GPSolo Magazine - April/May 2005
Bankruptcy and Your Client’s Collection
Your client lives well. He has an extensive vintage wine collection, two Jaguars, a collection of antique weapons, and a collection of signed posters from the New Orleans Jazz and Heritage Festival spanning the years 1976 to 1988. He particularly likes English pine furniture from the late 18th century, and his living room contains several nice pieces that look terrific on the $15,000 Persian rug he picked up on a trip to Turkey. Sometimes he wheels and deals a bit, buying and selling some of his wines to supplement his income by $5,000 to $10,000 annually. Unfortunately, he’s managed to incur substantial personal debt, and, weary of dodging calls from creditors, he thinks he might want to file for Chapter 7 bankruptcy protection. As usual, you’re targeted to save him from his own excesses while protecting what assets he’s still got from his creditors. Mission impossible? As usual, yes and no.
When it’s time to file the Chapter 7 petition and schedule assets, clearly your client will have to confess an approximate value of the collections he owns. If those assets are hidden now, an objection to discharge under §727 of the Bankruptcy Code is sure to follow from his creditors or, possibly, the Chapter 7 trustee (or Chapter 13 trustee, if your client has decided he can repay his debts under a wage-earner plan). And it might well be granted if, as one hapless debtor did, he sells furs and jewelry valued at $269,695 for $47,000 in cash at the Sands Casino in Atlantic City, New Jersey, and appliances and collections valued at $243,297 to an auctioneer in Philadelphia, Pennsylvania, for $33,000 in cash—and keeps no records. In re Delancey 58 B.R. 762, 768 (Bkrtcy.S.D.N.Y., 1986). If your client is not sure what the value may be, it’s best to describe the items in a footnote and state “value unknown,” rather than overestimating and frustrating the trustee who later finds it impossible to sell the items for that amount. Certainly, underestimating will likewise result in the wrath of creditors, who will no doubt object when the Persian carpet is listed at $200.
Of course, it’s possible that some of the items might be exempt under either federal bankruptcy law or state law, whichever applies in your particular state. Around 34 states have opted out of §522 of the Bankruptcy Code’s exemptions, and some allow a debtor to exempt under either the Bankruptcy Code or applicable state or non-bankruptcy law. These provisions may vary wildly and must be studied carefully. The debtor’s aggregate interest in jewelry, for example, is specifically exempted under §522 up to $1,225 if “held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.” That might not cover the debtor’s wife’s two-carat engagement ring valued at $15,000, but under state law it might be exempt.
Certainly, your client can claim that the antique furniture and the Oriental carpet gracing his living room are household furnishings or household goods under §522. If so, he (and you) must be mindful that the court may not agree. As the 10th Circuit pointed out in an Oklahoma case in which the debtors were bartering their business deals by pledging valuable religious paintings that they claimed were exempt as household furnishings,
The purposes of the exemption statute are to prevent improvident debtors from becoming subjects of charity by preserving to them sufficient definitely classified property that they may maintain a home for themselves, and to prevent inconsiderate creditors from depriving them of the necessities of life. . . . [But] this is not to say that . . . all items of personal property that a debtor uses in his home may be . . . exempted. Each case will be evaluated on its merits with regard to its own particular facts and circumstances to prevent abuses by either creditors or debtors. In re Reid, 757 F.2d 230, 236 (10th Cir. (Okl.), 1985)
Your client also might be able to claim some of the vintage wines as “tools of his trade,” but that exemption would likewise be questionable, depending on how much of his income was derived from his wine-trading hobby.
If your client cannot bear to part with his Jaguars, his wine collection, his antique weapons, and his set of signed Jazz Festival posters—and he probably can’t—he’s still got some options. Most bankruptcy trustees will work with the debtor to allow him or her to buy back the collections via a motion to abandon the property or sell to the debtor for an agreed-upon amount. In fact, because trustees report that it is universally difficult to sell an art collection for anything near its appraised value, and even more difficult to find a buyer for a wine collection at anything over bargain-basement prices, he or she would probably welcome such an offer from the debtor rather than the alternative of abandoning a valuable asset. Those Jazz Festival posters may list at high prices on e-Bay, but they generally aren’t worth nearly as much in a bankruptcy sale.
Once, as is probable, the trustee agrees to your client’s request that he buy the property, a court hearing would be held after notice. If an unhappy creditor files an objection (believing that your client has been living far too luxuriously while avoiding paying his secured creditors), your client may find himself in a bidding war. That’s when the Bankruptcy Court turns into an auction hall. Generally, the major secured creditor will win that war. After all, Greedy Bank will have no qualms about outbidding the debtor—it’s going to get the money back as a secured creditor anyway.
Maybe, instead of keeping the collections, your client thought he could get a better deal by selling them before filing the bankruptcy petition. Nice try, but you should inform him that any such transactions within one year pre-petition, under the guise of “bankruptcy planning,” would come under close scrutiny from the court and the bankruptcy trustee. However, if your client keeps careful records and can trace the proceeds of the sale, avoiding all appearance of fraud, any such sale may withstand the inevitable objections to discharge. It’s preferable that he spend the money to pay bills rather than to take deep-sea fishing trips, though. And if he wants to pay a friend or relative monies they’ve loaned him, make sure you tell him that any such payment within 90 days pre-petition is subject to avoidance by the trustee under §547 as preferential payments. His friends may not appreciate it if he files for bankruptcy fewer than 90 days after paying them. In general, it’s best to sell a collection after, rather than before, bankruptcy, to safeguard the debtor from any objections to discharge or undue attention from the trustee.
Finally, although it doesn’t seem to happen often in reported cases, there is no reason why a debtor could not use a collection to pay off a debt without first converting it to cash. In other words, the equivalent of a “deed in lieu of foreclosure” under common law, and “dation en paiement” under civil law, could work to the debtor’s advantage in negotiations with secured creditors. The official bankruptcy form for Statement of Financial Affairs contains a question concerning whether any “deed in lieu of foreclosure” was executed, so such a ploy is clearly contemplated. Certainly, if the collection was pledged as collateral, the creditor may retain it and sell it to satisfy the debt. If the debtor wants to pay an unsecured creditor by transferring the collection, there may be applicable restrictions under state law or the Uniform Commercial Code. However, it’s something worth considering.
Your client shouldn’t be forced to live without all of his favorite things simply because he filed for bankruptcy protection. If he uses any of his favorite things in his work, or as household furnishings, maybe they’re exempt. If he can afford to buy them back from the trustee, he might be able to cut a deal advantageous both to the bankruptcy estate and to him personally. Selling the collection before bankruptcy is feasible, as long as careful, precise, and honest records are preserved. After bankruptcy it may be harder to do, but there’s more assurance that a bankruptcy discharge will be granted. The debtor is under a duty to disclose assets as accurately as possible and to supplement the schedules later if anything changes. Value either for sale or scheduling purposes may be established by a reputable appraiser, or even by retaining original sales receipts in some cases. And once your client is discharged and granted the “fresh start” that bankruptcy affords, he can start all over again—this time with Lamborghinis instead of Jaguars.
Jennifer M. Stierman practices in the areas of commercial and bankruptcy law with the firm of Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in New Orleans, Louisiana. She can be reached at firstname.lastname@example.org. The author would like to acknowledge the helpful insights of David V. Adler and Ronald J. Hof, both Panel Trustees in bankruptcy cases for the Eastern District of Louisiana, in preparing this article.