MEMORANDUM OPINION
This mаtter comes on upon the filing by C. Jeffers Schmidt, Jr., the trustee herein, of a complaint pursuant to 11 U.S.C. § 548 to set aside a fraudulent transfer of real property. After hearing the Court makes the following determination.
STATEMENT OF THE FACTS
Walter Calvin White, Jr. (White), the debtor herein, and Jean White, the co-defendant herein, were married February 21, 1980. On February 26, 1980, White suffered the entry of a judgment against him obtained by Ralph Edward Davis in the amount of $50,000.00. When Davis executed on that judgment in April and June of 1980, White offered to make payments in settlement of the claim. In August, Davis issued a levy on White’s personal property. At a time while insolvent, White conveyed by deed dated September 9, 1980 real property he owned to himself and Jean White, his wife, as tenants by the entireties with the right of survivorship as at common law. That deed was recorded November 11,1980. In August, Davis had issued a levy on White’s personal property and in November, 1980, Davis threatened to enforce the levy if White failed to commence making substantial payments on the judgment. White filed his petition in bankruptcy on December 9,1980. White claimed the jointly owned real property exempt pursuant to 11 U.S.C. § 522(b)(2)(B). Although the real property is encumbered by several liens it has substantial equity for the benеfit of the general unsecured creditors of the estate if the transfer can be avoided and the exemption denied.
CONCLUSIONS OF LAW
This Court concludes the trustee is justified in bringing this action pursuant to 11 U.S.C. § 548(a) which provides
“[t]he trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor — (1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such trаnsfer occurred or such obligation was incurred, indebted; or (2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation...."
The trustee contends that White, by conveying his real estate to his wife and himself to be held as tenants by the entireties and then by exempting that property pursuant to 11 U.S.C. § 522(b)(2)(B), defrauded and hindered his creditors. If White had not transferred the property it would have been available to thе trustee to satisfy the claims of his creditors. If White had filed a homestead deed available to him under Virginia Exemption statutes, he could only have claimed exempt no more than
*242
$5,000.00 of his equity in the property.
1
By creating a tenancy by the entirety White attempted to immunize the property from the claims of all his individual creditors and render the real property liable solely for the joint debts of both himself and his wife.
Vasilion v. Vasilion,
It is well settled that a debtor may convert nonexempt property into exempt property on the eve of bankruptcy thereby making “... full use of the exemptions to which he is entitled under the law.”
In re Ford,
“.. . merely avails himself of a plain provision of the Constitution or the statute enacted for the benefit of himself and his family. He takes nothing from his creditors by this action in which they have any vested right.... Nor can thе use of property that is not exempt from execution to procure a homestead be held to be a fraud upon the creditors of an insolvent debtor, because that which the law expressly sanctions and permits cannot be a legal fraud.”
Forsberg
at 501, quoting
First Nat. Bank of Humboldt, Neb. v. Glass,
Courts have cited several rationales for justifying the conclusion that the conversion of nonexempt property to exemрt property by an insolvent debtor is not fraudulent per se. First, they note that state law providing for such exemptions is absolute and without exception and in converting debtors simply exercise their rights under state law.
Crawford v. Sternberg,
In enacting the 1978 Bankruptcy Reform Act, Congress acknowledged prior law which permitted debtors to convert nonexempt property into exempt property before filing a petition in bankruptcy and chose to make no change in that law.
4
*243
Cases decided under the 1978 Code recognize the validity of these exemptions
e.g., In re Johnson,
Although courts agree that a debtor’s conversiоn of his nonexempt property into exempt property on the eve of bankruptcy is not fraudulent per se, they conclude that extrinsic circumstances may indicate the commission оf a fraud on a debtor’s creditors.
Johnson
at 654.
See generally,
Resnick, “Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to Purchase or Improve Exempt Property on the Eve of Bankruptcy,” 31
Rutgers L.Rev.
615 (1978). Courts will deny a debtor the еxemption if he obtained the assets pursuant to a scheme to defraud his creditors. A debtor will not be permitted to exempt property which he acquired with funds obtained through fraud.
See e.g., Stoner v. Walsh,
24 Cal.App,3d 938,
Several courts have concluded that motive is an important factor in determining whether the conversion of the assets defrauded creditors. If the debtor effectuated the conversion with the motive to deprive creditors of assets, he committed fraud and the court denied him the exemption.
See, In re Majors,
“In theory, it is logical to distinguish between situations that involve an intent to dеprive creditors of assets and situations in which the debtor’s purpose is actually to acquire the exempt property.
Bankruptcy legislation and state exemption laws were not designed to protect the debtor who acts in bad faith to deprive his creditors of assets. The debtor who obtains exempt property because he has a good faith desire to own such property is not acting with fraudulent intent and, therefore, should be permitted to keep the property free of creditors’ claims.” (footnote omitted.)
Resnick at 638.
In the instant case this Court concludes that Whitе failed to convert his nonexempt property into exempt property. First, it is clear that this is a two party transfer in which the debtor attempted to transform his nonexempt property into exempt property by transferring an interest in that property to another person. The rule which permits conversion to nonexempt property is clearly inapplicable here.
Cf. Butz v. Wheeler,
It is clear that White was insolvent at the time he transferred his interest in the real estate to himself and his wife for which he received nothing of legal value in payment. 6 These facts alone are sufficient for this *244 Court to determine the transfer constituted a fraudulent conveyance pursuant to 11 U.S.C. § 548(a)(2)(B)(i). See, Butz at 88.
The trustee is directed to prepare аnd present to this Court within ten days an endorsed order in conformity with this opinion.
Notes
. Virginia law permits those qualified to claim exempt property or money, the value of which does not exceed $5,000.00. Va.Code Ann. § 34-4 (1982 Cum.Supp.).
. The property becomes immune from process as to all of the debtor’s individual creditors, although no immunity exists as to joint creditors of the debtor and his spouse.
Vasilion
. The Virginia Supreme Court in commenting on the use of tenants by thе entireties statutes to immunize property from the claims of the individual creditors of a spouse stated
“[t]hus if the husband should be engaged in a speculative business enterprise which turns out badly, forcing him to gо into bankruptcy, the property held by the husband and wife together, would not be subject to the claims of his creditors.”
Vasilion
.The Legislative History which accompanies 11 U.S.C. § 522 indicates conversion of nonexempt assets to exempt assets is pеrmissible. “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.No. 92-595, 95th Cong., 1st Sess. *243 360-1, 1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6317.
. The Courts in both In re Mehrer and In re Reed relied on state statutes which barred the conversions.
. Jean White, the debtor’s wife, admitted at trial that at the time of the transfer, her husband had inadequate assets to satisfy his debts.