The First Circuit, in Stornawaye Financial Corporation v. Hill (In re Hill), decided a matter of first impression when it determined that a debtor, who had fraudulently transferred real estate to his spouse, but later had the property re-conveyed back to him before filing bankruptcy was entitled to a homestead exemption in the property.
Prior to filing bankruptcy, Hill transferred his interest in his home to his wife at a time when he owed money to creditors. One of the creditors, Stornawaye Financial, sued Hill and asserted that Hill fraudulently transferred his real estate. Hill obtained advice from his attorney and had the real estate transferred back to himself, then filed a Chapter 7 bankruptcy petition. The bankruptcy court held that Hill's fraudulent transfer caused him not to be entitled to the homestead exemption; the Bankruptcy Appellate Panel reversed the bankruptcy court. The First Circuit affirmed the Bankruptcy Appellate Panel, and, in the process, addressed an issue which has plagued debtors' counsel for yerars - whether reversing a fraudulent transfer would enable a debtor to the benefits of an exemption (or a discharge) that a debtor would not otherwise be able to claim, had the fraudulent transfer not be undone.