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This page contains a single entry by Associate Editor - 3 published on May 19, 2011 3:51 AM.

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Recent Developments in Asset Protection Law, May 2011

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Recent Developments in Asset Protection Law, May 2011


FRAUDULENT TRANSFERS
Generally


Rocky Mountain Holdings: Undercapitalization, Consent Order, Limited Partnership, Antecedent Debt, and Reasonably Equivalent Value Issues Make For An Interesting Fraudulent Transfer Case

U.S. v. Rocky Mountain Holdings, Inc., 2011 WL 891823 (E.D.Pa., Slip Copy, Mar. 10, 2011).

This is a very interesting opinion with lots of issues that are germane to asset protection.


Schaefer: Where Does Title To Property Whose Transfer Has Been Voided As A Fraudulent Transfer Rest?

Schaefer v. Schaefer, 2011 WL 892384 (Iowa.App. Feb. 25, 2011).

In this Opinion, title to Iowa farmland was fraudulently transferred into an LLC and a court later voided the transfer. The question is: After a court voids a transfer of real property, who has legal title to the property? Read this fascinating opinion to see where the title eventually is deemed to rest.


Sarigianides: Late Transfer to Debtor's Attorney Deemed Fraudulent Transfer

Sarigianides v. Morris, 2011 WL 768816 (Cal.App. 2 Dist., Unreported, Mar. 7, 2011).

Lawyer attempted to tie up a piece of property with a $500,000 lien against actual attorney fees of $52,900. But, Sayeth the Court:

"All in all, this case presents the paradigm illustration of a fraudulent conveyance."


Carmack: Fraudulent Transfers and the Ordinary Course of Business and Estate Planning Defense
 
Individual Business Services v. Carmack, 2011 WL 1457133, 2011 Ohio 1824 (Ohio App. 2 Dist., April 15, 2011).

In this case, an Ohio appellate court found material issues of fact which should have prevented the trial court from entering summary judgment in favor of the creditor, and thus reversed the matter with instructions to go try the factual issues. What makes the case interesting is how the factual issues arise, which is in the context of the debtor asserting that the transactions were in the normal course of business and for estate planning purposes.


Struyk: The Perils of Interspousal Fraudulent Transfers


Struyk v. Meltzer, 2011 WL 1019916 (Cal.App. 4 Dist, Unpublished, Mar. 23, 2011).

Here is the opinion to show those clients who say, "My wife is not a debtor, so can't I just transfer everything into her name?"

The DDH ("Distressed Debtor Husband" -- a common breed in California these days) in this case did transfer valuable assets to his wife, who had no debts and a clean credit history, and they both were sued for fraudulent transfer.

Note that the wife was hit for a jury verdict well in excess of the value of the assets that she received, which is a permissible result as the court describes. In other words, not only did this transfer totally fail, but it made things a lot worse and merely created a second debtor for the creditor to chase. Being caught in a fraudulent transfer probably means that bankruptcy is no longer a viable option for them since their discharge will be denied, and such a debt is probably forever nondischargeable anyway.

Here is what happened, but you'll have to read the opinion to see how it turns out.

By the Court:

Struyk prepared a $500,000 check payable to Corporate Connections dated January 30, 2006. He gave the check to Scott and David Meltzer on the following day, after all the documents had been signed. Thereafter, David Meltzer quitclaimed his interest in the Meltzers' residence to his wife, Julie Meltzer, "as her sole and separate property." The document was recorded on March 9, 2006.

Struyk was unaware that David Meltzer had quitclaimed the Meltzer's residence to Julie Meltzer on March 9, 2006, and would have objected had he known about it. Julie Meltzer refinanced the residence three times between March and September 2006 because they "were in a cash crunch." The Meltzers had money tied up in another deal with Struyk and in other investments they were going to make. David Meltzer testified that Struyk suggested the quitclaim and refinancing, which would be quick because Julie Meltzer had a perfect credit score. Struyk denied suggesting the property transfer to Julie Meltzer, stating that it would have made it difficult for him to collect the $500,000 debt. David Meltzer also maintained, in the face of contrary testimony by Struyk, Scott and the notary, Melissa Lind, that he signed the Straight Note and Deed of Trust "weeks or months" after January 31, 2006.


Diamonds Are Forever -- In re M. Fabrikant & Sons, Inc. -- Numerous Complex Transfers Reviewed Under "Collapsing Fraudulent Transfer" Theory

In re M. Fabrikant & Sons, Inc., ___ B.R. ____, 2011 WL 309583 (Bkrtcy.S.D.N.Y., Jan. 25, 2011).

This case involved a corporation in financial distress, and a series of loans and repayments involving a consortium of banks to keep it afloat. Some creditors argued that the loans were actually complex and disguised fraudulent transfers by the banks to help the debtor loot the corporation. The court disagreed, but there is a very interesting and in-depth discussion of the application of so-called theory of "collapsing fraudulent transfers" where numerous transactions are involved, and how such is to be measured.

Here is a teaser from the opinion:

[U]nder appropriate circumstances, multiple transactions will be collapsed and treated as steps in a single transaction for analysis under the fraudulent conveyance laws. HBE Leasing Corp. v. Frank, 48 F.3d 623, 635 (2d Cir.1995); Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.1993) ("[A]n allegedly fraudulent conveyance must be evaluated in context; [w]here a transfer is only a step in a general plan, the plan must be viewed as a whole with all its composite implications.") (internal quotation marks and citations omitted). A party seeking to collapse a series of transactions must satisfy two elements, or prongs. First, "the consideration received from the first transferee must be reconveyed by the debtor for less than fair consideration or with an actual intent to defraud creditors." HBE Leasing, 48 F.3d at 635. Typically, the borrower acts as a conduit, and the consideration immediately passes to the third party. E.g., United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1302 (3d Cir.1986), cert. denied, 483 U.S. 1005, 107 S.Ct. 3229, 97 L.Ed.2d 735 (1987); Crowthers McCall Pattern, Inc. v. Lewis, 129 B.R. 992, 998 (S.D.N.Y.1991); see Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, 213 n. 12 (3d Cir.1990) (" 'Simultaneity' and 'purpose' are key to evaluating the transactions.")


Staff Iron Works: Trustee's Conclusory Allegations About Fraudulent Transfers Not Enough


Star Iron Works, Inc. v. J&L Equip. Co., 2011 WL 721651 (S.D.W.Va., Slip Copy, Feb. 22, 2011).

This is an interesting opinion as it relates to how a distressed business may continue to engage in transactions prior to bankruptcy but without those transactions rising to the level of fraudulent transfers. But note that this is a close case, and slightly better facts might have thrown the result the trustee's way.



Insolvency


In re Paul: Bankruptcy Trustee Fails to Prove Fraudulent Transfers


In re Paul, ___ B.R. ____, 2011 WL 767773 (8th Cir.BAP (S.D.), Mar. 7, 2011).

In a nutshell, the Trustee never proved that the Debtor was financially insolvent at the time the transfers were made and this inter alia sunk the Trustee's fraudulent transfer case.




Reasonably Equivalent Value


Performance Plumbing: Fraudulent Transfers Finding Based on Lack of Reasonably Equivalent Value and Transfer to Insiders

Bd. of Trustees v. Performance Plumbing & Heating, Inc., 2011 WL 745773 (N.D.Ill., Slip Copy, Feb. 16, 2011).

Just try to reconcile this case with the two other fraudulent transfer cases that I posted today!

Here, the Court seemingly placed the burden of proving "reasonably equivalent value" on the debtor, which of course is improper, although the context in which this comes up is a little funky because of the creditor's relationship to the debtor and the debtor's obligation to fund the ERISA plan.


Darrow: Are Property/Casualty Insurance Premiums Paid To A Commercial Insurer Always Considered "Reasonably Equivalent Value" For Fraudulent Transfer Purposes? No, Says This Georgia Bankruptcy Court


In re Darrow Automotive Group, Inc., 2011 WL 1321504 (Bkrtcy.S.D.Ga., Slip Copy, Mar. 29, 2011).

For those of us who practice in the area of captive insurance companies, there is almost a presumption that premiums paid for property/casualty insurance will always survive a fraudulent transfer analysis. But this opinion tells us that presumption may not always be true and that the entire factual circumstances for the premiums being paid had better be well-documented.


In re Creative Capital: Reasonably Equivalent Value And Fraudulent Transfers Where Credit Cards Used To Fund Debtor Corporation

In re Creative Capital Leasing Group, LLC, 2011 WL 1042666 (Bkrtcy.S.D.Cal., Unpublished, Feb. 10, 2011).

Another interesting fraudulent transfer case, involving a guy who borrowed on his credit cards and used the money to fund his LLC, which then repaid its loans to Bank of America which was loaning the company operating cash. When the LLC went BK, the Trustee sued Bank of America to recover the payments on the basis that the original transfers to the corporation were fraudulent transfers because there was no reasonably equivalent value exchanged.


Family Limited Partnership Interest Not Reasonably Equivalent Value for Fraudulent Transfer Analysis

In re Chadwick, 2011 WL 477858 (Bkrtcy.E.D.Tenn., Slip Copy, Feb. 7, 2011). Worth reading.


In re Tousa -- Long Discussion of "Reasonably Equivalent Value" in Bankruptcy Proceeding
 
In re Tousa, ___ B.R. ____, 2011 WL 522008 (S.D.Fla.)

Introduction by the Court:

The Appellants in this bankruptcy appeal are a collection of financial entities (the "Traneastern Lenders") FN1 that loaned appropriately $450 million in 2005 to a homebuilding joint venture involving TOUSA, Inc. ("TOUSA").FN2 The Bankruptcy Court below ordered the Transeastern Lenders to disgorge, as "fraudulent transfers" under Section 548 of the Bankruptcy Code ( 11 U.S.C. Sections 101, et. seq.), monies that they received on July 31, 2007, in repayment of their antecedent debt, and to pay prejudgment interest for a total disgorgement of more than $480 million dollars. The Transeastern Lenders appeal FN3 from this ruling as established by the Amended Findings of Fact and Conclusions of Law [ECF No. 722 in Bankruptcy Case No. 08-10928] ("the Opinion" or "Op.") and the Amended Final Judgment (the "Judgment") entered on October 30, 2009 by U.S. Bankruptcy Judge John K. Olson. This Court has jurisdiction pursuant to 28 U.S.C. § 158 and Federal Rule of Bankruptcy Procedure 8001(a).


Turner v. Ramo, LLC -- Are Notes "Reasonably Equivalent Value" for a Fraudulent Transfer Analysis? Maybe So, Maybe Not.

Turner v. Ramo, LLC, 2011 WL 541591 (S.D.Fla., Slip Copy, Feb. 8, 2011)

Plaintiff disputes the validity of the loans between Websta and Defendant, arguing that the transactions were not bona fide loans. Plaintiff contends that Warren Mosler, President of Defendant Ramo, organized Ramo solely for establishing a charter-flight service through Websta, and that Defendant and Mosler exercised complete control over Websta's operations and assets. Plaintiff further argues that Websta never repaid any of Defendant's purported loans and in fact the two entities never intended for Websta to pay Defendant anything. Rather, Plaintiff argues, Defendant simply purchased the aircraft for itself, but put title in Websta's name-Websta simply maintained the aircraft for Defendant and Mosler's own use. Accordingly, Plaintiff concludes that any discharge of Websta's "debt" was valueless and therefore Websta did not receive adequate value in exchange for the aircraft transfer.


Youngman: Financial Services found to be Reasonably Equivalent Value and not Fraudulent Transfers in this adversary proceeding

Youngman v. YA Global Investments LP, 2011 WL 576762 (Bkrtcy.D.N.J., Slip Copy, Feb. 9, 2011)

Under the undisputed facts in the record, the Court finds that the Debtor received reasonably equivalent value in exchange for the transfers received by Stone Street. First, the Court is persuaded that Stone Street provided services and financial advice of value to the Debtor in connection with the Promissory Note Structure and as contemplated in the CSA. Specifically, Mr. Beckman, principal advisor on the transaction and member of Stone Street, has testified that Stone Street monitored and restructured the debt, analyzed the risk involved, and assessed whether the Debtor's payments could be "pushed back." Moreover, Stone Street advised the Debtor on an ongoing basis concerning whether the market could absorb more of its stock and liquidity issues, whether trading of the stock needed to be suspended, and analyzed how much money the Debtor could raise and reasonably expect to use the public market for its stock to pay down its debt.


In re Classicstar: How "Reasonably Equivalent Value" is Tested

In re Classicstar LLC, 2011 WL 734559 (E.D.Ky., Slip Copy, Feb. 22, 2011)

In this short opinion which is a good read, the Court describes a two-step procedure for testing whether a transfer had "reasonably equivalent value", and also distinguishes the improper way of testing this term.


In re Permahos: Debtor Wins Discharge Even After Suspicious Pre-Petition Transfers

In re Permahos, 2011 WL 748144 (Bkrtcy.D.N.J., Slip Copy, Feb. 24, 2011)

As this opinion goes, a trustee cannot merely shout "Suspicious Transfers!" and win a denial of discharge, even if the pre-petition transfers are hinky.


Andres Holding: Alter Ego and Fraudulent Transfer Claims Survive Summary Judgment in Texas

Andres Holding Corp. v. Villaje Del Rio, Ltd., 2011 WL 860529 (W.D.Tex., Slip Copy, Mar. 8, 2011).

The commingling of personal funds with the funds of a business entity is a sure-fire way to make sure that an alter ego claim survives summary judgment, and this opinion is a stellar example of that.

But this opinion also offers a very interesting opinion about fraudulent transfers and lack of reasonably equivalent value in a complex project-financing "reorganization" context. It is worth the time to read on that point alone, which is towards the bottom of the opinion.




Parties To Fraudulent Transfer Action

Starnes v. C.I.R. -- IRS Fails To Prove Fraudulent Transfer Liability Against Shareholders

Starnes v. C.I.R., T.C. Memo. 2011-63, 2011 WL 894608 (U.S.Tax Ct., Mar. 15, 2011).

This is the first of several cases that involve the IRS attempting to pursue transferee liability, this one unsuccessfully against the shareholders of a business that was involved in a tax shelter.

This particular case involves North Carolina's fraudulent transfer and trust fund laws.


Rosier: West Virginia Court Says Wife Not A "Creditor" For Purposes Of Fraudulent Transfer Claim

Rosier v. Rosier, 705 S.E.2d 595 (W.Va. Nov. 23, 2010).

Not sure why my legal search database took so long to pick this one up, but it is pretty interesting insofar as the Court holds that a spouse is not a "creditor" of the other spouse for purposes of West Virginia's fraudulent transfer laws, under these facts.

Caution that this is nothing like a "ruling of general application" and turns on the nuances of West Virginia's marital property laws, and particularly the Court's finding that certain of the husband's property were his separate property.


Transferee Participants in Sham Mortgage Dodge Personal Liability to Creditor Because They Received No Personal Benefits From Fraudulent Transfer

In re Terra Bentley II LLC, 2011 WL 671753 (Bkrtcy.D.Kan., Slip Copy, Feb. 17, 2011).

Caution that another creditor might come up with some more creative arguments to hold these third-party transferee defendants in the case.

Introduction by the Court:

This proceeding is before the Court on a motion to dismiss filed by NRC Advisors, LLC, Steven Seat, Eric Comeau, and Tony Bettis ("the NRC Defendants"), four of the five Defendants in this action. They appear by counsel Frank Wendt of Brown & Ruprecht, PC. Plaintiff Village of Overland Pointe, LLC ("Village"), appears by counsel Steven R. Smith and Eldon J. Shields of Gates, Shields & Ferguson, P.A., and Ronald S. Weiss of Berman DeLeve Kuchan & Chapman L.C. The Court has reviewed the relevant pleadings and is now ready to rule.

Village is suing under the Kansas Uniform Fraudulent Transfer Act to avoid a mortgage the Debtor gave to another creditor. The NRC Defendants are those who allegedly caused the Debtor to give the mortgage, but there are no allegations that they personally received any interest in the mortgage or any personal benefit from the Debtor granting it. Village seeks relief in three counts. The first two counts ask to have the mortgage avoided, and the third count asks for actual and punitive damages. The NRC Defendants contend the Kansas UFTA does not authorize any recovery from someone who may have participated in a fraudulent transfer but personally received neither any of the property transferred nor any benefit from the transfer. After giving the matter due consideration, the Court concludes the NRC Defendants are right, and their motion to dismiss should be granted.


Hyosung: Asset Transfer From Debtor Subsidiary To Non-Debtor Subsidiary To Avoid Creditors Is Fraudulent Transfer And Also Supports Civil Conspiracy and Aiding And Abetting


Hyosung (America), Inc. v. Hantle USA, Inc., 2011 WL 835781 (N.D.Cal., Slip Copy, Mar. 4, 2011).

Here, assets were transferred from a debtor subsidiary to a non-debtor subsidiary in order to avoid creditors of the debtor subsidiary. The creditor "threw everything and the kitchen sink" in terms of causes of action against the transferee, including common-law fraudulent transfer, civil conspiracy, and aiding and abetting -- and the Court refused to dismiss any of the creditor's claims.


Amerlink: Fraudulent Transfer Supports Unjust Enrichment Action Against Transferee

In re Amerlink, Ltd., 2011 WL 1048848 (Bkrtcy.E.D.N.C., Mar. 18, 2011).

For those of you who have ever said, "The only thing that happens when a fraudulent transfer is found is that the transfer is reversed", you're wrong! This is one of the biggest misconceptions in asset protection planning, but unfortunately it is a phrase that is still repeated over and over at seminars.

To the contrary, the UFTA gives the Court broad latitude to fashion remedies to try to make the creditor whole. But even in addition to that, a creditor may directly sue the transferee on a variety of theories, such as -- as discussed in this case -- unjust enrichment.


Akanthos Capital: Noteholders Of Corporation Can Sue Corporate Officers And Directors For Fraudulent Transfers For Diminishing Corporate Value By Inside Transfers

Akanthos Capital Mgt., LLC v. CompuCredit Holdings Corp., ___ F.Supp.2d ____, 2011 WL 987353 (N.D.Ga., Mar. 15, 2011).

This is an excellent discussion of fraudulent transfer law -- in fact, one could teach an entire morning of CLE on fraudulent transfer (and to a significant extent, corporations law) just by going over this one opinion.

In a nutshell, the plaintiffs were debt noteholders of a corporation which was increasingly in distress. When the corporation presented them with a proposal for a lowball buyback of their notes, under the threat that the corporation would end up failing and they would get nothing, the noteholders sued the corporation and the corporate insiders for fraudulent transfers and alleged that they were making transfers and distributions to shareholders and taking other steps to reduce the value of the corporation so as to be able to stiff the noteholders if they didn't take the deal.

On the flip side, if you have clients who are corporate officers or directors, you ought to send them a copy of this opinion and say, "Here is why you need to do asset protection well in advance of dark clouds appearing on the horizon, and not when it starts thundering and raining."




BANKRUPTCY

Generally


In re Allou: Fraudulent Transfers Involving Talmudical Academy

In re Allou Distributors, Inc., ___ B.R. ____, 2011 WL 941603 (Bkrtcy.E.D.N.Y., Mar. 18, 2011).

This case involves a variety of numerous and complicated loans and gifts between a corporation being looted by its officers (who later went to jail) and an educational association which had some community association with those officers. The bankruptcy trustee alleged that the loans and gifts were fraudulent transfers meant to park money for the embezzling officers, and the matter came up on the summary judgment motion of the academy.


Wren Alexander: Bankruptcy Can't Stop IRS Fraudulent Transfer Action Against Transferee

In re Wren Alexander Investments LLC, 2011 WL 671961 (Bkrtcy.W.D.Tex., Slip Copy, Feb. 17, 2011)

Introduction by the Court:

The Chapter 11 Debtor filed an objection to the IRS's proof of claim. The IRS asserted a claim against a delinquent third party taxpayer and a lien on the Debtor's real estate by virtue of two fraudulent transfers. The Debtor's objection to the claim will be overruled because the IRS has sustained its burden of proof.


In re Ryan: Corporate Veil Piercing Fails in this Texas Bankruptcy Adversary Action

In re Ryan, ___ B.R. ____, 2010 WL 3420540 (Bkrtcy.N.D.Tex., Aug. 26, 2010)

A very interesting read on how the owner of a corporation was able to narrowly escape the application of veil piercing doctrines in this Texas adversary proceeding.


Bankruptcy Fraud

Attorney Convicted of Bankruptcy Fraud for Assisting Clients with Pre-Bankruptcy Fraudulent Transfers

Better late than never, as this Opinion came out in August but I didn't catch it until just now.

U.S. v. Anderson, 2010 WL 3069672 (S.D.W.Va., Slip Copy Crim No. 09-00233, Aug. 5, 2010). Note that the Attorney's charge to perform the transfer was only $150 -- probably the worst $150 that a lawyer ever earned!



Executory Interests

Ehmann Lives! Bankruptcy Trustee Can Take Over LLC says 9th Cir BAP

Lots of juicy issues in the case of In re First Protection Inc., ___ B.R. ____, 2010 WL 5059589 (9th Cir.BAP (Ariz.), Nov. 22, 2010).

The Ehmann case which dealt with the Bankruptcy Code 345/541 executory interest conundrum, and this Court also finds in favor of the Trustee on the same issue in this case.



Pre-Bankruptcy Planning

In re Permahos: Debtor Wins Discharge Even After Suspicious Pre-Petition Transfers

In re Permahos, 2011 WL 748144 (Bkrtcy.D.N.J., Slip Copy, Feb. 24, 2011)

As this opinion goes, a trustee cannot merely shout "Suspicious Transfers!" and win a denial of discharge, even if the pre-petition transfers are hinky.


Lumbar: Pre-Petition Transfers of Exempt Homestead Property Could Not Be Avoided by Creditor

In re Lumbar, ___ B.R. ____, 2011 WL 754854 (Bkrtcy.D.Minn., March 3, 2011)

This is a an interesting case that involved a series of transfers of property immediately prior to the filing of the bankruptcy petition. The Court concludes that the transfers could not be avoided, principally because the property was exempt homestead under Minnesota law. The case is a good read on how a bankruptcy court addresses these issues.


In re Bronk -- Pre-Bankruptcy Planning Heavily Criticized by Court : Fraudulent Conversion of Non-Exempt Assets to Exempt Assets and and Bankruptcy Trustee Gets the College Savings Accounts

In re Bronk, 2011 WL 61605 (Bkrtcy.W.D.Wis., Slip Copy, Jan. 7, 2011)

Introduction by the Court:

One of the most contentious aspects of bankruptcy law is the notion that by filing for relief debtors are getting away with something. This impression is only heightened when a debtor converts non-exempt assets into exempt property on the eve of bankruptcy in an attempt to protect them from creditors. Often innocuously described by debtors as "pre-bankruptcy planning," this transformation of assets is frequently regarded by others as a shell game, easily manipulated by a clever operator into a vehicle for fraud.FN1 In this case, the trustee takes exception to Mr. Bronk's pre-petition efforts to shield approximately $140,000.00 from his creditors. Resolution of the dispute requires consideration of not only the boundaries of permissible bankruptcy planning but also Wisconsin exemption law. For the reasons which follow, the Court concludes that Mr. Bronk is entitled to a discharge, but not to all of the exemptions he has claimed.


Denial of Discharge

Morgan: Life Insurance Agent Pays Client's Premiums With His Own Credit Cards But Loses Discharge Due To Poor Record Keeping

In re Morgan, 2011 WL 864963 (Bkrpt.E.D.Tn. Mar. 11, 2011).

This is an interesting case technically because it discusses how late credit card debt is sometimes treated in bankruptcy. But it is probably more interesting for the fact that when the economy turned south, this guy went around paying his client's life insurance premiums off his own credit cards.

I've seen a lot of strange stuff during the two serious recessions since I've been a lawyer, but this must rank as one of the strangest tales of financial desperation (or client loyalty?!?) during a downturn.


Hawkins v. FTB -- Excessive Pre-Petition Expenditures Lead To Denial Of Discharge

Hawkins v . FTB, 2011 WL 1045274 (N.D.Cal., Slip Copy, Mar. 22, 2011)

This guy continued to lead a wealthy lifestyle while knowing that he had significant unpaid liabilities, and the result was that his discharge was denied.

From the factual background by the Court:

In a monthly income and expense analysis attached to his October 2005 Offer In Compromise, Hawkins reported wages of $16,667.67/month and an "unknown" amount of interest/dividends while reporting $94,900/month in expenses. ( Id. at 190 (Collection Information Statement for Wage Earners and Self-Employed Individuals).) These expenses included, among other things, $7,000/month for "Food, Clothing and Misc.," $33,600/month for "Housing and Utilities," $2,700/month for "Transportation," $4,500/month for "Child/dependent care," and $40,550/month for "Other expenses." ( Id.) The "Housing and Utilities" expense reflected payments on a $4 million loan Hawkins took out on his Atherton home in order to fund his failing 3DO venture. ( See Appellant's Br. at 21; App. at 367 (Testimony of William M. Hawkins, III, December 3, 2009).) The "Transportation" expense included monthly payments of $1,207.61 on a Cadillac Escalade, which Hawkins and his wife bought for $69,974.28 in October 2004 to serve as the fourth vehicle for their family of two drivers. (Slip op. at 10 & n. 5; Appellant's Reply Br., Ex. D (Testimony of Lisa Warnes Hawkins, December 1, 2009).)

[Footnote 2] In September 2006, Hawkins filed a Chapter 11 bankruptcy petition. Hawkins filed schedules reporting expenses of $3,500/month for "Food," $1,100/month for "Recreation, clubs and entertainment, newspapers, magazines, etc.," $2,328/month for "Transportation" (including auto insurance and loan payments) and $3,800/month for "Child Care." (App. at 215-16.) The bankruptcy court found Hawkins' housing expenses to be $24,583/month, (Slip op. at 22), but Hawkins argues that his actual housing expenses at that time were $7,500/month (Appellant's Br. at 22; see also App. at 215).


In re Rahim: High-Living Debtors Bankruptcy Case Dismissed


In re Rahim, ___ B.R. ____, 2010 WL 5128944 (Bkrtcy.E.D.Mich.)

The issue before the Court is whether the debtors, who earn, and spend, over $509,000 per year, are entitled to relief under chapter 7 of the bankruptcy code. The Court concludes that the answer is no. Accordingly, the Court finds that there is "cause" to dismiss this case under 11 U.S.C. § 707(a). The case is therefore dismissed.


In re Cantu: Denial of Discharge for Hiding Assets and Spouse Also Denied Discharge


In re Cantu, 2011 WL 672336 (Bkrtcy.S.D.Tex., Slip Copy, Feb. 17, 2011)

Hiding assets and then filing a voluntary bankruptcy is usually not a good tactic. In addition to being denied a discharge, the odds are high that the State Bar of Texas will pull this guy's ticket for dishonest conduct, meaning both that his future revenue as an attorney will disappear and he may lose his attorney liens in cases. Then there is always the spectre of a possible prosecution for bankruptcy fraud.

This opinion is also instructive for when the "innocent spouse" defense to denial of discharge will be granted, or not granted as in this case.

Although Texas has liberal exemptions, you probably don't want a denial of discharge in Texas because of the equally liberal powers of a state court appointed Receiver when the bankruptcy is terminated. The Receiver can answer your mail, write checks on your accounts, cancel your children's private school, trade your Dallas Cowboys season tickets, and generally make your life a living hell.


Lombard: Blatant Lying Leads to Denial of Discharge -- Sting Operation by Trustee

In re Lombard, ___ B.R. ____, 2010 WL 3504130 (Bkrtcy.W.D.Mo.)

Introduction by the Court:

This revocation of discharge proceeding presents one of the more blatant cases of lying, deception and fraudulent conduct to come before the Court in years. In the eyes of the Chapter 7 panel trustee, it is the most egregious case of deception he has seen in his more than 20 years as a panel trustee. The evidence adduced at the trial on the United States Trustee's ("UST") complaint under 11 U.S.C. § 727(d)(1) and (d)(2) confirmed these characterizations. Thus, it should be no surprise that the Court finds ample evidence here to support a revocation of discharge under § 727(d)(2); the UST's § 727(d)(1) action, however, is time-barred and must be dismissed.



BANKRUPTCY STAY

Rountree: Bankruptcy Stay Prevents State Fraudulent Transfer Action Against Debtor In Bankruptcy But Not Against Transferees

In re Rountree, 2011 WL 806193 (Bkrtcy.E.D.Va., Mar. 2, 2011).

This is a very lengthy opinion that goes into a detailed analysis of many of the technical aspects of a fraudulent transfer clam and action, including when claims arise for purposes of the UFTA, and the general nature of a fraudulent transfer action. While long, it is well worth reading.

The Court concludes in this case that while the bankruptcy stay prohibits the creditor from continuing to proceed in a state court proceeding against the debtor-in-bankruptcy for a fraudulent transfer, the stay does not prohibit the creditor from continuing to go after the transferees to recover the assets allegedly fraudulent transferred.

Whether this result makes any sense considering that the assets are the debtor's assets and thus part of the debtor's estate, and the creditor cannot proceed against the debtor's estate once the bankruptcy petition is filed, I leave to you to decide.



TRUSTS

In re Quaid: When Self-Funding an Existing Trust is Self-Settling the Trust

 
From the Opinion's Conclusion:

Debtor transferred to the Trust assets he now seeks to shield from creditors. Debtor, as a Trust beneficiary and settlor, cannot shield assets from creditors by putting them in the Trust and declaring them exempt because of the spendthrift provision. The $359,697.46 can be reached by Debtor's creditors, and is part of the estate.



BUSINESS ENTITIES

Fairstar: Whose Law Applies To A Charging Order Dispute And Foreclosure?

American Institutional Partners, LLC v. Fairstar Resources, Ltd., 2011 WL 1230074 (D.Del., Mar. 31, 2011).

In issuing charging orders and allowing the foreclosure of charging orders in Utah against 30-some Delaware LLCs, the Utah courts didn't give a hoot about Delaware law. So, the debtor and the LLCs are trying to go to Delaware for declaratory relief. Let's see how this one turns out (I'm betting on the creditor).


Rossignol: NY Court Allows Divorce Court to Handle Disposition of LLC Wholly Owned by Husband and Wife

Rossignol v. Rossignol, ___ N.Y.S.2d ____, 2011 WL 723041, 2011 N.Y. Slip Op. 01560 (NYAD Dept. 3, Mar. 3, 2011).

In this case, a NY court treats an LLC as effectively a single-member LLC where it is owned by a Husband and Wife who are adversaries in a divorce proceeding.

To me, this conclusion is logical and makes perfect sense, but some pundits are starting to post along the lines of "Warning! Olmstead now being further expanded to husband and wife!", which is not really true because this matter does not deal with the external creditors of either Husband or Wife but instead how the Court is disposing of a marital asset.

Note that I am in the group who believes that Olmstead was CORRECTLY decided under the quite-logical rationale of In re Albright, i.e., charging order protection historically exists to protect the non-debtor member of an entity from being forced into being operating partners with a creditor of a debtor member, and this protection should not exist where there are no non-debtor partners who have interests worth protected.

Plus, the Olmsteads were running an advance fee credit card scam, and should not have been able to protect any of their assets if nothing else than on general principles. But I guess that is another issue for another day.



NON-BANKRUPTCY PREFERENTIAL TRANSFERS

United Ass'n v. Schmidt: Preferential Transfers By A Debtor To One Legitimate Creditor To The Detriment Of Other Legitimate Creditors Not Fraudulent Transfers, Conversion, Or Anything Else Bad

United Ass'n v. Schmidt, 2011 WL 766057 (D.N.J., Slip Copy, Feb. 24, 2011)..

This opinion is a good example of how -- outside of bankruptcy -- in many states a debtor may legally "prefer" one unsecured, legitimate creditor by transferring assets to pay off that creditor, to the detriment of other unsecured, legitimate creditors.



PROMOTERS

Merrill Scott -- When An Asset Protection Plan Requires That You Give Up Assets To Your Planner Or A Company Owned By Your Planner, Bad Things Are Apt To Happen

Broadbent v. Advantage Software, Inc., 2011 WL 754838 (10th Cir., Mar. 4, 2011)

Here is a case where the client transferred valuable license rights to a shell company owned by the Merrill Scott law firm, who turned out to be a bunch of scammers. When Merrill Scott went down and was taken over by a receiver, the client was left arguing that the transfers were not really bona fide transfers but were like "friendly mortgages" that were not really an asset of Merrill Scott and thus not part of the receivership estate. The District Judge, and in this opinion the 10th Circuit, disagreed.

My point is that pretty much every time I see a deal where a client is required to transfer something valuable to the promoter to make the deal work, something has gone seriously wrong, and the client ends up with big (real) losses.



GENERAL INTEREST

The Jasper Jasgur Case: Fraudulent Transfers And How A Valuable Photo Collection Ended Up Being Owned By A Drywall Company

In re Seminole Walls & Ceiling Corp., ___ B.R. ____, 2011 WL 768745 (Bkrtcy.M.D.Fla., Mar. 2, 2011).

This is one of the most interesting fraudulent transfer cases you will ever read, whereby a valuable collection of photographs is passed -- sometimes fraudulently -- between various parties and then becomes the subject of a big dispute after the photographer's passing.

Highly recommended reading!


U.S. -v- Simon: For The Client Who Wants To Evade Taxes With Offshore Accounts And Sophisticated Schemes

U.S. v. Simon, 2011 WL 924264 (N.D.Ind., Slip Copy, Mar. 14, 2011).

First offense, and he's going to get 70 to 87 months. Time in federal prison is "hard time" too -- he'll actually serve most of that.