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Chapter 7 Bankruptcy Appeal Involves Fraudulent Transfer Findings, Raises Questions of International Law

By Palagret [1] (Own work) [CC-BY-SA-2.5 (http://creativecommons.org/licenses/by-sa/2.5)], via Wikimedia CommonsThe Ninth Circuit Court of Appeals recently ruled in a bankruptcy case that almost literally involves international intrigue. The bankruptcy court ordered the debtor’s wife to turn over a substantial amount of assets, based on the Chapter 7 trustee’s adversary proceeding alleging fraudulent transfers of bankruptcy estate property. This led to a criminal indictment and an attempt to extradite the wife from France, where she had allegedly fled with her husband. The district court dismissed the wife’s appeal of the bankruptcy court’s order under the “fugitive disentitlement doctrine.” The Ninth Circuit reversed the district court’s dismissal and remanded the case for further proceedings on the first appeal. Mastro v. Rigby, No. 13-35209, slip op. (9th Cir., Aug. 22, 2014).

The Chapter 7 trustee brought an adversary proceeding against the debtor’s wife, alleging that she had transferred assets of the bankruptcy estate with the intent to defraud creditors. 11 U.S.C. §§ 544, 548. The bankruptcy court conducted a trial and found that the debtor and his wife had fraudulently shielded assets with “an increasingly elaborate series of transactions.” Mastro, slip op. at 4; In re Mastro, 465 B.R. 576 (Bankr. W.D. Wash. 2011). It ordered the wife to turn over specific pieces of personal property, including jewelry, gold bars, and cash totaling nearly $1.4 million.

The wife filed an appeal with the district court, but she “went missing” around the same time. Mastro, slip op. at 4. Authorities located her and the debtor in France, where they said they intended to stay. The wife was indicted on criminal bankruptcy charges in connection with the bankruptcy court’s order, but French courts have denied extradition requests by U.S. prosecutors.

The district court found that the wife is a fugitive from justice. It dismissed her appeal without reaching the merits based on the fugitive disentitlement doctrine, which essentially holds that a person cannot seek relief from the court system while he or she is also evading its jurisdiction in a criminal matter. The wife appealed the district court’s dismissal to the Ninth Circuit.

Before addressing the district court’s dismissal, the Ninth Circuit reviewed whether any of the courts involved had jurisdiction to hear the case. This is important because bankruptcy courts only have authority under federal law to hear “core proceedings” arising under the Bankruptcy Code. 28 U.S.C. § 157(b). The trustee’s claims against the wife, the Ninth Circuit found, were not core proceedings. Mastro, slip op. at 7. Ordinarily, this would mean that the bankruptcy court’s role would be limited to making findings and reporting to the district court, which would issue a final order. The Ninth Circuit held, however, that the bankruptcy court had authority to issue an order in this case because all of the parties had consented to its jurisdiction. Id. at 6, 28 U.S.C. § 157(c)(2).

On the issue of fugitive disentitlement, the Ninth Circuit held that the district court erred by dismissing the case. The fugitive disentitlement doctrine, the court stated, is intended to have a narrow scope based on the Supreme Court’s ruling in Degen v. United States, 517 U.S. 820 (1996), and Congress’ enactment of 28 U.S.C. § 2466. The district court’s dismissal was not one within the scope established by Degen. The Ninth Circuit remanded the case with instructions to consider the wife’s appeal of the bankruptcy court’s order.

Devin Sawdayi has represented individuals and families in the Los Angeles area in personal bankruptcy cases since 1997. To schedule a free and confidential consultation to see how we can assist you, contact us today online or at (310) 475-939.

More Blog Posts:

Embezzlement Judgment Does Not Prevent Debtor From Exempting Proceeds of Civil Lawsuit Against Creditor, Los Angeles Bankruptcy Lawyer Blawg, November 14, 2014

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 Palagret [1] (Own work) [CC-BY-SA-2.5], via Wikimedia Commons.