BANKRUPTCY LAW: Trustee May Recover Transferred Assets

BANKRUPTCY LAW: Trustee May Recover Transferred Assets

BANKRUPTCY LAW: Trustee May Recover Transferred Assets 
The filing of a voluntary bankruptcy petition by an individual, couple, or company (“the debtor” or “debtors”) triggers several important legal events. Among the most important are 1) the assignment of an assistant United States Trustee, who represents the Bankruptcy Court and who administers the bankruptcy; 2) the imposition of the automatic stay, which bars any litigation against the debtor and debtor’s estate; and 3) the U.S. Trustee’s control over the bankruptcy estate. This control ultimately allows the Trustee the ability to distribute the estate’s assets, if any, to unsecured creditors. (11 USC 541 (creation of estate); 11 USC §362 (automatic stay); 11 USC §§724, 726 (trustee distributes assets)).
 These legal effect also apply if the creditors of a debtor file an involuntary bankruptcy petition against a debtor.
 In protecting the potential assets of the bankruptcy estate, the Trustee has the power to claw back or seek the return of money or property transferred by the debtor. This power centers on, in particular, “preferential transfers,” which are transfers of assets by the debtor within the 90 days of the bankruptcy petition (11 USC 547), and “fraudulent transfers,” pursuant to 11 USC §548.
 A fraudulent transfer in bankruptcy is defined as an assignment, transfer or other conveyance of funds or property from the debtor to a third party, done for the purpose of preventing creditors from collecting on that asset.
 Title 11 US Code §548 (a) says the following:
 (1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
 (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
 (B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation . . .
 The statement that the Trustee may avoid any transfer means that the Trustee may demand that the recipient of the asset return it to the bankruptcy estate (i.e., send the property or the equivalent value back to the Trustee).
 The Trustee’s power to avoid the transfer, or “claw back” the asset is extensive. It extends beyond the 90 days of preferential transfers, and even beyond the 2 year period specified in 548(a)(1). For example, 11 USC §548 (e) states:
 (1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if—
           (A) such transfer was made to a self-settled trust or similar device;
           (B) such transfer was by the debtor;
           (C) the debtor is a beneficiary of such trust or similar device; and
           (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any       entity to which the debtor was or became, on or after the date that such transfer was made, indebted.
 The law of fraudulent transfer thus emphasizes the importance of protecting the integrity of the estate, 1) so that the Trustee can sort out if there are assets that can be distributed, and 2) so that a fair distribution of assets may take place, if assets are available.
 The bankruptcy of famous Los Angeles attorney Tom Girardi is an example of the power of the Trustee to claw back assets, under circumstances that triggered or could have triggered fraudulent transfer litigation.
 Mr. Girardi’s creditors filed an involuntary bankruptcy against him in December 2020, based on the fear that 1) he was fraudulently pocketing and spending client funds; and 2) the pending fraud litigation against Girardi would dissipate all of the assets in a manner that would favor some creditors over others, without the relatively “orderly” process of distribution of a bankruptcy proceeding. (The Recorder, December 18, 2020)
 The Trustee’s task became to locate and seek the recovery of money or assets transferred by Girardi or his associates, that would qualify as preferential transfers, as well as potentially fraudulent transfers, so that these assets could be brought back into the estate, and so that these assets or the cash value they represent can be distributed to the unsecured creditors who have filed claims.
 Two recent examples show how this process can work. In Mr. Girardi’s bankruptcy, the US Trustee sought and won an order that Mr. Girardi’s ex-wife, reality TV star Erika Jayne, turn over a pair of earrings worth $750,000, which the Trustee claims were purchased with stolen client funds. (Yahoo Finance, 1/31/2022; People, 6/30/2022; LA Times, 8/4/2022). If the earrings are indeed returned to the estate, they can be auctioned off to raise money that will later be part of the funds that will eventually paid out to unsecured creditors.
 Ms. Jayne apparently filed an appeal to defend her right to retain the earrings, so the fate of the jewelry has yet to be definitively determined. (People, 7/6/2022) However, there is no doubt that the Trustee’s legal authority for the order comes from 11 USC §548.
 Another example consists of gifts given by Mr. Girardi to former Appellate Justice Tricia A. Bigelow, with whom Girardi had an affair lasting several years. (LA Times, 8/19/2022). Published reports state that she returned “numerous gifts” from Mr. Girardi to the US Trustee. (NY Post, 12/23/2020; USTimes Post, 8/20/2022; LA Times Twitter, 8/19/2022). Published reports also say that the retired justice “does not want anything even potentially connected with monies Girardi took from his client victims,” according to Justice Bigelow’s attorney Alan Jackson. (LA Times, 8/19/2022). The LA Times story says that the gifts were returned in August 2022, despite the fact that the bankruptcy was filed in December 2020, with wide public notice.  
 Consequently, as the Girardi bankruptcy continues, the auctions of assets to raise funds for subsequent distribution to unsecured creditors will be part of the future proceedings.
 Bankruptcy counsel and the client must be aware that transactions entered into before the bankruptcy is filed will be scrutinized closely by the Trustee. This may be less important in the garden variety personal Chapter 7 where there are typically no assets to distribute. However, if the bankruptcy estate consists of millions of dollars, or large swaths of real or personal property, there is a danger that transactions that are considered out of the ordinary, or which look otherwise unusual, could be challenged and reversed. The Trustee possesses a great deal of discretion to claw back these assets.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY!!

 

 

SCOTUS: Violating Bankruptcy Discharge Serves Up Creditor for Contempt

SCOTUS: Violating Bankruptcy Discharge Serves Up Creditor for Contempt

The primary purpose of the bankruptcy stay [11 USC Sec. 362] is to protect the debtor. (In re Fuel Oil Supply and Terminaling, Inc., 30 BR 360, 362 (Bankr.N.D.Tex.1983), cited in In re Globe Investment & Loan Co., Inc., 867 F.2d 556 (1989)). By stopping all collection actions against the debtor, the bankruptcy stay acts 1) as an injunction to preserve the estate, and 2) to prevent the creditors from trying to go around the bankruptcy process to collect.

Once the debtor receive the discharge (11 USC Sec. 727), creditors are no longer able to collect the discharged debts. A creditor who, despite the discharge, seeks to collect a pre-bankruptcy debt, runs the risk of a contempt citation and punishment by the federal court.

And so it was held recently by the US Supreme Court which held that a business dispute with the debtor, that had begun prior to the debtor’s filing for bankruptcy, was discharged by the bankruptcy, and no further collection activity would be allowed.

Writing for a unanimous US Supreme Court, Associate Justice Breyer opined that the business creditors, who had initiated the lawsuit against the debtor (Mr. Taggart) had no reasonable basis to believe that the bankruptcy stay, and the subsequent discharge would not act to bar the continued litigation against the debtor. The debt was considered wiped away, and the creditors actions, seen objectively, were not only impermissible, but gave rise to contempt sanctions:

“Under the fair ground of doubt standard, civil contempt therefore may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.”

Taggart v. Lorenzen, ___ U.S. ___, 139 S.Ct. 1795, 1801, 204 L.Ed.2d 129 (2019).

The facts showed that the creditors had a working knowledge of the effects of bankruptcy law, and objectively should have realized that the pre-bankruptcy debt was no longer collectible. Therefore, the Supreme Court remanded the matter back to the 9th Circuit, to impose appropriate sanctions:

“We conclude that the Court of Appeals erred in applying a subjective standard for civil contempt. Based on the traditional principles that govern civil contempt, the proper standard is an objective one. A court may hold a creditor in civil contempt for violating a discharge order where there is not a “fair ground of doubt” as to whether the creditor’s conduct might be lawful under the discharge order.”

The Takeaway: Creditors Who Know that a Debtor has Filed for Bankruptcy Should Take No Action Against the Discharged Debtor, without First Having a Very Detailed, Careful Conversation with an Attorney, Lest Those Creditors End Up Held in Contempt!!

THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, AND READING IT DOES NOT CREATE AN ATTORNEY CLIENT RELATIONSHIP. PLEASE CONSULT DIRECTLY WITH AN ATTORNEY FOR ANY LEGAL ADVICE!!

Disclosure and the Pacific Ocean

Disclosure and the Pacific Ocean

Where the seller’s real estate broker failed to inform the seller that the next door neighbor had disclosed to the broker plans to build on the neighboring property, and therefore obstruct the seller’s Pacific Ocean view, and where after the sale, the buyer moved to rescind the transaction based on the loss of the ocean view, the Court of Appeal ruled that there was a question of fact regarding the broker’s failure to disclose the neighbor’s intent to build. There was a question of fact as to whether the broker breached his fiduciary duty to the seller. Summary judgment for the broker was reversed. Ryan v. Real Estate of the Pacific (2019) 32 Cal.App.5th 637, California Court of Appeal.

Community Property And Bankruptcy

Community Property And Bankruptcy

The Property received by one spouse from a third party during the marriage is presumed to be community property, unless there is a written document that shows that the community property interest of the other spouse was waived, making the item the separate property of the receiving spouse. The “title presumption” of Evidence Code Sec. 662 does not outweigh the “community property” presumption of Family Code Sec. 760, unless there is a written document showing that the community property presumption has been renounced or waived. In re Brace (2020) 9 Cal.5th 903 (2020), Supreme Court of California.

BANKRUPTCY LAW (Discharge Order)

BANKRUPTCY LAW (Discharge Order)

An order entered by the court at the conclusion of a bankruptcy proceeding, releasing the debtor from liability for most prebankruptcy debts. The order bars creditors from attempting to collect any debt covered by the order. 11 U.S.C. § 524(a)(2), cited in Taggart v. Lorenzen, 139 S.Ct. 1795 (Issued June 3, 2019)

Bankruptcy  Definitions: Bankruptcy  Trustee

Bankruptcy Definitions: Bankruptcy Trustee

BANKRUPTCY TRUSTEE: A private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases to represent the interests of the bankruptcy estate and the debtor’s creditors. [Source: Bankruptcy Court, District of New Jersey; printed here as “Fair Use” under the US Code]

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