## Facts

- Hugh and Mrs. Reed filed a Chapter 7 bankruptcy case in the Northern District of Texas.
- In the month immediately preceding the filing, Mr. Reed sold non-exempt personal property, including a gun collection, antiques, interests in Triple B’s Corporation, and gold coins.
- Ten days before filing, Reed sold his entire gun collection to a friend for $5,000 cash.
- The guns, antiques, and corporate interest were sold for about 20% of their estimated value; the gold coins were sold at about market value.
- The sales generated roughly $35,000, which the Reeds used to pay down liens on their Texas homestead, increasing exempt homestead equity.
- The Chapter 7 trustee objected to the claimed homestead exemption, asserting the transactions were designed to hinder, delay, or defraud creditors and should result in denial or limitation of the exemption.

## Issues

1. Whether converting non-exempt assets into exempt Texas homestead equity on the eve of bankruptcy, including sales for substantially less than estimated value, justifies denying or limiting the homestead exemption based on fraud.
2. Whether a bankruptcy court may disallow an otherwise valid state-law homestead exemption as a sanction for aggressive prepetition exemption planning absent proof of actual fraud.

## Decision

- The court overruled the trustee’s objection and allowed the Reeds’ Texas homestead exemption.
- The court held that prepetition conversion of non-exempt assets into exempt homestead equity is generally permissible under Texas law and the Bankruptcy Code absent sufficient proof of actual intent to hinder, delay, or defraud creditors.
- The trustee did not meet the burden of proving actual fraud sufficient to justify disallowing the exemption.
- The court declined to use equitable authority to create an extra-statutory forfeiture of a state-law exemption based solely on disapproval of the debtors’ timing or tactics.

## Legal Principles

- A debtor may convert non-exempt property into exempt property shortly before bankruptcy if the conversion is not accompanied by actual fraud.
- Mere intent to maximize lawful exemptions, including placing value in exempt form, is not itself equivalent to intent to hinder, delay, or defraud creditors.
- The objecting party bears the burden to prove fraudulent intent by adequate evidence; conversion alone is not per se fraudulent.
- Inadequate consideration and sales to friends may be relevant indicia of fraud, but without additional evidence of deceptive conduct they do not justify disallowing a valid homestead exemption.
- A bankruptcy court’s equitable powers do not authorize overriding explicit state-law exemptions without statutory basis; Texas homestead exemptions are construed liberally in favor of debtors.

## Conclusion

The court permitted the Reeds to claim increased Texas homestead equity as exempt even though it resulted from last-minute liquidation of non-exempt assets, because the trustee failed to prove actual fraudulent intent and the court would not disallow a state-law exemption based only on aggressive exemption planning.


In re Reed, 12 B.R. 41 (Bankr. N.D. Tex. 1981)