## Facts

- Kenneth and Lucille Hanson, South Dakota farmers, filed a voluntary joint Chapter 7 petition on November 30, 1983.
- First National Bank in Brookings was the Hansons’ principal creditor and held the mortgage on their homestead.
- Before filing—and after consulting an attorney—the Hansons sold nonexempt property at appraised value to their sons:
  - To their son Ronald, they sold a car, two vans, and a motor home for $27,115 (the appraised value). Ronald financed the purchase with a bank loan.
  - Ronald later sold the motor home and kept the proceeds. The other vehicles were stored at the Hansons’ home, where Ronald also lived. The Hansons sometimes used the vehicles, but only with Ronald’s express permission.
  - To their son Allen, they sold household goods and furnishings for $7,300 (the appraised value). The items remained at the Hansons’ home because Allen lived in Alaska and had not yet retrieved them.
- Using the sale proceeds, the Hansons converted funds into assets exempt under South Dakota law:
  - They purchased two life insurance policies with cash surrender values of $9,977 and $9,978 (just under the $20,000 aggregate exemption limit for such policies under state law).
  - Two days before filing, they prepaid $11,033 on their homestead mortgage held by First National, increasing equity in their exempt homestead.
- The Hansons claimed exemptions for the life insurance cash values and their homestead. The total claimed exempt value was about $31,000.
- First National objected, asserting the transfers and conversions were fraudulent and that the exemptions should be denied.
- The bankruptcy court found no fraudulent intent and allowed the exemptions. The district court affirmed, and First National appealed to the Eighth Circuit.

## Issues

1. Whether the bankruptcy court clearly erred in finding the Hansons lacked actual intent to hinder, delay, or defraud creditors when they sold nonexempt property to family members at appraised value and converted the proceeds into exempt life insurance and homestead equity shortly before filing.
2. Whether the eve-of-bankruptcy conversion of nonexempt assets into exempt assets—particularly through insider sales and continued possession or use—constitutes fraud by itself, or instead requires proof of actual fraudulent intent beyond the timing and family relationship.

## Decision

- The Eighth Circuit affirmed the district court’s judgment affirming the bankruptcy court’s order allowing the exemptions.
- The court held the bankruptcy court’s finding of no fraudulent intent was not clearly erroneous.
- The court rejected the argument that converting nonexempt assets into exempt assets on the eve of bankruptcy, even through sales to relatives, is automatically fraudulent.
- The court concluded that the bank’s evidence (timing, family transactions, and continued storage or limited use) did not compel a finding of actual intent to hinder, delay, or defraud creditors where the sales were at appraised value and the record supported the bankruptcy court’s view of the debtors’ intent.

## Legal Principles

- A debtor may engage in prepetition exemption planning, including converting nonexempt property into exempt property, as long as the debtor does not act with actual intent to hinder, delay, or defraud creditors.
- Whether a debtor acted with fraudulent intent is a question of fact; an appellate court reviews the bankruptcy court’s finding on intent for clear error.
- The objecting creditor bears the burden of proving actual fraudulent intent; suspicion based on timing and insider transactions is not enough without additional evidence showing a sham or improper purpose.
- “Badges of fraud” such as transfers to relatives and proximity to bankruptcy may support an inference of fraud, but they do not require a finding of fraud when the transactions are for fair value and the bankruptcy court credits the debtors’ explanation.

## Conclusion

The Eighth Circuit allowed the Hansons to exempt their life insurance cash values and increased homestead equity because the bankruptcy court’s finding that the Hansons acted without actual intent to hinder, delay, or defraud creditors was not clearly erroneous, and the bank’s reliance on the timing of the transactions and the family relationships did not, on this record, establish fraud.


Hanson v. First National Bank in Brookings, 848 F.2d 866 (1988)