Peter J. Woodford

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
In Re
PETER J. WOODFORD, 	Chapter 13
Debtor 	Case No. 06-10437-JNF
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
BLACKSMITH INVESTMENTS, LLC.,
Plaintiff
v. 	Adv. P. No. 06-1233
PETER J. WOODFORD
Defendant
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
MEMORANDUM
I. INTRODUCTION
The matter before the Court is the Complaint filed by Blacksmith Investments, LLC
(“Blacksmith” or the “Plaintiff”) against the debtor, Peter J. Woodford (“Woodford” or the
“Debtor”). Through its Complaint, Blacksmith seeks, pursuant to 11 U.S.C. § 523(a)(2)(A),
to except from discharge an 	obligation relating to an “Agreement for Judgment and
Issuance of Execution” (“Agreement for Judgment”) executed by the Debtor before the
commencement of his Chapter 7 case. Pursuant to the Agreement for Judgment, the Debtor
and MacSteel Erectors, Inc. (“MacSteel”), a now-defunct corporation that was wholly
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owned by the Debtor, agreed to the entry of judgment, jointly and severally, in the sum of
$200,000. The Agreement for Judgment pertained to Counts II, III, IV, and V of a Verified
Complaint which Blacksmith filed against Boston Steel & Precast Erectors Holdings Trust,
Boston Steel and Pre-Cast [sic] Erectors, Inc., Kathleen MacInnis, MacSteel, and Woodford
in the Suffolk Superior Court Department of the Trial Court. 	In that proceeding,
Blacksmith contended, among other things, that the Debtor conspired with Bernard
MacInnis, Jr. (“MacInnis”), who served as one of two officers of Boston Steel and Precast
Erectors, Inc. (“BSPE”), to create MacSteel and to transfer all of BSPE’s assets to MacSteel
to avoid paying its creditors.
The Court consolidated trial of Blacksmith’s Complaint with its “Objection to
Debtor’s Exemption of Retirement Annuity.” On Schedule C-Property Claimed as Exempt,
the Debtor initially chose the federal exemptions under 11 U.S.C. § 522(b)(2) and claimed
the annuity as exempt in the sum of $205,796.72, referencing 11 U.S.C. §§ 522(d)(10)(E),
(d)(12), as well as 11 U.S.C. § 541(c)(2). Blacksmith objected to the claim of exemption.
Following Blacksmith’s objection to his exemption of the annuity, the Debtor moved to
amend Schedule C and filed an Amended Schedule C on April 24, 2006, electing the
Massachusetts exemptions pursuant to 11 U.S.C. § 522(b)(3), and specifically claiming the
annuity exempt pursuant to Mass. Gen. Laws 234, § 34A [sic]. Blacksmith never filed an
objection to the Debtor’s amended Schedule C.
On January 13, 2009, the Court conducted a trial at which two witnesses testified
and seven exhibits were introduced into evidence. 	Following the trial, the parties
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submitted briefs. The issues presented are whether certain transfers, which the Debtor
conceded were fraudulent transfers voidable under Mass. Gen. L. Ch. 109A, § 5(a)(1) as
part of the Agreement for Judgment, amounted to a debt for money, property, or services
obtained by “false pretenses, a false representation, or actual fraud” which would except
the $200,000 debt from discharge under 11 U.S.C. § 523(a)(2)(A); and whether the Debtor
should be denied his claim of exemption with respect to the annuity because he borrowed
funds from his annuity based upon a false representation.
The Court now makes its findings of fact and conclusions of law in accordance with
Fed. R. Bankr. P. 7052.
II. FACTS
BSPE was in the business of erecting large scale buildings and structures. It was
organized on November 21, 2001 and dissolved involuntarily on May 31, 2007. MacInnis
served as president, treasurer and sole director of BSPE, and his spouse, Kathleen
MacInnis, served as the assistant treasurer.
On January 15, 2002, BSPE entered into a transaction whereby it purchased certain
assets, including tools and equipment, from Boston Steel Erectors, Inc. (“BSE”). Following
the transaction, BSPE entered into a consulting contract with Robert J. Saraceno
(“Saraceno”), BSE’s president and treasurer. Saraceno testified that BSPE granted him a
security interest in all assets of BSPE.
Approximately two weeks after the sale transaction, on January 29, 2002, BSE,
through Saraceno, and BSPE, through MacInnis, as well as Boston Steel Erectors Holdings
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Trust and Boston Steel & Precast Erectors Holdings Trust, executed and delivered a
Demand Revolving Line of Credit Note (the “Note”) in the amount of $1,200,000 to
Citizens Bank of Massachusetts (“Citizens”). The Note required monthly payments and
the full outstanding balance was due and payable on demand. The Note was secured by
a lien on all of assets of BSPE and Boston Steel & Precast Erectors Holdings Trust and was
guaranteed by Saraceno and MacInnis.
The Debtor, a union ironworker, had been an employee of BSE since the late 1990s
and became an employee of BSPE in 2002. During the course of his employment, he had
advanced to the position of foreman and had become involved in estimating jobs, using a
computer program owned by BSPE for that purpose.
According to Saraceno, BSPE had sales, “in the neighborhood of six, seven million
dollars,” and employed about 110 workers. Despite its sales, in early 2003, it encountered
serious financial difficulties. Saraceno advised MacInnis to refrain from drawing down
BSPE’s line of credit with Citizens and to concentrate on collection of its accounts
receivable. On or about August 13, 2003, BSPE stopped making payments to Citizens.
Facing unemployment, the Debtor was receptive to MacInnis’s idea to start a new
company. With the assistance of MacInnis, the Debtor incorporated MacSteel on April 11,
2003. The Debtor was the sole officer and director of MacSteel, which employed MacInnis.
In addition to shepherding the Debtor through the process of obtaining an attorney to
incorporate MacSteel, MacInnis assisted him in opening a bank account for the company
at Sovereign Bank, and both he and MacInnis had check signing authority.
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MacSteel appropriated the tools, equipment, office files, computers and computer
programs, including billing and estimating software, owned by BSPE for no consideration.
Further, MacSteel used BSPE’s office before moving its operations to the basement of
MacInnis’s home. MacSteel did not pay rent to MacInnis for use of space in the basement.
MacSteel also employed BSPE’s former office assistant, Renee Coyne, whom MacSteel paid
“under the table.” The Debtor also caused MacSteel to complete one of BSPE’s contracts
without any rebidding of the job. 	The Debtor received compensation in the sum of
$130,000 from MacSteel. MacSteel eventually paid MacInnis the same salary.
In order to fund MacSteel’s operations, the Debtor borrowed money from MacInnis.
Additionally, he borrowed $50,000 from his annuity with the Iron Workers District Council
of New England by representing that the purpose of the loan was to purchase a residence
rather than to fund his new business. The Debtor repaid the loan in full in 2005.
As noted, MacSteel operated from BSPE’s Saugus office, but later moved to
McGinnis’s basement. Saraceno visited BSPE’s Saugus office to collect receivables and had
the opportunity to observe operations. It is unclear whether he realized that MacSteel was
utilizing BSPE’s furniture, printers, computers, and software located there for its business
operations. In March of 2004, MacSteel changed the location of its principal office from
MacInnis’s basement to Malden, Massachusetts.
The 	Debtor 	had 	no 	experience 	operating 	or 	managing 	a 	company 	before
incorporating MacSteel. He continued with his responsibilities as foreman and relied upon
MacInnis to assist him with office work and estimating jobs for fabricators. While the
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The statute provides: “(a) A transfer made or obligation incurred by a debtor is1
fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer
was made or the obligation was incurred, if the debtor made the transfer or incurred the
obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor.
. . .” Mass. Gen. Laws ch. 109A, § 5(a)(1).
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Debtor’s self-interest in remaining employed and receiving a lucrative salary were evident
from his testimony, his lack of sophistication with respect to business matters also was
evident.
On August 14, 2003, after BSPE defaulted on the Note, Citizens delivered a written
demand for payment to BSPE. It also demanded payment from Saraceno on his guaranty.
Blacksmith paid the full balance due under the Note, and, in consideration for repayment,
Citizens, on November 6, 2003, executed an Allonge pursuant to which it assigned to
Blacksmith all its rights under the Note. The principal amount due under the Note as of
August 29, 2003 was $387,100, exclusive of interest, late charges, costs and expenses.
On or about February 23, 2004, Blacksmith commenced an action in Suffolk Superior
Court, captioned Blacksmith v. Boston Steel & Precast Erectors, Inc., et al, Civ. No. 04-0775,
seeking to recover approximately $387,000 from BSPE, Boston Steel & Precast Erectors
Holdings Trust, Kathleen MacInnis, 	MacSteel, and the Debtor under a variety of legal
theories. Blacksmith’s Verified Complaint set forth the following counts: Count I: Action
on the Note; Count II: Successor Liability - MacSteel; Count III: Actual Fraudulent Transfer
- MacSteel (citing Mass. Gen. Laws ch. 109A, § 5(a)(1)); Count IV: Constructive Fraudulent1
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The statute provides:2
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a
creditor whose claim arose before the transfer was made or the obligation
was incurred if the debtor made the transfer or incurred the obligation
without receiving a reasonably equivalent value in exchange for the
transfer or obligation and the debtor was insolvent at that time or the
debtor became insolvent as a result of the transfer or obligation.
Mass. Gen. Laws ch. 109A, § 6(a).
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Transfer - MacSteel (citing Mass. Gen. Laws ch. 109A, § 6(a); Count V: Personal Liability2
for Fraudulent Transfers - Woodford (citing Mass. Gen. Laws ch. 109A, §§ (5)(a)(1) and
6(a)); Count VI: Actual Fraudulent Transfer - Kathleen MacInnis; Count VII - Constructive
Fraudulent Transfer - Kathleen MacInnis; Count VII - Turnover of Collateral -MacSteel; and
Count IX: Preliminary Injunction - MacSteel. 	Saraceno testified that after filing suit,
MacSteel turned over some of the tools and equipment that it obtained from BSPE to
Blacksmith, which sold them for an indeterminate sum.
On or about September 30, 2005, Blacksmith, Saraceno, MacSteel, and the Debtor
entered into a Settlement Agreement pursuant to which the Debtor agreed to entry of a
judgment against him in the amount of $200,000 on Counts II, III, IV and V. The Settlement
Agreement provided that if Woodford paid Blacksmith $100,000 within 60 days,
Blacksmith would return to Woodford and MacSteel a copy of the Agreement for Judgment
marked “Satisfied in Full,” and Woodford and MacSteel would have no further obligations
to Blacksmith. The Settlement Agreement recited the following:
Woodford and MacSteel have denied that they have any liability whatsoever
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to Blacksmith. 	In addition, Woodford has provided to Saraceno, and
Saraceno has relied upon, an executed Financial Statement, indicating that
the only asset in which he holds an interest that may have any net, non-
exempt equity is the Ironworkers District Council of New England Annuity
Plan held at MassMutual Financial Group (the “Annuity).
Although Woodford may obtain the Settlement Payment from any source he
may choose, the parties hereto recognize that it is the current intent of
Woodford to make the Settlement Payment from the proceeds of the
Annuity. In the event that, in order to avoid penalties or taxes associated
with the withdrawal of such proceeds, the Annuity must be taken by judicial
process, such as execution or levy, Blacksmith agrees to provide reasonable
assistance to Woodford in obtaining the proceeds from the Annuity,
including proceeding by levy. In the event that the process of withdrawing
the proceeds takes longer than 60 days, Blacksmith agrees to extend the 60-
day deadline for making the Settlement Payment, as may be reasonably
necessary to complete the withdrawal. 	Blacksmith further agrees that
interest on the Agreement for Judgment shall be waived during the 60-day
period, as may be extended.
Because the Agreement for Judgment called for a separate and final judgment to be entered
against the Debtor under Mass. R. Civ. P. 54(b), the Superior Court held a hearing, signed
the Agreement for Judgment on October 6, 2005, and entered it as a separate judgment on
October 11, 2005.
The Debtor did not satisfy the Agreement for Judgment, and, on March 1, 2006, he
filed a petition for relief under Chapter 13 of the Bankruptcy Code. 	On Schedule I -
Current Income of Individual Debtor(s), he disclosed that he was employed by T & T
Erectors, Inc., earning gross monthly income of $5,439.90 or approximately one-half of
what he made as the owner of MacSteel. Blacksmith timely filed the instant Complaint
seeking to except the $200,000 debt from discharge under 11 U.S.C. § 523(a)(2)(A).
As noted above, Blacksmith failed to object to the exemption claimed in the Debtor’s
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It stated: “As originally formulated in this circuit, a creditor’s reliance had to be3
reasonable. Commerce Bank & Trust Co. v. Burgess, 955 F.2d 134, 140 (1st Cir.1992);
Century 21 Balfour Real Estate, 16 F.3d at 10. The Supreme Court, however, has since
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amended Schedule C pursuant to Mass. Gen. Laws ch. 235, § 34A. Neither party submitted
evidence as to the nature of the annuity or whether it is qualified under the federal
Employee Retirement Income Security Act of 1974 (“ERISA”), although Blacksmith’s
counsel conceded in his opening statement that the annuity was ERISA-qualified.
III. DISCUSSION
A. Applicable Law under Section 523(a)(2)(A)
As grounds for its Complaint, Blacksmith relies solely upon 11 U.S.C. § 523(a)(2)(A),
which excepts from discharge a debt of an individual debtor “for money, property,
services, or an extension, renewal, or refinancing of credit, to the extent obtained by-false
pretenses, a false representation, or actual fraud, other than a statement respecting the
debtor’s or an insider’s financial condition.” 11 U.S.C. § 523(a)(2)(A). The United States
Court of Appeals for the First Circuit has addressed issues under section 523(a)(2)(A) on
multiple occasions, observing that, as with all exceptions to discharge under section 523(a),
they are “narrowly construed . . . and the claimant must show that its claim comes squarely
within an exception enumerated in Bankruptcy Code § 523(a).” McCrory v. Spigel (In re
Spigel), 260 F.3d 27, 32 (1st Cir. 2001)(citing Century 21 Balfour Real Estate v. Menna (In
re Menna), 16 F.3d 7, 9 (1st Cir. 1994)). In Spigel, the First Circuit, while noting that the
Supreme Court overruled its formulation of the reliance element of the test for
nondischargeability under section 523(a)(2)(A), articulated the following requirements for3
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overruled this formulation and, drawing from the Restatement (Second) of Torts, held
that a creditor’s reliance need only be justifiable. Field v. Mans, 516 U.S. 59, 70-71, 116
S.Ct. 437, 133 L.Ed.2d 351 (1995).” Spigel, 260 F.3d at 32 n.6.
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establishing an exception to discharge under section 523(a)(2)(A):
[W]e have said that the statutory language does not “remotely suggest that
nondischargeability attaches to any claim other than one which arises as a
direct result of the debtor’s misrepresentations or malice.” Century 21
Balfour Real Estate, 16 F.3d at 10. Thus, in order to establish that a debt is
nondischargeable 	because 	obtained 	by 	“false 	pretenses, 	a 	false
representation, or actual fraud,” we have held that a creditor must show that
1) the debtor made a knowingly false representation or one made in reckless
disregard of the truth, 2) the debtor intended to deceive, 3) the debtor
intended to induce the creditor to rely upon the false statement, 4) the
creditor actually relied upon the misrepresentation, 5) the creditor’s reliance
was justifiable, and 6) the reliance upon the false statement caused damage.
Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997). Though the first two
elements of the Palmacci test describe the conduct and scienter required to
show fraudulent conduct generally, the last four embody the requirement
that the claim of the creditor arguing nondischargeability in an adversary
proceeding must arise as a direct result of the debtor’s fraud.
Spigel, 260 F.3d at 32 (footnotes omitted).
The allegations of Blacksmith’s Complaint and the evidence adduced at trial do not
fit neatly within the First Circuit’s formulation of the requirements for relief under section
523(a)(2)(A). Blacksmith submitted no evidence with respect to any of the required
elements set forth by the court in Spigel. Rather, Blacksmith urges this Court to adopt the
holding of McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000), and its progeny. See
Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (B.A.P. 6th Cir.
2001)(“actual fraud as used in 11 U.S.C. § 523(a)(2)(A) is not limited to misrepresentations
and misleading omissions. . . . When a debtor intentionally engages in a scheme to deprive
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or cheat another of property or a legal right, that debtor has engaged in actual fraud and
is not entitled to the fresh start provided by the Bankruptcy Code.”); K-B Building Co. v.
Barber (In re Barber), 281 B.R. 617, 624 (Bankr. W.D. Pa. 2002); and Gentry v. Kovler (In re
Kovler), 249 B.R. 238, 260-61 (Bankr. S.D.N.Y. 2000).
In McClellan, the United States Court of Appeals for the Seventh Circuit considered
an appeal from the dismissal of a creditor’s complaint under section 523(a)(2)A) for failure
to state a claim and the issue of whether, as the bankruptcy court and the district court
ruled, 	fraud 	for 	purposes 	of 	section 	523(a)(2)(A) 	can 	only 	involve 	a 	deliberate
misrepresentation or a deliberately misleading omission. Id. at 892. The facts set forth by
the Seventh Circuit in McClellan warrant a full discussion as they are somewhat analogous
to those present in the instant case. The Seventh Circuit, which was required to accept the
allegations in the complaint as true in view of the procedural posture of the case, stated the
facts as follows:
In 1989 McClellan, the creditor, sold his business assets, consisting of
ice-making machinery, to the debtor’s brother for $200,000, payable in
installments. McClellan retained, but did not perfect, a security interest in
the machinery. The brother defaulted, owing McClellan more than $100,000.
McClellan sued the brother in an Illinois state court, seeking among other
things an injunction against the brother’s transferring the machinery. With
the suit pending, the brother “sold” the machinery to his sister, the debtor.
The bill of sale recites the price as $10, and there is no reason to believe that
it was more; we may assume therefore that it was a gratuitous transfer. The
sister knew about the suit and in accepting the transfer of the machinery was
colluding with her brother to thwart McClellan’s collection of the debt that
her brother owed him. She turned around and sold the machinery for
$160,000-and she’s not telling anyone what has happened to that money.
The sale took place in 1994 and the following year McClellan added the sister
as a defendant in his state court action, claiming that her brother’s transfer
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of the machinery to her had been a fraudulent conveyance. 740 ILCS 160/5.
Two years later, with the state court suit still pending, the sister filed for
bankruptcy under Chapter 7. Fearing lest her debt to him be discharged at
the conclusion of the bankruptcy proceeding, McClellan filed an adversary
proceeding against her seeking to recover the debt that he alleged she owed
him as the recipient of a fraudulent transfer of the assets that secured her
brother’s debt. The bankruptcy court dismissed his complaint on the ground
that the debt was dischargeable, and the district court affirmed . . . .
McClellan, 217 F.3d at 892.
The Seventh Circuit began its analysis of applicable law under section 523(a)(2)(A)
by noting that “[n]othing in the Supreme Court’s opinion [in Field v. Mans, 516 U.S. 59, 68
(1995)] suggests that misrepresentation is the only type of fraud that can give rise to a debt
that is not dischargeable under section 523(a)(2)(A).” Id. It also observed that although
most frauds do involve misrepresentations, section 523(a)(2)(A) is not limited to
“fraudulent misrepresentations,” id. at 893, adding that by distinguishing between “a false
representation” and “actual fraud,” the statute makes clear that actual fraud is broader
than misrepresentation.” Id. (citing 4 Collier on Bankruptcy ¶ 523.08[1][e], p. 523-45 (15th
ed., Lawrence P. King ed., 2000)( section 523(a)(2)(A) defines “actual fraud” as “any deceit,
artifice, trick, or design involving direct and active operation of the mind, used to
circumvent and cheat another”).
The Seventh Circuit also stated that the type of conduct of which McClellan
complained turned bankruptcy into “an engine for fraud” and that while exceptions to
discharge should be construed narrowly, the exceptions do “serve vital functions,” such
as preventing fraud. Id. It thus determined:
Fraud is a generic term, which embraces all the multifarious means which
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human ingenuity can devise and which are resorted to by one individual to
gain an advantage over another by false suggestions or by the suppression
of truth. No definite and invariable rule can be laid down as a general
proposition defining fraud, and it includes all surprise, trick, cunning,
dissembling, and any unfair way by which another is cheated.
Id. (citing Stapleton v. Holt, 207 Okla. 443, 250 P.2d 451, 453-54 (Okla.1952)).
The court in McClellan distinguished between actual and constructive frauds. It
observed that “[t]o transfer property for less than adequate consideration may be
desperate, foolish, or imprudent, and the receipt of such a transfer a pure windfall, . . .
neither the transfer nor the receipt is in and of itself dishonest, and so neither is an
appropriate ground for refusing to allow the debtor to discharge the debt arising from the
transfer.” 	McCllenan, 217 F.3d at 894. 	It further explained the ramifications of the
distinction:
[W]hen a conveyance is merely constructively fraudulent, in the sense that
having transferred the property that secured the debt without obtaining
adequate consideration the debtor is now unable to pay his creditor, the
transferee is not guilty of an actual fraud against the creditor and so the
creditor cannot use section 523(a)(2)(A) to prevent the transferee from
discharging the debt in bankruptcy. And so in this case, if though the
debtor’s brother intended to thwart McClellan and was thus committing
actual fraud, his sister was innocent-if she had no intention of hindering any
creditor-the debt that McClellan is seeking to collect from her would not
have been obtained by her by actual fraud. But she is alleged to have been a
full and equal participant in her brother’s fraud, to have been in effect his
accomplice, as in Cenco v. Seidman & Seidman, 686 F.2d 449, 452-453 (7th
Cir.1982). The debt that McClellan is seeking to collect from her (and prevent
her from discharging) arises by operation of law from her fraud. That debt
arose not when her brother borrowed money from McClellan but when she
prevented McClellan from collecting from the brother the money the brother
owed him.
Id. at 894-95.
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The United States Court of Appeals for the First Circuit has not adopted the
approach taken by the Seventh Circuit; nor has it unequivocally rejected it. In Spigel, the
First Circuit observed:
We note that the Seventh Circuit has recently called into question whether
the Palmacci test should properly be considered the exclusive test to
determine nondischargeability under § 523(a)(2)(A). In McClellan v. Cantrell,
217 F.3d 890 (7th Cir.2000), that court noted that Palmacci and similar cases
have adopted a test that focuses solely upon false representations as the total
universe 	of 	fraud 	under 	§ 	523(a)(2)(A), 	in 	large 	part 	because 	false
representations were the only fraud before those courts. Id. at 892. §
523(a)(2)(A), 	however, 	explicitly 	lists 	both 	“actual 	fraud” 	and 	“false
representations” as grounds for denying a discharge, a distinction in the
statutory language that the McClellan court relied upon to hold that “actual
fraud” encompasses more than misrepresentations. Id. at 892-93; see also
Mellon Bank N.A. v. Vitanovich, 259 B.R. 873, 876 (6th Cir. BAP 2001)
(adopting 	McClellan’s 	definition 	of 	actual 	fraud 	to 	evaluate
nondischargeability of a debt created by a check kiting scheme). Though
there are differences between McClellan and Palmacci-the most significant
of which concerns whether reliance is required-we do not decide whether we
would adopt the Seventh Circuit’s reasoning. McClellan is consistent with
our existing precedent in that it also requires a direct link between the alleged
fraud and the creation of the debt. McClellan, 217 F.3d at 894-95 (noting that the
actual 	fraud 	denied 	discharge 	under 	§ 	523(a)(2)(A), 	as 	opposed 	to
constructive fraud, requires a showing that the fraud created the debt); see
also, e.g., Century 21 Balfour Real Estate, 16 F.3d at 10.
Spigel, 260 F.3d at 32 n. 7(emphasis supplied).
The direct link between the alleged fraud - - the conspiracy between the Debtor and
MacInnis to acquire BSPE’s assets for no consideration - - and the creation of the debt is the
key here. This Court would have to conclude that the Debtor’s receipt, as the alter ego of
MacSteel, of fraudulently transferred property to MacSteel by BSPE created a new debt to
Citizens Bank and its assignee, Blacksmith. The debt which Blacksmith seeks to except from
discharge was money owed to Citizens that was secured by a security interest in BSPE’s
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assets. The Debtor, in executing the Agreement for Judgment, conceded that the transfer
of BSPE’s equipment to MacSteel was “with actual intent to hinder, delay, or defraud”
creditors of BSPE as alleged in both Counts II and V. See Mass. Gen. L. Ch. 109A, § 5(a)(1).
Although Blacksmith was not a creditor of BSPE, as it did not acquire the Citizens debt
until November of 2003, after the BSPE had transferred its assets to MacSteel, Citizens was
such a creditor. The Agreement for Judgment was endorsed by the Superior Court and
that judgment is a final judgment entitled to preclusive effect as to the existence of a n
intentionally fraudulent transfer. See Arrieta-Gimenez v. Arrieta-Negron, 859 F.2d 1033,
1041 (1st Cir.1988)(judgments entered pursuant to valid consent agreements are afforded
the “same preclusive effect as judgments in litigated cases.”).
The question in this case turns then on whether the First Circuit would follow the
Seventh Circuit’s holding in McClellan. 	Additionally, to the extent that the Debtor
received property in fraud on Citizens, it is unclear whether the amount of that debt is
measured by the amount of $200,000 set forth in the Agreement for Judgment or the value
of the property acquired by MacSteel.
In the absence of a clear indication from the First Circuit, this Court lacks the
sanguinity of the Seventh Circuit in side stepping the decision of the Supreme Court in
Field v. Mans, 516 U.S. 59 (1995). In that case, the Supreme Court set forth the statutory
language of section 523(a)(2) and its precursors in a compelling fashion. It stated:
These provisions were not innovations in their most recent codification, the
Bankruptcy Reform Act of 1978 (Act), Pub.L. 95-598, 92 Stat. 2590, but had
obvious antecedents in the Bankruptcy Act of 1898 (1898 Act), as amended,
30 Stat. 544. The precursor to § 523(a)(2)(A) was created when § 17(a)(2) of
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the 1898 Act was modified by an amendment in 1903, which provided that
debts that were “liabilities for obtaining property by false pretenses or false
representations” would not be affected by any discharge granted to a
bankrupt, who would still be required to pay them. Act of Feb. 5, 1903, ch.
487, 32 Stat. 798. This language inserted in § 17(a)(2) was changed only
slightly between 1903 and 1978, at which time the section was recodified as
§ 523(a)(2)(A) and amended to read as quoted above. Thus, since 1903 the
statutory language at issue here merely progressed from “false pretenses or
false representations” to “false pretenses, a false representation, or actual
fraud, other than a statement respecting the debtor’s or an insider's financial
condition.”
Id. at 64-65 (footnote omitted). The Supreme Court concluded:
The 	operative 	terms 	in 	§ 	523(a)(2)(A) 	. 	. 	. 	“false 	pretenses, 	a 	false
representation, or actual fraud,” carry the acquired meaning of terms of art.
They are common-law terms, and, as we will shortly see in the case of “actual
fraud,” which concerns us here, they imply elements that the common law
has defined them to include. See Durland v. United States, 161 U.S. 306, 312,
16 S.Ct. 508, 510, 40 L.Ed. 709 (1896); James-Dickinson Farm Mortgage Co. v.
Harry, 273 U.S. 119, 121, 47 S.Ct. 308, 309, 71 L.Ed. 569 (1927). Congress could
have enumerated their elements, but Congress’s contrary drafting choice did
not deprive them of a significance richer than the bare statement of their
terms.
Id. at 69. The Court added:
Since the District Court treated Mans’s conduct as amounting to fraud, we
will look to the concept of ‘actual fraud’ as it was understood in 1978 when
that language was added to § 523(a)(2)(A). Then, as now, the most widely
accepted distillation of the common law of torts was the Restatement
(Second) of Torts (1976), published shortly before Congress passed the Act.
The section on point dealing with fraudulent misrepresentation states that
both actual and “justifiable” reliance are required. Id., § 537.”
516 U.S. at 70 (footnotes omitted).
This Court agrees with the Court in Bunsinger v. Storer (In re Storer), 380 B.R. 223
(Bankr. D. Mont. 2007), that “[t]he determination of nondischargeability under §
523(a)(2)(A) is a question of federal, not state law and since the elements of § 523(a)(2)(A)
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mirror the common law elements of fraud, courts must interpret these elements consistent
with the common law definition of “actual fraud” as set forth in the Restatement (Second)
of Torts (1976) §§ 525-557A.” 380 B.R. at 231 (citing Field v. Mans, 516 U.S. 59, 69, 116 S.Ct.
437, 443-44, 133 L.Ed.2d 351 (1995)). In short, absent a clear directive from the First Circuit,
this Court remains bound by the elements comprising the common law formulation of
“actual fraud” enunciated by the court in Spigel.
Rather than depart from the accepted common law elements for relief under section
523(a)(2)(A), section 523(a)(6) presents another avenue upon which a creditor may obtain
a determination of nondischargeability if there exists a transfer with actual intent to hinder
deceive and defraud creditors. 	The Seventh Circuit in McClellan recognized this
possibility, stating: “For completeness we note that it might also be possible to shoehorn
the facts of this case into another provision of section 523, the provision that excludes from
discharge debts arising from “willful and malicious injury by the debtor to another entity
or to the property of another entity.” But why shoehorn?” 217 F.3d at 896 (citations
omitted). 	See also McCain Foods USA Inc. v. Shore (In re Shore), 317 F.3d 536 (B.A.P. 10th
Cir. 2004). Indeed, in a concurring opinion in McClellan, Judge Ripple indicated that he
would hold that section 523(a)(6) would require an exception to the discharge of
McClellan’s debt. He stated:
Given the overall structure of § 523, it seems clear that Congress intended §
523(a)(2)(A) to cover debts relating to the procurement of money or property
by fraud and § 523(a)(6) to apply in a situation such as the one before us.
Section 523(a)(2)(A) excepts from discharge any debt “for money, property,
services, or an extension, renewal, or refinancing of credit, to the extent
obtained by-(A) false pretenses, a false representation, or actual fraud. . . .”
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This Court notes that Blacksmith did not argue that the Agreement for4
Judgment satisfied the elements for actual fraud as articulated by the courts in Spigel,
260 F.3d at 32 and Aoki, 323 B.R. at 814. Moreover, it did not argue the relevance of, or
even cite, the Supreme Court’s decision in Archer v. Warner, 538 U.S. 314 (2003).
Moreover, the Plaintiff did not include a count seeking to except the debt from
discharge under 11 U.S.C. § 523(a)(6) and did not move to amend the complaint to
include such a count at any time.
18
11 U.S.C. § 523(a)(2). The language “obtained by” clearly indicates that the
fraudulent conduct occurred at the inception of the debt, i.e., the debtor
committed a fraudulent act to induce the creditor to part with his money or
property. Ms. Cantrell played no role, fraudulent or otherwise, in inducing
Mr. McClellan to part with his money or property. 	Nevertheless, the
majority makes a plausible argument that a literal, although perhaps
strained, reading of § 523(a)(2)(A) would permit the subsection to cover the
situation before us. Section 523(a)(6), however, more easily covers our facts
because it reaches any debt for willful and malicious injury to another's
property. I think it is important to point out that § 523(a)(6) provides a far
more direct avenue for dealing with a situation such as the one we have
before us.
217 F.3d at 896.
In summary, this Court rejects Blacksmith’s reliance upon McClellan. Because the
fraudulent transfer made to MacSteel and the Debtor of BSPE’s property in fraud on its
creditors does not fit within the parameters of common law “actual fraud” as articulated
by the Supreme Court in Field v. Mans and because of the absence of a clear directive from
the United States Court of Appeals for the First Circuit, this Court refuses to find that
Blacksmith sustained its burden of establishing all the common law elements required by
decisions in this circuit. See, e.g., Aoki v. Atto Corp. (In re Aoki), 323 B.R. 803, 814 (B.A.P.
1st Cir. 2005). 4
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Section 34A provides:5
The right or interest of any person in an annuity, pension, profit sharing
or other retirement plan subject to the federal Employee Retirement
Income Security Act of 1974, in any plan maintained by one or more
self-employed individuals as a Keogh Plan, so-called, in any plan
maintained by a corporation or other business organization pursuant to
section 401(a) of the Internal Revenue Code but not subject to the federal
Employee Retirement Income Security Act of 1974, or in any Simplified
Employee Plan, annuity plan to which the provisions of section 403(b) of
the Internal Revenue Code apply or Individual Retirement Account or
Annuity maintained by an individual, or in any annuity or similar
contract distributed from or purchased with assets distributed from any of
the foregoing, shall be exempt from the operation of any law relating to
insolvency and shall not be attached or taken on execution or other
process to satisfy any debt or liability of such person, except as may be
necessary to satisfy (i) an order of a court of competent jurisdiction
concerning divorce, separate maintenance or child support or (ii), in the
event of the conviction of such person of a crime, an order of a court
requiring such person to satisfy a monetary penalty or make restitution to
the victim of such crime. The exemption in this section for plans
maintained by an individual, whether or not self-employed, shall not
apply to sums deposited, determined without regard to deposits pursuant
to a rollover or transfer except to the extent protection under this section
would be limited in the absence of a rollover or transfer, in said plans
during the five year period preceding the individual’s declaration of
bankruptcy or entry of judgment in excess of 7 per cent of the total income
of such individual for such period.
Mass. Gen. Laws ch. 325, § 34A.
19
B. Annuity Exemption
Although the Debtor did not reference section 541(c)(2) on amended Schedule C,
citing instead Mass. Gen. Laws ch. 235, § 34A, 	he argues that his annuity is ERISA-5
qualified and further that an ERISA-qualified annuity is not property of the bankruptcy
estate. See 11 U.S.C. §541(c)(2)(“A restriction on the transfer of a beneficial interest of the
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20
debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in
a case under this title.”). 	Blacksmith’s counsel conceded that the annuity is ERISA-
qualified, although in its brief, Blacksmith did not specifically address whether the Debtor’s
annuity is or is not part of his bankruptcy estate.
Pursuant to the Supreme Court’s decision in Patterson v. Shumate, 504 U.S. 753
(1992), if a debtor had a beneficial interest in an ERISA-qualified plan, it is excluded from
property of the estate under 11 U.S.C. § 541(c)(2)(an antialienation provision in an
ERISA-qualified pension plan constitutes a restriction on transfer enforceable under
“applicable nonbankruptcy law” for purposes of the § 541(c)(2) exclusion of property from
the debtor’s bankruptcy estate.). Nevertheless, Blacksmith argued that because the Debtor
obtained funds from the annuity through a fraudulent representation the annuity should
be considered property of the estate.
Blacksmith’s position is untenable for a variety of reasons. In the first place, the
Court has determined that its debt is dischargeable. 	Accordingly, Blacksmith cannot
attempt to collect its debt from the annuity. Moreover, Blacksmith failed to set forth any
cogent theory that would cause property that is excluded from property of the estate to be
transformed into property of the estate because of the Debtor’s conduct. Blacksmith failed
to provide this Court with sufficient evidence or legal authority to permit it to proceed
against the Debtor’s interest in his annuity under applicable Massachusetts law.
Alternatively, if the Debtor properly exempted the annuity from property of the
estate, the provisions of 11 U.S.C. § 522(c) apply to shield the annuity from the reach of
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The statute set forth a number of exceptions but none are applicable in the6
instant case.
21
creditors. Section 522(c) provides in pertinent part the following:
(c) Unless the case is dismissed, property exempted under this section is not
liable during or after the case for any debt of the debtor that arose, or that is
determined under section 502 of this title as if such debt had arisen, before
the commencement of the case . . . .
11 U.S.C. § 522(c). 	Because this Court has ruled that Blacksmith failed to satisfy its burden6
under 11 U.S.C. § 523(a)(2)(A), and the Debtor claimed it as exempt on Schedule C, the
annuity is not liable for satisfaction of the debt, unless the Court were to sustain
Blacksmith’s objection to the Debtor’s claimed exemption .
Blacksmith urges the Court to find that the Debtor’s borrowing from his annuity to
fund MacSteel precludes him from exempting the annuity from his bankruptcy estate and
permits it to satisfy its state court judgment from the funds. It is true that “. . . the shield
of exemption may be penetrated in extreme circumstances where there is fraudulent
conduct or a clear showing of bad faith.” Pineo v. Bogan (In re Pineo), 302 B.R. 524, 529
(Bankr. W.D. Pa. 2003)(denying exemption where debtor secretly embezzled $400,000 from
employer postpetition); see also Wood v. Premier Capital, Inc. (In re Wood), 291 B.R.
219,227-28 (B.A.P. 1 st 	Cir. 2003)(denying exemption where debtor concealed workers’
compensation claim); In re Koss, 319 B.R. 317,323 (Bankr. D. Mass. 2005)(rejecting debtor’s
argument that § 522(c) prevented the trustee from surcharging his exemption when he had
converted nonexempt assets and stating that debtor “may not employ § 522(c) as a
shield.”); and In re Stinson, 221 B.R. 726 (E.D.Mich. 1998)(denying exemption where debtor
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22
settled postpetition personal injury claim for $20,000 without bankruptcy court’s
authority). 	In all of these cases, however, the debtor concealed property obtained
postpetition from the bankruptcy trustee.
In the instant case, the Court need not address Blacksmith’s alternative argument
as it failed to file an objection to the Debtor’s amended Schedule C and otherwise failed to
sustain its burden that the exemption was not properly claimed under Mass. Gen. Laws ch.
235, § 34A by filing a timely objection to amended Schedule C. Section 522(l) and Federal
Rule of Bankruptcy Procedure 4003 compel the Court’s conclusion. Section 522 provides:
(l) The debtor shall file a list of property that the debtor claims as
exempt under subsection (b) of this section. If the debtor does not file
such a list, a dependent of the debtor may file such a list, or may claim
property as exempt from property of the estate on behalf of the
debtor. Unless a party in interest objects, the property claimed as exempt on
such list is exempt.
11 U.S.C. § 522(l)(emphasis added). Rule 4003 provides, in relevant part:
(b) Objecting to a claim of exemptions
(1) Except as provided in paragraphs (2) and (3), a party in interest
may file an objection to the list of property claimed as exempt within
30 days after the meeting of creditors held under § 341(a) is concluded
or within 30 days after any amendment to the list or supplemental schedules
is filed, whichever is later. The court may, for cause, extend the time for
filing objections if, before the time to object expires, a party in interest
files a request for an extension.
***
c) Burden of proof
In any hearing under this rule, the objecting party has the burden of proving
that the exemptions are not properly claimed. . . .
Fed. R. Bankr. P. 4003(b)(1) and (c). Thus, under either scenario posed by Blacksmith, the
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The Plaintiff orally withdrew Count II of the Complaint.7
23
discharge of the underlying debt precludes it from reaching the annuity to satisfy the
Agreement for Judgment.
IV. CONCLUSION
In view of the foregoing, the Court shall enter a judgment in favor of the Defendant
on Count I of the Plaintiff’s Complaint. 	The Debtor’s obligation to Blacksmith is not7
excepted from discharge pursuant to section 523(a)(2)(A). Further, the Court overrules
Blacksmith’s “Objection to Debtor’s Exemption of Retirement Annuity”as moot.
By the Court,
Joan N. Feeney
United States Bankruptcy Judge
Dated: April 13, 2009
cc: David B. Madoff, Esq., Jeffrey J. Cymrot, Esq.
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