of a note to Bank of the West. On December 11, 1979, he sold the remaining antiques to the friend, Steve Gallagher for $ 5,000.00 cash. One month prior to the commencement of the bankruptcy proceedings, D purchased for $15,000.00 an interest in a corporation with the intriguing name of Triple BS Corporation. He sold that interest to the friend, Steve Gallagher, on December 11, 1979, for $5,000.00 cash. In three separate transactions between October 5, 1979, and November 13, 1979, D purchased gold coins -for the total sum of $22,115.00. On or about December 10, 1979, he sold those coins for $19,500.00 cash. Ten days prior to bankruptcy D sold nonexempt assets with an aggregate value of $ 68,500.00 receiving as proceeds the sum of $ 34,500.00. On December 11, 1979, $19,892.00 from the proceeds of the sale of nonexempt assets were applied to pay off a home improvement loan. The balance of $ 15,000.00 was applied towards the lien note against the residence, reducing the balance of that note to approximately $ 28,000.00. P insists that the homestead exemption on the residence should be avoided, because of the flagrant prebankruptcy planning in which D engaged. P claims fraudulent intent is shown by D receiving less than a reasonably equivalent value for the assets. In his defense D cites a comment in the legislative history following § 522(b): 'As under current law, the debtor will be permitted to convert nonexempted property into exempt property before filing a bankruptcy petition. See Hearings, pt. 3, at 1355-58. 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.'