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Bankruptcy Panel Rules Transfer of Exempt Property May Be Fraudulent - Sullivan v. Welsh

October 14, 2011

As Redlands personal bankruptcy attorneys, we were interested to see an appeals court case about when a debtor may transfer his or her property. In Sullivan v. Welsh et al., the Bankruptcy Appellate Panel of the Eighth U.S. Circuit Court of Appeals ruled that Mary Joan Lumbar did not fraudulently transfer her home to her parents, from whom she'd bought it in the first place. Lumbar's transfer was the result of a lawsuit filed by her parents, Raymond and Joan Welsh, against Lumbar and her former husband for failing to make mortgage payments. Nonetheless, her quitclaim deed had not been filed as of the date of her bankruptcy filing, and the bankruptcy trustee sought to avoid the transfer on the grounds that it was fraudulent. The Minnesota bankruptcy court agreed, but the panel reversed.

Mary and her ex-husband, Daniel Lumbar, bought their home from the Welshes in 1994. The Welshes later set up a living trust that owns the home. The Lumbars made their monthly payments but failed to make two balloon payments, after which they simply continued making monthly payments. Daniel filed for divorce in 2006, after which the Welshes served a notice of cancellation of the contract, giving the Lumbars 30 days to pay in full. There followed much litigation, in which Daniel sought to obtain a loan and buy the home in his own name, and Mary defied a court order to sign the necessary documents. Ultimately, they reached a settlement that, among other things, included a requirement for Mary and Daniel to execute a quitclaim deed on the property in favor of the Welshes. Mary signed that paperwork on November 16, 2007, but the quitclaim deed had not yet been filed in county records when she filed for Chapter 7 bankruptcy on December 24, 2008. She did not list the property in her filing or claim an exemption. Nonetheless, the bankruptcy trustee sought to avoid the transfers to the Welshes, citing fraudulent transfer. The court ultimately granted summary judgment to the Welshes.

This appeal followed. Before the Bankruptcy Appellate Panel, the trustee argued that the bankruptcy court was wrong to find that exempt homestead property cannot be fraudulently transferred under Minnesota law. The panel agreed, but found that this state-law premise does not apply to the federal bankruptcy code on fraudulent transfer. In fact, it said, the bankruptcy code has express rules for situations where trustees recover fraudulently transferred property that can be exempted. Under those rules, Mary may not claim an exemption in the property she voluntarily transferred -- so the bankruptcy court was wrong to rule that the property was exempt and could not be fraudulently transferred. It is still disputed whether Mary received less than adequate value for it, or was insolvent at the time, the BAP said, so it's not clear whether the trustee actually can avoid the transfer. Thus, it reversed the bankruptcy court's decision and remanded the case for more proceedings.

Our Huntington Beach consumer bankruptcy lawyers hope the bankruptcy court does not penalize Mary on remand. Judging by the facts of the case, she was not attempting to defraud the bankruptcy court by making the transfer; she was attempting to follow a court order. Rescinding the transfer would benefit the creditors at the expense of the deal she was trying to honor, which she had attempted to honor over a year before filing for bankruptcy. Without more information, this seems like a misuse of the fraudulent transfer rules. In general, people considering bankruptcy can avoid this kind of negative consequence by consulting a bankruptcy attorney before filing and working up a plan. Murrieta individual bankruptcy attorneys like us understand what kinds of transfers can be challenged in bankruptcy court and how to structure them as safely as possible.

If you're come to believe you can never pay back debt that's taking over your life, you should call Howard Law, P.C., to discuss your legal options. You can reach us at 1-800-872-5925 or send us an email today.

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