TRANSFER OF $30,000 TO SON FOR COLLEGE BEFORE BK FILING FRAUDULENT

The 341a hearing for this case was held last week on Friday, the day after Thanksgiving. I was sitting in the courtroom minding my business waiting for my client’s case to be called. I noticed that the chapter 7 trustee’s questioning of debtor being interviewed had become more aggressive. This change in tone normally means that the trustee has just seen an asset that is worth something and is not exempt. In other words, the trustee believes that the asset belongs to the bankruptcy estate. Upon further questioning, it came out that debtor transferred $30,000 to his son two months before he filed his chapter 7 case. Question: Why did you give $30,000 to your son? Answer: I gave the money to him to pay for his college tuition and expenses. Question: When did you give the money to him? I gave him the money in August, two months before I filed my chapter 7 case. Question: Did your son pay you or do anything for you in exchange for the $30,000? Answer: No. Question: Sir, the $30,000 that you gave to your son is fraudulent and I want the money back. Answer: But he needs the money for college. Question: Sir, you owe your creditors $170,000 in credit card debt; your creditors also need the money you gave to your son. Question: Give me the name and address of your son; I am going to write him a letter to ask him to give the $30,000 to me. If he fails to do so, I am going to file a lawsuit against him to collect the $30,000.

 What is going on here? By these questions to debtor and his answers, trustee has determined that a fraudulent transfer of $30,000 to debtor’s son has taken place, and trustee is invoking the trustee avoidance powers to nullify the transfer. Section 548 of the bankruptcy code states that, “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 reasonable equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.”

If son does not turn over the $30,000 to trustee immediately, trustee will file an adversarial complaint against son to recover the money pursuant to Section 548. Will son have any defenses against the complaint? Theoretically, if son had given debtor an exchange of value for the money, this would be a good defense. For example, if son gave debtor a 2009 Lexus 350-R without liens to father for the $30,000, trustee would not be able to prove circumstances required by 548 (B)(i) causing the complaint to fail. However, debtor testified that son did not do anything for debtor to entitle him to get paid $30,000 by debtor. This is strong evidence that there was no exchange of value for the money.

 Even transfers made pursuant to a divorce judgment are subject to the trustee avoidance power of Section 548. For example, divorce judgment orders transfer of debtor’s community property share in equity of the residence to ex-spouse and debtor did not receive any exchange of value for this transfer. If transfer occurred within 2 years of the bankruptcy filing, the transfer may be annulled!

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 four 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.