Patricia Clark Snyder CASE NO. 84-00169


VS. ADV. NO. 84-0151



This action is before the court for decision.




During late 1983 and early 1984, National Bank of Lancaster (Lancaster Bank) renewed four unsecured loans totaling $34,649.51 with the debtor Kenneth Terry Snyder (Snyder) as follows:

Amount Loan No. Renewed Due Date

$19,536.00 40843-1 March 3, 1983 March 3, 1984

1,000.00 41392-4 November 18, 1983 May 18, 1984

7,000.00 41554-4 December 10, 1983 June 10, 1984

7,113.51 43261-1 February 11, 1984 February 11, 1985

The number following the dash indicates the number of times that particular note was renewed. For example, loan number 40843-1 was renewed one time; number 41392-4, four times. The November and December, 1983 loans were marked for "bus (business operating)" and "operating" purpose, respectively, and no security interest was given. The March, 1983 and February, 1984 loans were marked for "personal" purpose, and the form used showed Snyder as giving a security interest "in my deposit accounts and other rights to the payment of money from you."

Snyder submitted one financial statement to the bank dated November 14, 1980 and another dated March 6, 1983. On the 1983 financial statement, "Antiques & Furniture" were valued at $43,000, and all assets were valued at $183,233.

March 9, 1984 Snyder and his wife, Patricia Ann Snyder, filed for relief under chapter 7 of the Bankruptcy Code in this court.

On June 7, 1984 Lancaster Bank took the deposition of Kenneth Snyder and on June 22, 1984 filed objections to the following items of property included in the list of property claimed as exempt in Schedule B-4 of the Snyders' Schedules of Assets and Liabilities: an annuity for Kenneth Snyder, purchased from Fireman's Fund, claimed exempt pursuant to KRS 427.150, in the amount of $14,000; an Individual Retirement Account (IRA) for Patricia Snyder, maintained through J.J.B. Hilliard, W.L. Lyons, Inc. (Hilliard & Lyons), claimed exempt pursuant to KRS 427.150, in the amount of $1,247.50; and an IRA for Kenneth Snyder, maintained through Hilliard & Lyons, claimed exempt pursuant to KRS 427.150, in the amount of $1,990, for a total of $17,237.50.

In support of its objections, Lancaster Bank stated that "(n)either the Annuity or the Individual Retirement Accounts maintained by the debtors are reasonably necessary, or necessary whatsoever, for the support of the Debtors or their dependents and therefore should be disallowed as exemptions" and that "(t)he exemptions in issue were created by the Debtors immediately prior to the filing of their bankruptcy case with actual intent to hinder and delay the Bank and prevent it from recovering any dividend against its claim in this case."

In conjunction with its objections, Lancaster Bank moved the court for an order consolidating a hearing on its objections with a trial on its complaint against Kenneth Snyder which sought an exception to discharge of debts owed Lancaster Bank pursuant to 11 U.S.C. 523(c). An order consolidating was entered on June 25, 1984.

Lancaster Bank's complaint against dischargeability, filed on June 27, 1984, asked for nondischargeability of Kenneth Snyder's indebtedness in excess of $35,000 because of the financial statement dated March 6, 1983 given by Snyder to Lancaster Bank and upon which the bank allegedly relied in renewing the four personal, unsecured notes. The financial statement was alleged to be materially false in that "Snyder deliberately stated in the financial statement that he owned 'antiques and furniture' with a fair market value of $43,000.00, all the while knowing that the true value of his 'antiques and furniture' was in fact less than $5,000.00.

On October 13, 1988 the court conducted a hearing on Lancaster Bank's objections to exemptions and a trial on its dischargeability complaint. At the conclusion of the hearing and trial, the court took the matter under submission.

At trial, testimony was that the debtors began doing business with Lancaster Bank in late June of 1979. During the course of that relationship, the bank held secured and unsecured notes with the debtors, the highest balance due in March and April of 1982 at $107,649 and the lowest in February of 1984 at $39,649.51. The bank obtained financial statements from Snyder dated November 14, 1980 and March 6, 1983 which he prepared.

The testimony and exhibits at trial indicated that on March 4, 1983 Snyder wrote a check to Lancaster Bank in the amount of $19,965.98 for "interest and notes." On that same day Snyder deposited $19,933.93 in his checking account at Lancaster Bank. He executed a note for $19,536 with the bank dated March 3, 1984. The check and deposit were processed by the bank on March 7, 1984. Many questions concerning these transactions were left unanswered.

However, the sequence of events appears to be that on March 4, 1983 Billy Lanham, a loan officer at Lancaster Bank, received a payment of $3,125.76 from Snyder as interest on loan number 40843-1, the renewal note of some $19,000. A Commercial Loan Transaction ticket prepared by Lanham shows the effective date of renewal as March 3, 1983. Testimony at trial was that Lanham backdated the effective date of the renewal when interest due for the previous year was paid in full. Thus, March 4, 1983 was the date Lanham waited on Snyder, received the payment of interest in full, and prepared the paperwork for processing.

Another Commercial Loan Transaction ticket concerning loan number 40843-1 was prepared on March 7, 1983 by Ann Irvin, a loan processing clerk at the bank; it also shows the effective date of renewal as March 3, 1983. March 7, 1983 was the date Irvin received the paperwork from Lanham for processing of the loan. Testimony was that Lanham apparently held final processing of the renewal until Snyder's financial statement was received. The effective date of the loan then was backdated to March 3, 1983, the maturity date of the original note.

Lanham testified that the bank "relied upon first of all me knowing Ken Snyder, his character, his credit worthiness. Second of all, we relied upon a financial statement (the financial statement dated March 6, 1983)."

Lanham explained that he had known Snyder all his life, they had grown up together, and Lanham considered them to be friends. Lanham stated that from 1980 to 1984 when Snyder filed bankruptcy Snyder had a good reputation for paying his debts with the bank. Lanham went on to say that the bank had a relationship with Snyder's grandparents, parents, aunts, uncles, sister and that they all consistently paid their debts to the bank. Lanham also testified that he worked for Snyder as a real estate agent from January or February of 1980 until he went to work at Lancaster Bank in November of 1980 and continued for a time thereafter to work for him "on the side."

In the financial statement dated March 6, 1983, Snyder showed the total value of assets as $183,233; he listed realty valued at a total of $104,000 including his home valued at $86,000 and personalty including "Antiques & Furniture" valued at $43,000. Thus, antiques and furniture were shown as having 50% of the value of Snyder's house and 23% of the value of his total assets.

Lanham further testified at trial that the bank accepted Snyder's evaluation of antiques and furniture because Snyder's parents "were in the antique business," Snyder had conducted antique auctions, Lanham understood Snyder to have acquired some antiques as a result of disposition of his mother's estate, and Snyder "put them on the paper, basically. It is on the financial statements." Lanham went on to say that the bank "would not have renewed them nor would we have made any more loans without trying to obtain some type of collateral, co-signer, some other type of property as collateral," if the bank had realized that Snyder's net worth was overstated by some $37,000 in the financial statement. Lanham testified that under those circumstances if the bank could not have acquired collateral or a co-signer, it would have sought collection on outstanding notes. Lanham stated that Snyder did not at any time in March of 1983 inform Lanham that he was using the insured value of personalty rather than the actual value and that when Snyder signed the renewal note in February of 1984, he did not discuss his financial condition or that he was planning to file bankruptcy.

Snyder testified at trial that the $43,000 shown on his financial statement represented the insured value of his furniture and antiques. When asked if he explained that the value given represented the insured rather than the true value, he explained, "When I took a statement in, Billy had asked me to bring it back. He told me he needed one for his files. So I took it back in and I handed it to him. There was no discussion of the financial statement that day." "Billy told me when I renewed the note that the auditors hadn't been in for a while and they needed a financial statement for the files." Snyder testified that he obtained a homeowner's insurance policy in February of 1983 which listed personal property coverage at $43,000. The Homeowners Declaration Premium Statement produced at trial indicated that policy, covering the period from March 1, 1983 to March 1, 1984 and showing personalty coverage of $43,000, was mailed to Lancaster Bank.

An amendment to the Snyders' schedules was filed on May 25, 1984 which itemized household furnishings and fixed the value at $5,730 or $37,270 less than listed on the financial statement, an overstatement of 15% but which even if adjusted to "fire sale" value would have left Snyder with a positive net worth. As to this assignment of value, Snyder testified, "I went back to the auctions that we had and tried to come up with a value on it. " Snyder referred to the sale of personal property as a "fire sale" which he defined as "something that has to be sold immediately, whatever you can get for it, it sells for."

Snyder also testified at trial that in February, 1984 he obtained a loan of $24,000 from the Peoples Bank of Paint Lick (Peoples Bank) which he deposited in his checking account at that bank; the loan was secured by certificates of deposit with Lancaster Bank. $10,000 of those funds was used to purchase a house in Lexington. Snyder described the process:

At that time, I had been talking to Richard Clay about filing bankruptcy and he advised me to convert assets into, he told me some things I could do with it, like $10,000 I could carry through a bankruptcy by converting it into a home. We wanted to move away from Lancaster. We wanted to move to Lexington. We had for some time. The house had been on the market for over a year and I took $10,000 of it and purchased us a home over here.


Exhibits produced at trial included checks written on an account at Peoples Bank dated February 10, 1984 in the amount of $14,000 to Fireman's Fund American Life Insurance Company for an annuity; February 27, 1984 in the amount of $500 to the Snyders' attorney for consultation and checks written on an account at First Security National Bank & Trust Company, Lexington, Kentucky on March 1, 1984 in the amount of $2,487.50 to Hilliard & Lyons for a 1984 IRA contribution; March 5, 1984 in the amount of $750 to Hilliard & Lyons for a 1984 IRA contribution. When questioned about those checks, Snyder responded, "Yes, I was converting my assets into exempt items." "He (Snyder's attorney) advised me to convert my assets into exempt items." "It was an attempt on his advice to convert it to exempt items. The annuities and IRA's really were intended for a retirement for my wife and I." "It was really the---well, my mother died earlier and my dad died in 1982. It was the inheritance, what really I could convert to something that I could convert to the retirement program for my wife and I." Snyder was approximately 36 years old and his wife, 35 years old when the annuity and IRAs were purchased. The Snyders have two children. Snyder has a Bachelor's degree in Business Administration and has worked as a self-employed real estate agent; his wife has worked as a housewife and real estate agent.

In tracking Snyder's financial condition prior to filing bankruptcy, evidence at trial was that Snyder's gross income for the year 1983 and January and February, 1984 was nearly $100,000. It was comprised of almost $21,000 in salary, $9,500 in real estate commissions, $22,000 in gross cash receipts from the sale of a piece of property located at Dale Hollow, and $45,000 in inheritance from his father's estate.

When questioned about the status of the annuity, Snyder stated that it had been cashed because he was unemployed "from October 9th until the 1st of May of this year, October 9th of last year." When asked if he discussed cashing the annuity with counsel, Snyder responded, "I believe that I did talk to him and told him that I needed funds. Those were some that I could get and I did receive them." In responding to questions concerning the status of the IRA accounts, Snyder answered, "A couple of weeks ago when my attorney was trying to negotiate a settlement, I placed an order to cash those in. I have not received the funds from those yet."

At his deposition given June 7, 1984 in response to a question that the reason for opening the two IRA accounts and purchasing the annuity was to "shield" that money from his creditors, Snyder responded, "Not necessarily to shield them. He (his attorney) was telling me that they would possibly be an exempt asset." After further cross-examination, when asked if he made a "conscious decision to try to shield the money" from Lancaster Bank, Snyder answered, "Yes."

On October 28, 1988 an order was entered prohibiting the debtors from "pledging as collateral, cashing or otherwise liquidating or depositing" the funds held in the IRAs. If the debtors had been successful in their efforts to liquidate the IRAs, they were ordered to deposit all funds received in an interest-bearing escrow account pending ruling from the court for accrued interest. The order also reserved Lancaster Bank's right to pursue "all claims, or causes of action, against any and all parties responsible for the funds lost as a result of the Debtors liquidating properties claimed as exempt, but which were subject to the objections of the Bank and/or the Trustee."


Concerning the creditor's objections to claimed exemptions, Lancaster Bank asserts that an IRA, as a matter of law, is not exempt because it is neither specifically referred to in the Kentucky exemption statute Snyder is relying on nor is it a "similar plan or contract" within the meaning of the statute. KRS 427.150(1)(b) reads:

An individual is entitled to exemption of the following property to the extent reasonably necessary for the support of him and his dependents in addition to property totally exempt under subsection (2) of this section:

Assets held, payments made, and amount payable under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract, providing benefits by reason of age, illness, disability, or length of service. (Emphasis added.)

Lancaster Bank takes exception to a case out of the Western District of Kentucky by Judge G. William Brown, In re Worthington, 28 B.R. 736 (Bankr. W.D.Ky. 1983), which holds that the language "similar plan or contract" includes IRAs as exempt property. The bank argues that decision is contrary to decisions from other jurisdictions and cites Dicken, Is an IRA Exempt Property Under the Kentucky Exemption Statute KRS 427.150(1)(b)?, 73 Ky.L.J. 1127 (1984-1985), a Kentucky law journal article opposing the Worthington decision. To summarize the bank's position, it asserts an IRA should not be considered a "similar plan or contract" because the debtor may control the assets. The bank argues that just as Snyder cashed his annuity after filing bankruptcy, he could cash the IRAs.

This court accepts Judge Brown's reasoning and conclusion in Worthington: Debtor control over assets is not the determinant of whether exempt status exists; the language of the statute is the determinant. In addition, this court notes that 11 U.S. section 522, which allowed Kentucky to "opt out" of federal exemptions and required Snyder to claim state exemptions, contains language which if not identical is certainly reminiscent of the Kentucky exemption statute in question here. It provides for exemption of "payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." (Emphasis added.) Federal and Kentucky law exempt an annuity, which in this case Snyder acquired and cashed. Just as the debtor may exercise control over an annuity so may he with an IRA. The element of control is not crucial to a finding of exemption. An annuity is specifically exempted; an IRA, although not specifically denoted in the statute as exempt, should be as a "similar plan or contract." As for contrary decisions in other jurisdictions, Judge Brown wrote in Worthington:

The court is not unmindful of bankruptcy decisions which have addressed this question under other appropriate state exemption statutes, but since this court of necessity must look to the Kentucky exemption statutes to resolve the issue herein, the precedents expounded are neither compelling nor controlling in the instant case.

Having found the IRAs exempt as a matter of law, the court must now look to the issue of whether the annuity and IRAs are "reasonably necessary" for the support of Snyder or his dependents. Lancaster Bank argues they are not. In Worthington Judge Brown stated only that "in view of its modest amount," $5,959.68, the test of reasonable necessity had been met. However, in another opinion concerning IRAs, In re Fisher, 63 B.R. 649 (Bankr. W.D.Ky. 1986), Judge Brown discussed the "reasonably necessary test":

To determine if the reasonably necessary test has been meet, the court must examine all of the facts and circumstances including the debtor's age, earning capacity, present and future financial needs, ability to insure against future disruptions in earning capacity, and his ability to reestablish a retirement fund.

He went on to say:

Our task is to attempt to interpret the purpose of the exemption statute, which we believe is to afford certain protection to debtors upon their retirement or disability. The purpose of exemptions is " provide sufficient assets to enable the debtor to make a fresh start in accumulating post-bankruptcy wealth for future support". Dicken, Is an IRA Exempt Property Under the Kentucky Exemption Statute K.R.S. Section 427.150(1)(b)?, 73 Ky.L.J. 1127 (1984-1985); See also In re Hahn, 5 B.R. 242, 244 (Bankr.S.D.Iowa 1980).

Judge Brown found that the creditor, in objecting to the debtor's claimed exemptions in a Keogh plan, an IRA, and a profit-sharing plan and trust, had not met its burden of demonstrating that the total net value of the funds, $69,072.86, was not reasonably necessary for the support of the debtor and his dependents where the debtor was a 61 year old physician who in all probability had but a few more years to practice medicine and was in bankruptcy after 25 years of practice.

The proof before this court is that at the time of the hearing, October of 1988, Snyder, having been a self-employed real estate agent with a Bachelor's degree in Business Administration, was 40 years old with a wife and two children; that his gross income for 1983 and January and February of 1984 was about $100,000, the source of almost half of which was inheritance from his father's estate; and that the annuity and IRAs totaled some $17,000. (Snyder testified that the annuity, purchased for $14,000, had been cashed at the time of the hearing to cover living expenses during Snyder's seven months of unemployment.) Given these facts, it is the opinion of this court that Lancaster Bank has not met its burden of demonstrating that the amount claimed as exempt is not reasonably necessary for the support of the debtor and his dependents upon his retirement or disability.

The last issue concerning the bank's objection to claimed exemptions is whether the annuity and IRAs were created immediately prior to filing of the debtors' bankruptcy case with actual intent to prevent the bank from recovering on its claim against Snyder. The debtor was candid, both in deposition and at trial, when explaining the circumstances under which the annuity and IRAs were purchased; he stated that he was attempting on advice of counsel "to convert my assets into exempt items."

Exemption planning clearly was considered by the House and Senate: As under current law, the debtor will be permitted to convert nonexempt property before filing a bankruptcy petition. The practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law. H.R.Rep.No.595, 95th Cong., 1st Sess.361 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6317; S.Rep.No. 989, 95th Cong., 2d Sess. 76 (1978), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5863.


The rule is that mere conversion of nonexempt property to exempt property for the sole purpose of placing it out of the reach of creditors is permissible. However, if the debtor is shown by extrinsic evidence to have acted with intent to defraud creditors, exemption planning is not permissible. In re Norwest Bank Neb., N.A. v. Tveten, 848 F.2d 871 (8th Cir. 1988). The rule is simple enough to state but difficult to apply. Compare Tveten with In re Hanson, 848 F.2d 866 (8th Cir. 1988), a case decided the same day as Tveten, in which a married couple used approximately $55,000 in proceeds from the sale of assets to prepay their home mortgage and to purchase exempt insurance policies with cash values and the court found no fraudulent intent. In Tveten the debtor physician owed creditors approximately $19,000,000 and converted $700,000 of assets to exempt property and the court found fraudulent intent. A debtor is allowed a fresh start but not a head start.

In Hanson the creditor did not establish any indicia of fraud:

(T)he Hansons did not borrow money to place into exempt properties; they accounted for the cash they received from the sales; they had a preexisting homestead; and they did not obtain goods on credit, sell them, and then place the money into exempt property. They sold the property for its fair market value and then used this money to take advantage of some of the limited exemptions available under South Dakota law on the advice of counsel.

In Tveten the court cited abuse of protections permitted by the Bankruptcy Code given the circumstances under which Tveten converted his property:

His awareness of Panuska's judgment against him, of several pending lawsuits, his rapidly deteriorating business investments, and his exposure to extensive liability well beyond his ability to pay[.]

This court finds no extrinsic evidence of intent to defraud creditors in the debtor's conversion of nonexempt assets to exempt assets on the eve of bankruptcy. Snyder candidly testified in deposition and at trial that upon the advice of counsel he converted exempt assets into exempt assets. Although Snyder did testify at trial that he borrowed money from Peoples Bank, using certificates of deposit at Lancaster Bank for security, and then used $10,000 of the $24,000 borrowed to purchase a home in Lexington, the claimed homestead exemption is not at issue here. The court has no evidence before it as to how the remaining $14,000 was used.

Finally, concerning Lancaster Bank's assertions that Snyder's remaining debt of some $34,000 should not be discharged under section 523 of the Code because the financial statement dated March 6, 1983 was false, 11 U.S.C. section 523(c) states that the debtor shall be discharged from a particular debt unless the court determines the debt should be excepted from discharge under other specified sections which include the provision applicable here, 11 U.S.C. section 523(a)(2)(B), the "false financial statement" provision. That section does not allow for discharge of a debt for an extension, renewal, or refinancing of credit, to the extent obtained by:

use of a statement in writing--

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive[.]

Lancaster Bank alleges the March 6, 1983 financial statement was materially false because the debtor valued his "Antiques & Furniture" at $43,000, the insured rather than the actual value. The bank relies on the fact that Snyder a year later, at the time of filing his petition for relief under the Bankruptcy Code, valued his personalty at approximately $37,000 less than the value given on the financial statement. The amount of difference in values is certainly substantial. However, Lancaster Bank has not shown by clear and convincing evidence that Snyder intended to deceive the bank. Furthermore, the court is not persuaded that the bank, if it relied at all on the financial statement, reasonably relied on it. See In re Phillips, 804 F.2d 930 (6th Cir. 1986). Lanham's testimony at trial was that the bank "relied upon first of all me knowing Ken Snyder, his character, his credit worthiness. Second of all, we relied upon a financial statement." The court is also influenced by the fact that Snyder's Homeowners Declaration Premium Statement indicated that the policy was mailed to Lancaster Bank; that statement showed personalty coverage of $43,000. Therefore, even if Lancaster Bank relied on the March 6, 1983 financial statement in renewing loans (and certainly the court questions whether the bank relied at all on the finanacial statement in renewing the $19,000 note, given the confusion surrounding that transaction), the bank knew or should have known that Snyder was valuing his personalty by insured value, 1/2 of the value of the realty, rather than actual value. As stated in In re Hunt, 30 B.R. 425 (Bankr. M.D.Tenn. 1983), standards as to nondischargeability of debts by reason of fraud are to be strictly construed in favor of the debtor. In this case any doubt must be resolved in favor of the debtor.


By the court -







Copies to:


Steven L. Spalding

Richard Clay

Jerry D. Truitt