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Bankruptcy Trustee Files “Clawback” Suits Seeking Return of Allegedly Fraudulent Transfers

By Own work (Own work Own Work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 4.0-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/4.0-3.0-2.5-2.0-1.0)], via Wikimedia CommonsA series of lawsuits, filed by a trustee as adversary proceedings in an ongoing bankruptcy case, seek the return of money paid by the debtor in allegedly fraudulent transfers. This type of proceeding is sometimes known as a “clawback” suit. The bankruptcy case, In re GGW Brands, LLC, No. 2:13-bk-15130, petition (C.D. Cal., Feb. 27, 2013), involves several business entities, but the trustee’s claims would also apply in a personal bankruptcy case. The primary debtor is a company with a very controversial business, which entered into bankruptcy after years of legal troubles involving its founder. The allegedly fraudulent transfers include payments made by the business for the founder’s personal tax debt. The trustee claims that these payments are subject to avoidance due to fraudulent intent or lack of an equitable exchange.

Prior to filing for bankruptcy, the debtor was the publisher of the adult-themed video series “Girls Gone Wild” and the lesser-known “Guys Gone Wild.” The company faced a wide range of legal challenges, including lawsuits by women who appeared in the videos for invasion of privacy and other claims. The company’s founder continues to have an even-wider range of legal troubles, from multiple criminal charges and massive tax debts, to a defamation lawsuit by a Las Vegas casino mogul that resulted in a $40 million jury verdict. The company’s 2013 bankruptcy filing was reportedly an effort, at least in part, to protect its assets from the founder’s creditors.

The trustee filed nine adversary proceedings between December 2014 and February 2015. The Bankruptcy Code authorizes a court-appointed trustee to avoid transfers made by a debtor, or obligations incurred by a debtor, less than two years before the date the debtor filed for bankruptcy. This includes a transfer made or obligation incurred “with actual intent to hinder, delay, or defraud” any creditor, 11 U.S.C. § 548(a)(1)(A); or any transfer or obligation for which the debtor “received less than a reasonably equivalent value in exchange,” id. at § 548(a)(1)(B). The trustee is authorized to recover the actual property transferred, or to recover the value of the property from the transferee in most circumstances. 11 U.S.C. § 550(a).

Two adversary proceedings are seeking to recover money paid by the debtor to satisfy the founder’s tax debts. Neilson v. United States, et al, Adv. Proc. No. 2:15-ap-01016, am. complaint (C.D. Cal., Jan. 29, 2015); Neilson v. State of California Franchise Tax Board, Adv. Proc. No. 2:15-ap-01017, complaint (C.D. Cal., Jan. 12, 2015). The trustee alleges that, in October 2011, the debtor transferred more than $100,000 to the IRS and more than $227,000 to the California Franchise Tax Board for the founder’s personal tax liabilities. At the time of the alleged transfers, the founder had no direct relationship with the debtor as a director, manager, or officer, nor was he an employee. The trustee claims that the transfers constituted constructive fraud under § 548(a)(1)(B), since the debtor did not receive anything of equivalent value in exchange for the tax payments. He alternatively pleads actual fraud under § 548(a)(1)(A), alleging intent to defraud creditors.

Bankruptcy attorney Devin Sawdayi has represented individuals and families in Chapter 7 and Chapter 13 cases in Los Angeles since 1997. Our practice is dedicated to helping clients repair their finances with dignity and respect. To schedule a free and confidential consultation with a knowledgeable and experienced financial advocate, please contact us today online or at (310) 475-939.

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Transfer of Real Estate by Debtor More than One Year Before Filing Chapter 7 Bankruptcy Petition Does Not Bar Discharge of Debt, According to California Appellate Court, Los Angeles Bankruptcy Lawyer Blawg, January 9, 2015

Pre-Bankruptcy Sale of Real Property Below Market Price Found to be Fraudulent by Bankruptcy Judge, Los Angeles Bankruptcy Lawyer Blawg, November 7, 2014

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

Photo credit: By Own work (Own work Own Work) [GFDL or CC BY-SA 4.0-3.0-2.5-2.0-1.0], via Wikimedia Commons.