LARGE MORTGAGE PAYMENTS FROM SALE OF ASSETS MAY BE EVIDENCE OF FRAUD IN BANKRUPTCY

Imagine you won the new Prius in your church lottery. Instead of keeping the car, you sold it for $25,000. You use the $25,000 to pay down the mortgage on your house. After six months, you decide to file for Chapter 7 relief because you owe $100,000 of credit card debt of which $40,000 is owed to American Express. AX files an adversarial complaint objecting to the discharge of the $40,000 alleging that the payment of $25,000 was made with the intent to hinder, delay or defraud American Express. You argue in your defense that you made the payment of $25,000 to save your house from foreclosure. Who is correct? I would have to say that this is a close call. It’s just like the presidential elections, it’s a dead heat today 5 days before the elections.

In Re Villani , the Plaintiff in August 2006, sold a catering business to CR Oakcrest Cove Inc., an entity partially owned by the debtor. The debtor personally signed a promissory note in the amount of $300,000 as partial payment. No payments were ever made. In October 2007, the Plaintiff sued the debtor, his businesses, and others. On October 25, 2007a preliminary injunction was entered by the state court requiring payments from the business be paid into an escrow account. The debtor filed for Chapter 7 relief in January 2009. He listed the Plaintiff as the holder of a disputed claim in the amount of $400,000 described as a “trade debt.” In April 2010, the Plaintiff filed an adversary complaint objecting to the debtor’s discharge pursuant to § 727(a)(2)(A) on the grounds that he “transferred and concealed at least $130,000…in direct violation of the Preliminary Injunction.” In particular, the creditor alleged that debtor sold his boat, deposited the $85,000 he received for the boat into Villani Construction Inc.’s payroll account, and then paid $85,000 from the payroll account to Wells Fargo Home Mortgage to reduce the first mortgage on debtor’s home. The creditor also alleged that the debtor similarly deposited $21,719.86 he received in settlement of a claim for damage to his truck into the payroll account and then transferred $18,257.36 from the payroll account to Wells Fargo. Finally, the Plaintiff alleged that the debtor withdrew $36,892 from his retirement account, which he then deposited into his sweetheart’s personal account. She kept about $10,000 as reimbursement for bills she had paid, and used the rest of the money to pay the debtor’s bills.

Debtor did not deny that the transfers were made, but said he did not intend to defraud the Plaintiff. However, he testified that he took steps to save his home from foreclosure, and his girlfriend, who was also his bookkeeper, said the payroll account was established because a woman at the bank said an account labeled “payroll” is safe. The bankruptcy court considered the three transactions identified by plaintiff, and concluded that the debtor did not intend to hinder, delay or defraud creditors, despite the facts that the debtor deposited money into accounts which were not subject to attachment, and took steps to protect his assets, including his house. Oops, there could be a legal boo-boo here. Plaintiff appealed and the 1st Circuit reversed.

“It is undisputed that the debtor applied the insurance and boat proceeds to reduce his mortgage in order to safeguard his home from foreclosure, an inescapable reference to protection from his creditors,” said the Appeals court. “There is no question that the debtor made all of the transfers while in financial distress; the general chronology of events demonstrates that each transaction was consummated on the heels of the preliminary injunction and in the shadow of the debtor’s bankruptcy filing. Additionally, the debtor failed to disclose any of the subject transfers on his Statement of Financial Affairs.” The Appeals court said every indicia of fraud articulated in Marama v. Citizens Bank, was present in this case, including blaming the Benghazi terror attack on September 11 on the You-Tube video.

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.