In re Sholdan

Arthur Sholdan (debtor) was a 90-year-old retiree who had serious medical issues and lived in an assisted-care facility. After Sholdan was named a defendant in a personal-injury lawsuit with claimed damages that exceeded Sholdan’s liability-insurance coverage, Sholdan liquidated $162,000 from his bank accounts, certificates of deposit, and a mortgage against his former property. Sholdan used the money to purchase a new house worth roughly $135,000 and moved out of the assisted-care facility. Sholdan also asked the builder to add certain finishes to the home to increase the purchase price. Sholdan filed for Chapter 7 bankruptcy immediately after purchasing the house. In Sholdan’s bankruptcy filing, he listed the house as an exempt homestead under Minnesota law. Sholdan died shortly after the bankruptcy filing. The bankruptcy trustee objected to Sholdan’s claimed homestead exemption, asserting that Sholdan had converted nonexempt property (i.e., the bank accounts and other liquidated assets) into exempt property (i.e., the house) in contemplation of the bankruptcy filing, with the intent to defraud his creditors. The bankruptcy court noted that under Minnesota law, a debtor cannot claim a homestead exemption if property is transferred to obtain the homestead with an actual intent to hinder, delay, or defraud the debtor’s creditors. The bankruptcy court further explained that Minnesota law identifies a nonexclusive list of “badges of fraud”—circumstantial factors indicating fraudulent intent—that courts can use in analyzing a debtor’s conduct. Applying the badges-of-fraud approach, the court inferred from Sholdan’s actions that he had converted the nonexempt property into the exempt property with fraudulent intent. The court thus sustained the trustee’s objection, and the district court affirmed. The personal representative of Sholdan’s probate estate appealed.