FRAUDULENT TRANSFER NOT DISCHARGEABLE IN BANKRUPTCY

A transfer of property for the purpose of hiding the property from creditors is a fraudulent transfer of property. For example, you are being sued for $500,000 for breach of contract. A month after you are sued, you quitclaim your house to your friend Barack Khan, a direct descendant of Kublai Khan, son of Genghis. Your house has $400,000 of equity. After a year, plaintiff obtains a judgment against you for half a million dollars. To enforce the judgment he puts a lien of $500,000 on your house and attempts to force the sale of your house to satisfy the judgment. You object on the ground that the house you live does not belong to you. As proof, you give plaintiff a copy of the quitclaim to Barack Khan who is in your backyard living in a tent and tending to his horses. Plaintiff then files a motion to annul the quitclaim as a fraudulent transfer of property claiming that the purpose of the transfer was to hinder, hide, and delay or otherwise attempt to place the property out of his reach. You oppose the motion alleging that Barack paid you 400 Mongolian horses worth $1,000 each to pay you for your $400,000 of equity. Who will win?

 In Re Jennings, the debtor’s former husband, Bruce, controlled Bryco Arms, Inc., a company that manufactured handguns, and B.L. Jennings Inc., a company that distributed handguns. The appellee, Brandon J. Maxfield, was rendered a quadriplegic when he was accidentally shot by a handgun made by Bryco and distributed by B.L Jennings.

In May 2001, Maxfield sued Bruce Jennings and his two companies for personal injury. In December 2001, Maxfield amended the complaint to add the complaint to add the debtor and RKB Investments as defendants. RKB was a partnership created by Bruce and the debtor. KB was the owner of property known as Shoreview, which was worth $3.9 million.

 On May 13, 2003, a jury found the original defendants to be liable for Maxfield’s injury. The jury awarded him $24,774,146.53 in damages. The next day, the original defendants plus the debtor and RKB filed Chapter 11 petitions. The de3btor’s case was subsequently converted to Chapter 7.

In June 2007, the bankruptcy court ruled that the debtor participated in a joint venture with the original defendants. Therefore, she was jointly and severally liable with those parties for Maxfield’s damages. The court also found that the debtor was a conspirator with Bruce and RKB in the fraudulent transfer of Shoreview. Therefore, she was jointly and severally liable for the damages to Bruce’s creditors in the amount of $3.9 million. The debtor did not challenge this ruling.

 In December 2007, Maxfield filed an adversary proceeding against the debtor alleging that his claim for Shoreview’s value was excepted from discharge pursuant to Section 523(a)(6) which is the intent to cause injury to another. The bankruptcy court granted the debtor’s motion to dismiss, finding that a conspiracy claim was not the type of intentional tort that gave rise to a non-dischargeable claim under Section 523(a)(6).

 The district court reversed and remanded, finding that “in certain circumstances willful and malicious injury may be inflicted by a co-conspirator.”

On remand, the bankruptcy court granted the debtor’s motion for summary judgment. The court characterized the debt owed as the one resulting from the personal injury suit. Because Maxfield’s injury was not caused by the debtor, the court ruled that Maxfield’s claim against the debtor was not the result of her willful and malicious conduct. The court found that even though the debtor aided in transferring Shoreview with knowledge of the Maxfiled suit, her conduct and knowledge were “insufficient as a matter of law to establish intent to harm or cause injury to Maxfield as required by Section 523(a)(6).”

The district court REVERSED AGAIN, concluding that the evidence establishing a fraudulent transfer, also established that the debtor acted willfully and maliciously. The 11th Circuit Court of Appeals agreed. Thus, a fraudulent transfer of property by a co-conspirator constituted willful and malicious injury.

 Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally.  Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
 
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