Norwest Bank Nebraska, N.A. v. Tveten
1988 WL 54232, 848 F.2d 871 (1988)
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Rule of Law:
While a debtor is generally permitted to convert non-exempt property into exempt property before filing for bankruptcy, a discharge can be denied under federal law if extrinsic evidence of fraudulent intent exists. The sheer magnitude of the assets converted, especially under an unlimited state exemption, can constitute such evidence of an intent to hinder, delay, or defraud creditors.
Facts:
- Dr. Omar A. Tveten, a physician, personally guaranteed debts on a series of real estate investments that soured.
- By mid-1985, Tveten became personally liable for nearly $19,000,000 to various creditors, an amount far beyond his ability to pay.
- One creditor, Harold J. Panuska, had already obtained a judgment for $139,657 against Tveten, and other lawsuits were pending.
- On the advice of counsel and in anticipation of bankruptcy, Tveten undertook seventeen separate transfers to liquidate almost all of his non-exempt property, valued at approximately $700,000.
- Tveten used the proceeds to purchase life insurance and annuity contracts from the Lutheran Brotherhood, a fraternal benefit association.
- Under Minnesota law at the time, assets held in such contracts were entirely exempt from creditors' claims, with no monetary limit.
- Tveten conceded that the purpose of these transfers was to shield his assets from his creditors.
Procedural Posture:
- Creditors Norwest Bank, Business Development Corporation, and Harold J. Panuska objected to Omar A. Tveten's discharge in his Chapter 11 bankruptcy case.
- The United States Bankruptcy Court for the District of Minnesota held a hearing and entered an order denying Tveten's discharge, finding he possessed the intent to defraud, delay, and hinder his creditors.
- Tveten (appellant) appealed the bankruptcy court's order to the United States District Court for the District of Minnesota.
- The District Court affirmed the bankruptcy court’s order, holding that its finding regarding Tveten's intent was not clearly erroneous.
- Tveten (appellant) then appealed the District Court's decision to the United States Court of Appeals for the Eighth Circuit.
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Issue:
Does a debtor's conversion of approximately $700,000 of non-exempt assets into exempt assets under an unlimited state law exemption on the eve of bankruptcy constitute 'intent to hinder, delay, or defraud a creditor' under 11 U.S.C. § 727(a)(2), sufficient to deny a discharge of debts?
Opinions:
Majority - Timbers, Circuit Judge
Yes, a debtor's conversion of such a large amount of assets into an unlimited exemption on the eve of bankruptcy can be sufficient evidence to infer an intent to defraud creditors and deny a discharge. While mere conversion of non-exempt property to exempt property is not itself fraudulent, federal bankruptcy law allows courts to look for extrinsic evidence of fraudulent intent when determining the right to a discharge. Here, Tveten's entire pattern of conduct, including converting nearly his entire net worth of $700,000 while facing $19 million in liabilities, went far beyond the 'fresh start' policy of bankruptcy. The unlimited nature of the Minnesota exemption allowed for abuse that perverted the Code's purpose; Tveten sought a 'head start,' not a 'fresh start.' This conduct demonstrated the requisite intent to hinder, delay, and defraud creditors, justifying the denial of his discharge.
Dissenting - Arnold, Circuit Judge
No, a debtor's conversion of assets into exempt property, even for the express purpose of placing them beyond creditors' reach, is not fraudulent and does not justify denying a discharge. Longstanding precedent and explicit Congressional reports state that this practice is not fraudulent and permits a debtor to make full use of exemptions. The majority finds fraudulent intent based solely on the large amount of money involved, which is not a manageable judicial standard and improperly invades the legislative role of setting exemption limits. Without extrinsic evidence of actual fraud, such as lying to creditors or transferring assets for less than fair value, a court should not deny a discharge simply because it disapproves of the scope of a state's exemption law. The majority creates a vague 'when a pig becomes a hog' test that provides no clear guidance for debtors exercising their legal rights.
Analysis:
This decision establishes that courts can find the requisite fraudulent intent to deny a bankruptcy discharge based on the sheer scale and circumstances of pre-bankruptcy asset conversion, even if the conversion itself complies with state exemption laws. It creates a significant tension between a debtor's right to maximize state-law exemptions and the overarching federal bankruptcy policy against fraud. The case injects a level of judicial discretion and uncertainty into pre-bankruptcy planning, suggesting that courts may impose an equitable limit on otherwise unlimited state exemptions when evaluating a debtor's conduct for federal discharge purposes. Future debtors in jurisdictions with generous exemptions must now consider whether their planning could be viewed as 'too much,' risking the denial of their entire discharge.
