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Pre-Bankruptcy Sale of Real Property Below Market Price Found to be Fraudulent by Bankruptcy Judge

The original uploader was KarlM at English Wikipedia (Transferred from en.wikipedia to Commons.) [CC-BY-SA-2.5 (http://creativecommons.org/licenses/by-sa/2.5)], via Wikimedia CommonsThe trustee in a Chapter 7 bankruptcy case filed a motion for partial summary judgment seeking to avoid two transfers that occurred shortly before the debtors filed their bankruptcy petition. The court held one of the transfers, the sale of real estate for less than the market price, was fraudulent under federal and state law. In re Chu (“Chu I”), No. 12-00986, Adv. Pro. No. 12-90091, mem. decision (D. Haw., Jun. 5, 2014). The court also denied a motion for summary judgment brought by the trustee in another adversary proceeding that sought to deny the Chapter 7 discharge based on the same transfers. In re Chu (“Chu II”), No. 12-00986, Adv. Pro. No. 13-90056, mem. decision (D. Haw., Jun. 5, 2014).

The debtors, a married couple, filed for Chapter 7 bankruptcy in May 2012. The wife had purchased real property in 2001 for $600,000. About three months before filing bankruptcy, she had transferred the property to her two sons for $5,000 in cash and the assumption of a $400,000 debt she allegedly owed to a friend. The trustee challenged the real property transfer and also challenged the $400,000 debt because of a lack of any record of payments made by the debtors.

During the bankruptcy proceeding, the trustee demanded that the sons return the property to the estate. The sons did so, and the trustee was able to sell it for $710,000. The trustee moved for partial summary judgment, asking in part that the court find that the real estate transfer was fraudulent under 11 U.S.C. § 548(a)(1) and the Uniform Fraudulent Transfer Act, HI Rev. Stat. § 651C et seq. See also CA Civ. Code Sec. 3439 et seq.

The court first considered whether the transaction constituted actual fraud, which requires proof that the debtor had “actual intent to hinder, delay, or defraud” a creditor. 11 U.S.C. § 548(a)(1)(A). The court noted that the real estate transfer was one of several questionable conveyances, but also that the wife testified that her intent was to make certain one of her creditors got paid. The court found that “[a]n intent to prefer one creditor over others is not necessarily the same as” the intent required for actual fraud. Chu I at 7, citing In re Miller, 39 F.3d 301, 307 (11th Cir. 1994).

By showing that the wife had transferred the real property for significantly less than the market price, the court held that the trustee had established constructive fraud. 11 U.S.C. § 548(a)(1)(B), HI Rev. Stat. § 651C-5(a). See also CA Civ. Code § 3439.05. The debtors had conveyed the property for $5,000 in cash and the assumption of $400,000 in questionable debt. The trustee had little problem selling the property shortly thereafter for almost $300,000 more.

The trustee had filed a second adversary proceeding seeking to prevent a Chapter 7 discharge, in part on the basis of the fraudulent transfer of the property. The court held that, since it had denied partial summary judgment for actual fraud under § 548 in the other proceeding, it could not grant summary judgment on the basis of actual fraud in this proceeding. Chu II at 8, 11 U.S.C. § 727(a)(2).

Bankruptcy lawyer Devin Sawdayi has represented people in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies since 1997. To schedule a free and confidential consultation with a knowledgeable and experienced advocate, contact us today online or at (310) 475-939.

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Bankruptcy Court Order Invalidating Sale of Real Estate Affirmed by Ninth Circuit, Los Angeles Bankruptcy Lawyer Blawg, September 23, 2014

Court Converts Bankruptcy Case from Chapter 13 to Chapter 7 Based on Finding that Debtor Withheld Information, Los Angeles Bankruptcy Lawyer Blawg, January 27, 2014

Creditor Challenges Debtor’s Transfer of Business Assets to Himself Prior to Chapter 13 Bankruptcy Filing, Los Angeles Bankruptcy Lawyer Blawg, December 16, 2013

Photo credit: The original uploader was KarlM at English Wikipedia (Transferred from en.wikipedia to Commons.) [CC-BY-SA-2.5], via Wikimedia Commons.