In re Schwarb Case Analysis

In In re Schwarb, 150 B.R. 470 (Bankr. M.D. Fla. 1992), the bankruptcy court held that moving non-exempt assets into exempt form purely to defeat creditors can cost the debtor the exemption. Chief Judge Alexander Paskay receded in part from his decision earlier the same year in In re Levine, which had held that motive alone never defeats an exemption.

The decision predates the law that governs conversions today. In 1993 the Legislature added sections 222.29 and 222.30 to the exemption chapter. In 2001 the Florida Supreme Court held the constitutional homestead protected even when the debtor bought it to defeat creditors. Schwarb survives as the origin of the intent standard, not as current doctrine.

How the Schwarbs Converted Their Assets

F. Allan Schwarb sold non-exempt real estate for $150,000 in early 1992 and liquidated mutual funds for another $60,000. He used $85,000 of the proceeds to buy paid-up annuities and used the balance to pay off his homestead mortgage. On February 7, 1992, he and his wife Linda filed a joint chapter 11 petition, claiming the annuities exempt under section 222.14 of the Florida Statutes and the residence as their constitutional homestead.

Sir Speedy, Inc. held a pre-petition judgment against Schwarb for $103,092. It objected that the debtors were guilty of fraudulent pre-bankruptcy planning and had forfeited both exemptions. The debtors answered that converting non-exempt assets into exempt assets is proper under the case law, even though the conversion removes the property from the reach of creditors.

The Rule in Levine and Horath

Judge Paskay had twice allowed debtors who converted non-exempt assets before bankruptcy to keep their exemptions. In In re Horath, 116 B.R. 835 (Bankr. M.D. Fla. 1990), an unemployed couple moved $5,000 from savings into two IRAs while creditors pursued them, then filed chapter 7 three months later. The court overruled the trustee’s objection. Congress’s own committee reports permit a debtor to convert non-exempt property into exempt property before filing. When fraudulent intent taints the conversion, the remedy is losing the discharge, not losing the exemption.

The court went further in Weissing v. Levine (In re Levine), 139 B.R. 551 (Bankr. M.D. Fla. 1992). The Levines had converted $440,000 of non-exempt assets into annuities from four insurance companies while they were indebted to a creditor, then filed chapter 7. The trustee sued under Florida’s fraudulent transfer statute, section 726.105, to set the conversion aside.

Judge Paskay dismissed the complaint. A transfer requires a transferor and a transferee, and the Levines still owned everything they had converted, so the fraudulent transfer statute did not apply. Converting non-exempt property into exempt property to place it beyond creditors’ reach would not, without more, cost a debtor an exemption. The opinion warned only that extrinsic evidence of fraudulent intent could bar the debtor’s discharge.

Receding From Levine After Further Research

In Schwarb, Judge Paskay re-read the legislative history that Levine and Horath had relied on. The committee reports say a debtor may convert non-exempt property into exempt property before filing, and that the practice is not fraudulent as to creditors. The hearings behind those reports read differently. They center on a letter from Bankruptcy Judge Phelps, who accepted that conversion on the eve of bankruptcy is not, standing alone, fraudulent. Judge Phelps condemned deliberately enlarging exemptions “in contemplation of bankruptcy” as cheating.

From that history the court concluded that Congress never approved bankruptcy planning without reservation, and that conversion is allowed “only within limits.” The limit is intent, proved by circumstance. An exemption may be denied on a showing, by extrinsic evidence, that the debtor converted non-exempt property with the specific intent to defraud creditors.

The order names two kinds of extrinsic evidence. One is a debtor who began converting only after deciding to file and consulting a bankruptcy attorney. The other is a judgment creditor about to levy on the non-exempt property when the conversion happened.

Applying that standard, the court found the Schwarbs had undertaken a systematic conversion of assets to protect them from Sir Speedy, a judgment holder ready to collect. The order closes by receding in part from Levine. Proof that the debtor converted an asset into exempt form for the specific purpose of putting it beyond creditors’ reach is now enough to defeat the claim.

An Amended Order and a Divided District

Two orders, three weeks apart, make up the Schwarb decision. The October 29, 1992 order granted summary judgment and sustained the objection, on the mistaken assumption that Sir Speedy had moved for summary judgment. The amended order acknowledged that the motion was the debtors’ own. It readopted every finding and conclusion, vacated the ruling itself, denied the debtors’ motion, and reset the objection for a pre-trial conference. Whether the Schwarbs’ exemptions survived does not appear in any later decision.

Another judge in the district declined to follow the new standard. Judge Funk faced similar facts in Crews v. First Colony Life Insurance Co. (In re Barker), 168 B.R. 773 (Bankr. M.D. Fla. 1994). A bank had sued the elderly debtor, and he had consulted a bankruptcy attorney. He then sold stock, bought a $14,007 annuity, and filed chapter 7 five days later.

The Barker court rejected the Schwarb approach because the Bankruptcy Code contains no language allowing a court to disallow an exemption that is valid under state law, and creditors hold other remedies. The same opinion recorded that other courts in the district were denying exemptions on a finding of intent. The exemption stood, but the same order avoided the annuity purchase as a fraudulent transfer under section 548 and denied the debtor his discharge.

The 1993 Statutes and Havoco

The Florida Legislature added sections 222.29 and 222.30 to chapter 222 in 1993, the year after Schwarb. Section 222.30 took effect on October 1, 1993. It makes a debtor’s conversion of non-exempt assets into exempt form a fraudulent asset conversion when the debtor intends to hinder, delay, or defraud a creditor.

A creditor can avoid the conversion, and a judgment creditor can levy on the converted asset. The action must be brought within four years of the conversion. Section 222.29 provides that no exemption granted by chapter 222 is effective if it results from a fraudulent transfer under chapter 726.

A federal court soon treated section 222.30 as codifying the existing case law rather than changing it. The court in Bank Leumi Trust Co. of New York v. Lang, 898 F. Supp. 883 (S.D. Fla. 1995), denied a section 222.14 annuity exemption, following Schwarb and In re Mackey, while the same debtors’ homestead survived.

The conversion fight in Levine itself later went the other way. The Eleventh Circuit held in Levine v. Weissing, 134 F.3d 1046 (11th Cir. 1998), that section 726.105 can be invoked to set aside the Levines’ $440,000 conversion into annuities, and it said that homestead precedent had little bearing on the appeal.

The homestead boundary became law in Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001). Sections 222.29 and 222.30 reach only the exemptions chapter 222 provides. The homestead exemption comes from the Florida Constitution, so a home acquired with non-exempt funds stays protected even where the debtor intended to defeat creditors.

The intent inquiry Schwarb introduced now runs through the statute against every chapter 222 exemption. A court applying section 222.30 in In re Rensin, 600 B.R. 870 (Bankr. S.D. Fla. 2019), required an intentional conversion by the debtor himself. And In re Jennings, 332 B.R. 465 (Bankr. M.D. Fla. 2005), disallowed the exemption for a $500,000 annuity the debtor purchased while a personal-injury suit against him was already pending.

What In re Schwarb Means for Planning Today

Timing and circumstance decide whether an exemption acquired on the eve of a bankruptcy or a collection action holds. Section 222.30 now asks the question Schwarb asked. The same facts that betrayed intent in 1992 still betray it: a conversion begun once the debtor had decided to file or had consulted bankruptcy counsel, or made while a judgment creditor prepared to levy. A conversion by itself is not evidence of that intent. Exempt investments made before any claim exists, as part of ordinary financial planning, stand on different ground.

The Barker decision adds a caution: beating the exemption objection can still leave the debtor worse off. The annuity there survived as exempt, and the debtor lost the funds anyway through fraudulent transfer avoidance and lost his discharge with them.

The statutory exemptions for annuities, life insurance, and wages all sit inside chapter 222, where sections 222.29 and 222.30 apply; the constitutional homestead does not. The fraudulent transfer case law page gathers the decisions applying section 222.30, and the fraud limit on chapter 222 exemptions runs through the Florida exemption decisions. As the start of the intent-based line, Schwarb sits with the other Florida asset protection case law decisions that bankruptcy courts apply as Florida law.