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Eighth Circuit Rules Debtor May Not Exempt Proceeds of Property Sold With Homestead - Danduran Jr. v. Kaler

September 26, 2011

As Norco personal bankruptcy attorneys, we know that in most bankruptcy cases, homeowners can exempt a certain amount of money from the bankruptcy as part of their "homestead" -- usually the equity in a primary home. Clearly, fixtures in the home such as a stove and oven are part of the home -- but what about more easily moved property like a television? That was the issue in Danduran Jr. v. Kaler, which pitted Chapter 7 filer Lawrence Danduran Jr. against his trustee, Kip M. Kaler. Danduran sold his homestead with some extra personal property inside, and put the proceeds in a specially created savings account. In this case, the Eighth U.S. Circuit Court of Appeals finds that the part of the proceeds that came from the extra property are not proceeds of the homestead, and can therefore be part of the bankruptcy estate.

Danduran, of North Dakota, sold the home and property for $225,000. The non-fixtures included relatively high-priced items like a pool table, hot tub, audiovisual equipment and a washer/dryer set. Roughly $87,500 was left over after Danduran paid off the mortgage, and he later claimed this for a homestead exemption when he filed for Chapter 7 bankruptcy. The trustee objected to this amount, claiming part of it was proceeds of non-exempt personal property. After a hearing, the bankruptcy court agreed and allowed $7,700 to become part of the bankruptcy estate. Danduran appealed to the Eighth Circuit's Bankruptcy Appellate Panel, which reversed, applying the Eighth Circuit's "permissive" approach to non-fraudulent planning. The trustee appealed to the Eighth Circuit.

The appeals court reversed the case again. It started by noting that while personal property is not exempted from bankruptcy under North Dakota state law, proceeds of personal property might be. Furthermore, it said, precedent allows debtors to convert non-exempt property into exempt property for the express purpose of exempting it, unless it is done to defraud creditors. Nonetheless, the Eighth Circuit found that the BAP erred when it required only "significant indicia" of Danduran's intent to convert this property. In order to apply the exemption, the court said, there had to be an actual conversion, such as paying down the mortgage to create more equity. Simply letting it sit in a bank account does not complete the conversion. Furthermore, the Eighth said, the panel was mistaken to find anything about Danduran's intent; the finding of facts is the province of the bankruptcy court. It then went on to reject two of Danduran's arguments before taking up a third: that the trustee failed to demonstrate that the $7,700 of personal property proceeds was not used to pay off the mortgage. Because the funds from the property and the home were intermingled, the court said, the trustee has the burden of proving which funds went to which ends. Because he failed to do this, the bankruptcy court erred in ruling otherwise. Nonetheless, the Eighth reversed the case and sent it back to bankruptcy court.

Our Placentia consumer bankruptcy lawyers believe bankruptcy debtors and potential filers could take a lesson from this ruling. The Eighth Circuit did not object that Danduran attempted to convert non-exempt property into exempt property. Indeed, it expressly said this is permissible unless it's an attempt to defraud creditors. This shows how important it can be to plan your bankruptcy ahead of time. Depending on your circumstances, you may be able to sell property that would otherwise become part of the estate, like Danduran's pool table, and use it to hold on to property that has an exemption. An experienced Los Angeles County individual bankruptcy attorney can help you figure out how to do this without even the appearance of defrauding creditors.

If you feel overwhelmed by your debt and don't see how you can ever pay it off, it may be helpful to call Howard Law, P.C. for a free, confidential consultation on a bankruptcy. You can reach us toll-free at 1-800-872-5925 or send us a message online.

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