Daily Development for
Wednesday, August 5, 1997
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
BANKRUPTCY; FRAUDULENT CONVEYANCE: A debtor's payoff of his residential mortgage pre-petition, using a cash bequest, may be deemed a transfer by the debtor to his exempt "entireties entity" under Virginia law; because insolvency was present, the value of the pay-off could be recovered from the exempt "entity" as a fraudulent conveyance.
In re Meyer, 206 B.R. 410 (Bankr. E.D.Va. 1997).
The banks receiving the pay-off were not targeted for disgorgement (as they gave value in the form of debt satisfaction). But the Bankruptcy Court construed the statutory, marital entireties estate under Virginia law as a separate entity. Then the court found that the debtor had not merely transmuted non-exempt property into exempt property, which is almost always permissible "bankruptcy planning." Rather, the court found, the debtor had taken a cash bequest, which lay in his checking account, and with one payment had made two transfers -- to the home mortgagees, which was not avoidable, and to the "entitireties entity," which was. For purposes of fraudulent conveyance law, the value of exempt property may not be included for purposes of measuring solvency.
Reporter's Comment: We leave it to members of the Virginia bar to grapple with the ingenious notion of an "exemption entity" as a real estate "transferee" under the facts of this case. The case is, in any event, an example of how not to do bankruptcy- and creditor-sensitive estate planning. A testator's desire to relieve the heirs of their home mortgage debt is a common testamentary objective; and there are at least a half-dozen ways to do it, without dumping free cash in an heir's bank account. The court found that while the testator's desire had been for the debtor to pay off the mortgages, and while the debtor felt morally obligated to do so, the testamentary instruments clearly gave the debtor the right to do anything he wanted with the money.
The opinion also discusses why two trusts with a corpus of $ 1.25 million were not includable either in the bankruptcy estate or, for purposes of the fraudulent conveyance analysis, on the debtor's financial statement, where the debtor was only a remainderman.
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