Articles Posted in Fraudulent Transfers

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Credit card debt can be incredibly stressful for people experiencing financial difficulties. High interest rates and late fees, along with increasingly high minimum payments, may make final payment of the debt seem impossible. The bankruptcy system may allow the discharge of some or all of a person’s credit card debt. It prevents discharge, however, of debt(s) incurred fraudulently or in bad faith, such as if a person charges a large amount to a credit card shortly before a planned bankruptcy filing.

Unsecured vs. Secured Debt

Most credit card debt is unsecured, meaning that the creditor does not have the right to repossess property, known as collateral, if the debtor defaults. In the case of a credit card issued by a retail store, the store may have the legal right to repossess whatever items the debtor purchased, although it is not always financially feasible to do so. Secured debt, such as a mortgage or car loan, generally receives higher priority for repayment from the bankruptcy estate than unsecured debt.

Bankruptcy Schedule F

Certain unsecured debts, such as child support or tax debt, are treated as “priority claims,” while the rest are “nonpriority claims.” A debtor filing for personal bankruptcy under Chapter 7 or Chapter 13 must complete Schedule F, which identifies creditors who have “unsecured nonpriority claims.” Most forms of credit card debt go on this schedule. Continue reading

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The 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. Continue reading

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A debtor’s withdrawal of money from a bank account less than a year before filing for Chapter 7 bankruptcy resulted in the denial of a discharge of debt, based on a bankruptcy court’s finding of fraudulent intent. The debtor claimed that he withdrew the money because of concerns about a creditor’s methods of collection. The Bankruptcy Appellate Panel (BAP) for the Ninth Circuit Court of Appeals affirmed the ruling. In re Haag (“Haag I”), Nos. AZ-11-1661, AZ-11-1662, AZ-11-1663, memorandum (BAP 9th Cir., Sep. 27, 2012) (PDF file). The Ninth Circuit also affirmed, rejecting the debtor’s arguments that the court should consider his good intentions regarding the creditor’s allegedly questionable collection practices. In re Haag (“Haag II”), No. 12-60074, memorandum (9th Cir., Aug. 20, 2014).

The debtor was the sole owner of an engineering company called HTI, Inc. that had a line of credit with Northwestern Bank (NWB). In mid-2007, the housing market collapsed, and the company was not able to generate enough revenue to pay the debt. After an unsuccessful attempt to sell the business, the debtor surrendered all of HTI’s assets to NWB in late 2008. He informed the bank that he intended to file for Chapter 7 bankruptcy, and that his only sources of income were IRAs, social security, and unemployment.

In early 2009, the debtor received federal and state tax refunds totaling almost $250,000. He deposited “some or all” of the funds, Haag I at 5, into a personal checking account at the Bank of Tucson. He withdrew $120,000 in cash from that account in July 2009 and placed it in a safety deposit box that he had jointly rented with his wife at another bank. About three weeks later, NWB obtained a judgment against the debtor in a Michigan court, based on his personal guaranty of business debts, for approximately $1.7 million. The bank obtained a domesticated judgment in Arizona, where the debtor resided, in February 2010. The debtor filed for Chapter 7 bankruptcy the following month. Continue reading

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A creditor filed an adversary proceeding in a Chapter 13 bankruptcy case, seeking an exception from discharge based on alleged fraud and willful and malicious injury. The creditor had been involved in a business venture with the debtor and made numerous allegations of accounting irregularities and financial misrepresentations. After a bench trial, at which the plaintiff-creditor presented expert testimony from a forensic accountant and a certified public accountant, the bankruptcy court held that the plaintiff did not meet his burden of proof under either claimed exception to discharge and ruled in favor of the defendant/debtor. In re Olsen, No. 2:13-bk-60733, memorandum (D. Mont., Aug. 28, 2014).

The facts of the case might be best summarized as a business venture where the parties had different understandings of the business relationship. The defendant was the majority shareholder of Human Interactive Products, Inc. (HIPinc), a “business incubator” engaged in a wide range of activities, known as as “profit centers,” under different trade names. HIPinc had a system, including accounting methods, for evaluating the performance of its profit centers.

The plaintiff, a native plant restoration specialist, approached the defendant about starting his own business in 2006. He accepted an offer of employment with HIPinc as “Operations Manager/Senior Restoration Ecologist” with a venture called Great Bear Restoration (GBR). The defendant would be his supervisor. The plaintiff did not contribute any capital towards GBR but received a salary from HIPinc. Continue reading

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The city of San Bernardino, California is in the process of preparing a bankruptcy plan in its ongoing bankruptcy case. While a Chapter 9 case, applied specifically to municipalities, might have some superficial similarities to an individual’s Chapter 13 bankruptcy case, cities and towns typically have issues that differ from both personal and business bankruptcy cases. The city is currently considering removing its ban on medical marijuana dispensaries, which would provide new sources of tax revenue. This is legal for cities and counties under California law, but it still conflicts with federal drug laws. In personal bankruptcy, individual debtors may be able to find a higher-paying job, take additional jobs to supplement their income, or go back to school to improve their job prospects. A debtor risks criminal penalties by disclosing income derived from illegal activity in a bankruptcy case, but he or she also risks revocation of the bankruptcy discharge if he or she fails to disclose that income.

San Bernardino filed for Chapter 9 bankruptcy in 2012, and it is still working on its exit plan. The city attorney proposed medical marijuana dispensaries in July 2014 as a means of increasing revenue, and the matter went to the full City Council in mid-September. Voters in California passed Proposition 215 in 1996, which amended the state Health and Safety Code to exclude individuals from state drug laws if they possess small amounts of marijuana with a valid doctor’s prescription. Senate Bill 420, enacted in 2003, further defined the scope of the program and created a system of identification cards for medical marijuana patients.

A 2009 California Supreme Court ruling required all of the state’s counties to participate in the program. Cities, however, are not obligated to allow dispensaries to operate within their jurisdictions. Oakland became the first city to tax marijuana sales in 2009, and others have followed. San Bernardino’s city attorney cited Palm Springs, which has about one-fifth the population of San Bernardino but brings in about $500,000 per year from its ten-percent marijuana tax. Continue reading

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A 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).
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A bankruptcy court ruled in favor of the Chapter 7 trustee in an adversary proceeding to deny a discharge. In re Clark, No. 12-00649, Adv. No. 13-06042, mem. dec. (PDF file) (Bankr. D. Id., Feb. 12, 2015). The trustee alleged multiple grounds under 11 U.S.C. § 727(a), which prohibits a discharge of debt in a Chapter 7 proceeding if a court finds that a debtor has committed any of a lengthy list of types of misconduct. A trustee or creditor may object to discharge under this provision. The court found that the trustee had met his burden of proof to establish fraudulent transfers, insufficient recordkeeping, false statements, and violations of an injunction.

The debtor filed for bankruptcy under Chapter 12 of the Bankruptcy Code, which applies to people who make a living as farmers or fishermen, in March 2012. His initial Chapter 12 petition provided very little information, according to the court, and subsequently filed schedules did not offer much more clarity. He reportedly included some assets, such as checking accounts in the name of a limited liability company (LLC), in which he claimed no ownership interest.

The bankruptcy court held a hearing in May 2013 on whether to convert the case to Chapter 7 due to fraud by the debtor under 11 U.S.C. § 1208(d). This is somewhat similar to provisions allowing a court to convert a Chapter 7 case to Chapter 11 or Chapter 13 for “abuse.” 11 U.S.C. § 707(b). The court converted the case to Chapter 7 and appointed a trustee.

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The Bankruptcy Code prohibits the discharge of debt in Chapter 7 cases if the debtor transferred property out of his or her own name, with fraudulent intent, less than one year before filing a petition. 11 U.S.C. § 727(a)(2)(A). This is known as a “lookback period.” The Bankruptcy Appellate Panel (BAP) in Pasadena, California ruled earlier this year on the following question. Is this one-year lookback period a “statute of limitations,” which a court can adjust if a creditor shows good cause, or a “statute of repose” that bars claims after one year without exception? It ruled in the debtor’s favor, holding that a transfer of real property more than a year before filing a Chapter 7 petition does not prevent discharge. In re Neff, 505 B.R. 255 (BAP 9th Cir. 2014) (PDF file).

The case involves a total of three successive bankruptcy cases. The debtor filed a Chapter 13 petition in March 2010, but the court dismissed it one month later for failure to attend the creditors’ meeting. He filed a second Chapter 13 petition in June 2010. In March 2008, he had executed a revocable living trust and a quitclaim deed conveying a piece of real property (the “Property”) to the trust. The deed was not recorded, however, until April 7, 2010, while the first Chapter 13 case was still pending. The court noted this fact during the second Chapter 13 case, and the debtor signed a deed conveying the Property back into his name in August 2010.

The creditor was a patient of the debtor’s dental practice who had obtained a judgment for $310,000 in a malpractice lawsuit. He moved to dismiss the debtor’s second Chapter 13 case for bad faith in September 2010, based in part on the transfer of the Property to the trust. The debtor agreed not to oppose the motion to dismiss if he was not barred from filing a Chapter 7 case, so the court dismissed the Chapter 13 case. Continue reading

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The 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.
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The Ninth Circuit Court of Appeals affirmed a bankruptcy court order invalidating the sale of real estate located in Mexico, based on a finding that the sale was an unauthorized transfer made after the debtors filed their bankruptcy petition. In re Icenhower, No. 10-55933, slip op. (9th Cir., Jul. 3, 2014). The purchasers of the real estate appealed the bankruptcy court’s order, raising several points of error about the court’s jurisdiction over real property in Mexico and its application of U.S. law. They also challenged the court’s finding that the purchase of the property was conducted in bad faith.

The debtors purchased an interest in a coastal villa in Jalisco, Mexico in 1995. Because of legal restrictions on land ownership within 50 kilometers of the coast by foreigners, the debtors did not hold title to the property but rather had a beneficial interest in a trust that gave them the right to use it.

In March 2002, the debtors purchased a shell company called H&G. They transferred the villa interest to H&G on the same day. H&G agreed to pay the debtors $100,000 for the villa interest and assume $140,000 of debt. Almost two years later, in December 2003, the debtors filed for bankruptcy. H&G sold the villa interest to the appellants for $1.5 million in June 2004. Continue reading

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