Explaining a Bankruptcy Fraudulent Transfer by California Bankruptcy Attorney Jeffrey Hsu of JCH Law Firm

Posted by on Nov 22, 2011 in Chapter 11 Bankruptcy Issues, Chapter 13 Bankruptcy Issues, Chapter 7 Bankruptcy Issues, Creditor's Rights in Bankruptcy, Discharge in Bankruptcy | 1 comment

What’s a bankruptcy fraudulent transfer?  Well, it happens when a debtor conceals or transfers away property to avoid claims of executing creditors for purposes of bankruptcy.  In bankruptcy, there are 2 types of fraudulent transfer laws: state based under Section 544 and federally based under 548 of the Bankruptcy Code.  The state law version has a longer statute of limitations depending on the applicable state whereas the federal version looks back 2 years before the time the bankruptcy case was filed.

For example, John intends to file bankruptcy but he owns a fancy BMW that is paid off and worth $70,000.  John learns that under California bankruptcy law, that the chapter 7 California bankruptcy trustee will liquidate and sell the BMW to repay John’s creditors.  Although John is entitled to payment of some of the equity in the BMW under bankruptcy law, John will lose the car and find that a significant portion of the car sales proceeds will go towards creditor repayment.   John doesn’t like this scenario so John decides he will be smart and transfer title to his best friend, Steve.   Steve is a good friend and decides to help John do this by receiving title to the BMW.   Shortly thereafter, John files chapter 7 bankruptcy and is asked whether he has ever sold or transferred property to anyone.  John, thinking he did nothing wrong, says to the trustee that he transferred the BMW to Steve and that the car is no longer his.   John immediately realizes something is wrong when the trustee’s eyes light up and the trustee’s voice becomes highly animated.   The trustee then says to John, ” well that’s a bankruptcy fraudulent transfer so I’m going to take that car from Steve because that car is property of the estate.  I’m gonna sell it to repay your creditors!”   Turns out the trustee is right and sells the car.   John’s strategy backfired completely under the bankrupty fraudulent transfer rules put in place under law.   John had no idea what he did was improper but it doesn’t matter – a fraudulent transfer is a fraudulent transfer regardless of intent.  Had John engaged in actual fraud, it could also cause John to to lose discharge under §727(a)(2) in addition to losing the BMW.

Luckily, in most cases of good faith mistakes, a transferee can return the property to the transferor pre-petition and nullify the effect of the first transfer.  See In re In re Top Sport Distributors, Inc., Bkrtcy.S.D.Fla.1984, 41 B.R. 235 (There were no transfers to avoid as either fraudulent or preferential transfer when debtor repaid loans to its principals, but each principal redeposited loan proceeds back into debtor’s bank account, nullifying the transfers).  However, that is not always the case, and each scenario must be looked at independently under the totality of the circumstances.

A bankruptcy fraudulent transfer is something that should be avoided and thus, persons considering bankruptcy should consult a Bankruptcy Attorney when deciding whether bankruptcy is appropriate or not.   At JCH Law Firm, Southern California Bankruptcy Attorney Jeffrey Hsu has experience filing California bankruptcy cases for debtors and creditors.   If you are located in Southern California or face a Southern California bankruptcy issue, contact our offices today at 800-371-5523 immediately.

 

 

 

 

 

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