Archive for the ‘Fraudulent Transfers’ Category
Friday, April 15th, 2011
The Associated Press reports that former baseball star Lenny "Nails" Dykstra has been charged with bankruptcy fraud by a California based United States Attorney. Dykstra filed for Chapter 7 bankruptcy in 2009, scheduling $31 million in debts and only $50,000 in assets.
In the complaint, prosecutors allege that Dykstra sold or destroyed over $400,000 worth of property. Among the property that Dykstra allegedly sold – presumably to raise case – were sports memorabilia and furnishings from the home he lost in the bankruptcy.
Obviously most of the Chapter 7 cases filed in the Northern District of Georgia, or in most bankruptcy courts do not involve millions of dollars of debts incurred by a high profile debtor. However, there is an important lesson that all bankruptcy filers can learn from the charges levied against Mr. Dykstra.
When you list assets on your bankruptcy petition, you are swearing that this list is accurate under penalty of perjury. If your trustee discovers that items have been omitted, or worse, that they have been secretly sold, the trustee will refer the case to the U.S. Attorney for prosecution.
Sometimes, I overhear conversations in bankruptcy court in which a debtor expresses frustration with the bankruptcy process or anger at an ex-wife, a former business partner or even a former employer. I also hear conversations expressing frustration with the rather stingy dollar limits set out in the Georgia exemption statute. I sense that some bankruptcy filers believe that the circumstances that led to their having to file were unfair and out of their control and as such leaving out inherited jewelry that "no one will ever know about" or selling a few items for cash can be rationalized.
While it is probably true that Chapter 7 trustees generally do not have the resources to thoroughly investigate every Chapter 7 debtor, I caution any bankruptcy filer not to take the risk.
First and foremost, an intentional failure to disclose assets is illegal and constitutes a crime under federal law. No asset is worth your freedom or personal integrity.
Second, you have no way of knowing if the United States trustee will select your case for a random review which can also mean much more intrusive scrutiny.
Third, it is possible that a third party – often an ex-wife or ex-business partner – might anonymously write the U.S. Trustee to report intentional errors on your petition.
Fourth, you might fall victim to "Murphy's law" – your trustee or someone from his office might see you walk into a pawn shop or might see your auction on eBay. Believe it or not, these types of coincidences do happen.
Often, issues associated with assets that you cannot protect can be resolved if you do not have to file right away. While the bankruptcy laws can be unforgiving, they will not punish you if you sell assets to raise money for food, shelter and clothing, as long as those sales are disclosed when applicable. This is why I advise anyone who is even remotely considering bankruptcy to speak with a bankruptcy lawyer at the earliest possible date. In my office, I regularly maintain files in "pre-bankruptcy" status for four, six, eight months or longer. Often the delay arises from my client's need to gain lawful benefit from assets that would be seized if the case was filed early.
Posted in Bankruptcy, Chapter 7 issues, Denial of discharge - Section 727, Fraud, Fraudulent Transfers, General consumer bankruptcy info, Lenny Dykstra, a, allegedly, and, attorney , bankruptcy fraud, baseball, based, california, charged, conversations, dykstra, examples of prosecution for bankruptcy fraud, expressing, filed, frustration, furnishings, hear, lenny, memorabilia, nails, sold, sports, star, states, united | Comments Off
Monday, October 18th, 2010
Five years ago one of my clients bought a new home pre-construction while he lived in his then current Florida homestead. The builder told him the new home would take 18 months to build. The builder finished early, in 12 months, and wrote my client a letter saying the home was soon complete and that under the construction contract he must purchase the new home in 30 days. The client had not yet put the existing home on the market (in the old days, it took only a month or two to sell a house). So, the client closed on the new home, then put the old home on the market. Three months after moving he sold the old home. He used all the sales proceeds to reduce the principal balance of the new mortgage on the new house. Now, he wants to file Chapter 7 bankruptcy and asks whether transferring the sales proceeds to the new house is a fraudulent transfer.
When the debtor moved to the new home he moved his homestead. The hold home ceased to be an exempt homestead property when the debtor moved in to the newer home as his principal residence. The use of sales proceeds to pay down the homestead mortgage was a conversion of non-exempt money to an exempt asset. The transfer cannot be attacked under Florida fraudulent transfer statutes because it occurred five years ago, beyond the statute of limitations. However, conversion of money to a homestead property within 10 years of filing bankruptcy may be avoided under bankruptcy law if the debtor intended to pay down his mortgage to avoid creditor claims.
Even though this occurred within the 10 year bankruptcy window, I do not think what this debtor did with his old house could reasonably be undone as a fraudulent conversion. The conversion of money into a homestead is reversible only if the debtor had actual intent to defraud creditors. This transaction does not appear to be a plan to defraud creditors or a bankruptcy trustee. This transaction looks like a normal person moving into a new home in a normal manner. Obviously, this debtor intended to sell his old home and use the money to buy a new home. Only because the home was ready unexpectedly early did the debtor have to move first and sell second.
Posted in Bankruptcy Questions, Fraudulent Transfers | Comments Off
Friday, July 9th, 2010
Last October, I wrote a post on this blog about bankruptcy fraud, and pointed out that everything included in a bankruptcy filing is subject to scrutiny by the office of the United States Trustee, which is an arm of the United States Department of Justice. In other words, false statements on a bankruptcy petition could land a debtor in hot water – dismissal of the bankruptcy case, fines and even prison.
Because the bankruptcy process can seem informal, it can be easy to forget that a Chapter 7 or Chapter 13 filing is made up of documents filed in a federal district court and subject to investigation by the F.B.I.
Attorney Gini Nelson, a New Mexico bankruptcy lawyer, recently published a post about bankruptcy fraud in the Bankruptcy Law Network blog. Gini's post includes a link to the IRS.gov site containing examples of bankruptcy fraud investigations. I found the IRS.gov link especially interesting in that one can get a sense of the type of fraud that bankruptcy debtors have attempted and the level of fraudulent activity that generated prosecution. Given the highly interconnected and electronic public record access that is available to bankruptcy trustees as well as government investigators I can't believe any of these folks believed that they would not be caught.
Posted in Bankruptcy, Blog, Chapter 13 issues, Chapter 7 issues, Debtors, Fraud, Fraudulent Transfers, access, and, bankruptcy and perjury, bankruptcy fraud, department, easy, electronic, examples, examples of prosecution for bankruptcy fraud, f b i attorney, gini, highly, informal, interconnected, investigation, investigations , nelson, public, record, states, the, united | Comments Off
Sunday, June 6th, 2010
Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts. This particular debtor used Chapter 7 to discharge over $1 million in liabilities.
I bring this case to your attention for several reasons. First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets. While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.
In the Texas debtor's case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.
These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents. Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a "poison pen" letter to the trustee will allegations about improper activities by a bankruptcy debtor.
Second, be aware that Chapter 7 trustees and the U.S. trustee like to pursue fraud cases periodically to send a message to debtors and debtors' lawyers that the trustees are paying attention. Bankruptcy lawyers may be tempted to say "don't worry about it," to avoid extra expense and complication but playing fast and loose with disclosure rules can create major problems for both debtors and their lawyers.
Occasionally I meet with a client who may say something like "between you and me, no one knows this but…." This type of statement is the last thing that any bankruptcy lawyer wants to hear. From my perspective that client is really saying "I am thinking about committing a federal crime and I want you to help me." My license to practice law is not worth the fee for any one case and I have and will continue to decline representation for any client who wants to use my office to file inaccurate schedules.
Nobody likes to surrender assets, especially in a bankruptcy case that may have come about because of factors beyond one's control (such as a layoff, unfair treatment by a lender, a lawsuit judgment that you did not know about). In most bankruptcy cases you will not lose in assets. However, losing a few hundred or thousands of dollars is a far better fate than federal prison.
Posted in 84, Chapter 13 issues, Chapter 7 issues, Debtor, Discharge issues, Fraud, Fraudulent Transfers, General consumer bankruptcy info, Insurance, Trustee, a, an, and, assets in, assets nbsp, bankruptcy crime, bankruptcy fraud, cases, committing, crime, disclose, documents nbsp, ended, evidence, failed, failure to disclose assets in bankruptcy, federal, hidden, periodically, prison, programs, provide, pursue, records, texas, the, title, training, trustees | Comments Off
Thursday, April 29th, 2010
If a debtor transfers money to his parents prior to filing Chapter 7 bankruptcy the bankruptcy trustee could try to recoup the money from the parents as recipients of fraudulent transfers. The general rule is that prospective bankruptcy filers should not try to remove non-exempt assets from their bankruptcy estate by transferring the asset to parents or other family members.
A client consulted with me today about the benefits and risks of his filing bankruptcy. The client is a well-paid computer consultant who will pass the means test because of significant ongoing medical expenses. The client’s family lives in India. The family is not well-off and they depend upon the client for support. Each month during the past few years this client sends money to help support his parents so they can have what we would consider necessities of life. Over the past year he has paid is parents over $20,000.
In most cases the transfer of $20,000 from a bankruptcy debtor to his parents within the year prior to bankruptcy could be reversed as a fraudulent conveyance. This case is different. I don’t think the client’s support of his parents evidences his intent to hide the money from his creditors. Among other reasons, he has been paying support for many years and did not increase transfer amounts prior to bankruptcy. I don’t think it is reasonable for this client to cut off financial support and deprive parents of basic necessities in order to file bankruptcy; some readers may disagree.
This clients questions illustrates that fraudulent transfer analysis depends on the facts of each case. All transfers prior to bankruptcy are not automatically fraudulent transfers. The most important element in fraudulent transfer law is the debtor’s intent. Transfers intended primarily for purposes other than hindering or delaying creditors are not reversible as fraudulent transfers.
Posted in Fraudulent Transfers | Comments Off
