This post is the fourth in a series in which I will discuss fraudulent transfers.  The second post discussed the sources for a trustee’s authority to avoid a fraudulent transfer.  This one deals with the mechanics of fraudulent transfer avoidance. 

            D.        Avoiding Fraudulent Conveyances

            1.        The Power To Avoid

The Bankruptcy Code’s fraudulent transfer avoidance power is found in beginning of 11 U.S.C. § 548(a):  “. . . the trustee may avoid any transfer . . . of an interest of the debtor in property . . .” and in 11 U.S.C. § 548(b):

The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.

The first avoidance passage — from § 548(a) — is quite general and encompasses any sort of fraudulent conveyance, whether or not the debtor was insolvent.  The second provision is much more narrowly tailored, and applies only to a debtor that is a partnership that was insolvent at the time of transfer, or immediately after the transfer.

The trustee will learn of the transfer because the debtor is required to report it in item 10 of the Statement of Financial Affairs.  Failure to report the transfer is perjury, which can be redeemed for free room and board at government expense.

The vehicle for avoiding a fraudulent transfer is an adversary proceeding pursuant to Fed. R. Bankr. Proc. 7001(1): 

The following are adversary proceedings:  a proceeding to recover money or property, other than a proceeding to compel the debtor to deliver property to the trustee, or a proceeding under §554(b) or §725 of the Code, Rule 2017, or Rule 6002.

An adversary proceeding is a full-blown lawsuit, so it’s a big deal.

Why does the Bankruptcy Code provide for the avoidance of fraudulent transfers?  When a debtor files bankruptcy papers an estate is created that consists of all of the debtor’s assets (except those the debtor can exempt).  In theory, the debtor ceases to be liable for those debts (this ultimately happens when the debtor receives a discharge, though some types of debts may not be dischargeable), and the debtor’s debts become claims against the estate.  The estate is the pot from which creditors are to be repaid.  A fraudulent transfer diminishes that pot.  
Continue Reading Fraudulent Transfers IV

This post is the third in a series in which I will discuss fraudulent transfers.  It covers the statutory definitions.  This one’s a bit long because the definitions are a bit labyrinthine.  If you think it’s dry, then avoid Syrahs and stick to Rieslings.

C.        The Definition Of Fraudulent Transfer

1.        The Intent Definition

i.          The Bankruptcy Code’s Definition

11 U.S.C. § 548(a) contains two independent definitions of fraudulent transfer.  We begin with the first definition, found in § 548(a)(1)(A).  A transfer is fraudulent (with emphasis added):

if the debtor voluntarily or involuntarily — 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.

An interesting feature of this definition is that the transfer need not have been voluntary on the part of the debtor.  Thus, even though the term “fraudulent transfer” seems to imply ill intent on the part of the debtor, the debtor might not have wanted the transfer to take place.  The statutory ill intent is on the part of the transferor, who may or may not be the debtor.

This first definition in the Bankruptcy Code captures the essence of Horace’s behavior.  (Horace was the ancient Roman we met in our first fraudulent transfer post.)  The transfer was done with the intent to hinder, delay, or defraud the creditor.  An important feature of this definition is that it requires the transfer to have been made after the debt in question was incurred.  Therefore, using § 548 the trustee would be unable to avoid transfers that antedated the incurrence of the debtor’s debts.  This is in contradistinction to the first definition given in California’s UFTA.  (As with the Bankruptcy Code, the UFTA has two independent definitions of “fraudulent transfer.”)
Continue Reading Fraudulent Transfers III

This post is the second in a series in which I will discuss fraudulent transfers.  I have been told that my posts are too long.  Therefore, today I’ll briefly discuss the source of a bankruptcy trustee’s fraudulent transfer avoidance powers.

B.        The Trustee As Heir To Creditors’ Avoidance Power

One of the complications associated with fraudulent transfer jurisprudence in bankruptcy is found, not in 11 U.S.C. § 548 (the statutory section dealing with fraudulent transfers), but in 11 U.S.C. § 544(b)(1) (emphasis added):

Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502 (e) of this title.

This means that the trustee  can appeal to nonbankruptcy law to avoid a fraudulent transfer.
Continue Reading Fraudulent Transfers II

In this series I will discuss fraudulent transfers, a concept that has some similarities to preferential transfers — our previous topic — but has much more serious consequences, especially in bankruptcy.  Today I’ll start with a folksy introduction.  In subsequent posts I’ll deal with the much more technical legal aspects of fraudulent transfers.

A.        Introduction

I frequently have conversations with potential clients who assure me that I needn’t worry about the principal residence because the potential client transferred title of the house to a relative.  I used genderless terms in the previous sentence, but the reality is that my interlocutor is usually a man who has transferred title to his wife.  He tells me this with some measure of pride, perhaps believing he’s the first person ever to have thought of this clever idea.

My response is to tell the gentleman that he did what the law refers to as a fraudulent transfer (a.k.a. fraudulent conveyance).  I let him know that the ancient Romans were well aware of this “clever” idea, and had laws to address it.  (See, e.g., Theodor C. Albert, The Insolvency Law Of Ancient Rome, 28 Cal. Bankr. J. 365 (2006).  Sorry, I don’t have a link, so you’ll have to consult your local library to get a copy.)  I add that over the last two thousand years, in response to all sorts of machinations that debtors have tried in their attempts to avoid the strictures of fraudulent transfer law, the law has become extremely sophisticated and now has two independent definitions to the term fraudulent transfer.  I then tell him that careful prebankruptcy planning may be required to prevent problems in the bankruptcy.
Continue Reading Fraudulent Transfers I

If you’ve been following the news from Wall Street, you might assume that the economy is finally improving.  For example, in the July 11, 2013 issue of The Wall Street Journal’s Market Watch, Kate Gibson reported:

U.S. stocks leapt Thursday, with the S&P 500 up for a sixth day and setting a record finish, after Federal Reserve Chairman Ben Bernanke said the Fed would remain accommodative.

Whoopee Wall Street!

I.          Unemployment And Underemployment Are Growing

However, there are threatening clouds overshadowing the current economy.  One of them is the combination of growing unemployment and underemployment.  Indeed, in the very same Market Watch article Ms. Gibson reported:

Labor Department figures released Thursday showed first-time jobless claims rising last week by 16,000 to a two-month high of 360,000.

Moreover, in the May 3, 2013 issue of Market Watch Rex Nutting reported that although there were more jobs created, there were fewer hours worked:

The April employment report exceeded expectations, with 165,000 jobs created and a welcome drop in the unemployment rate to 7.5%.  But there was a dark side to the report:  Total hours worked fell sharply, and the total amount of money earned by U.S. workers actually declined from the month before.  “Aggregate weekly hours” is an obscure series of data in the jobs report, but it’s vital to understanding how strong the economy is performing. As the name implies, it measures the total number of hours worked, which is what matters for sizing up overall growth in the economy.

In fact, the reduction in hours worked translates into what is economically equivalent to a loss of 500,000 jobs.  As Mr. Nutting pointed out:
Continue Reading The Economy, Reduced Work Hours, Bankruptcy

On January 30, 2013 Shan Li of the L.A. Times reported:

Nearly 44% of American households are one emergency away from financial ruin.  That means they don’t have enough savings to cover basic living expenses for three months if something unforeseen happens such as losing a job or falling sick, according to a recent study by the Corporation for Enterprise Development.  Almost a third of Americans have no savings account at all. . . .  Many people living precariously have jobs.  About 75% are working full time, and more than 15% are earning middle-class incomes of more than $55,000 a year, according to the report.  But despite steady jobs, many of those surveyed are surviving paycheck to paycheck, trying to cope with the recession’s aftermath; one emergency could tip them over “the edge of financial disaster.”  Possible reasons for their lack of savings?  Experts say many factors could be at play, including stagnating wages, rising prices and high credit card debt.

It’s worth noting that a fairly large number of employed people are underemployed, which gives a partial explanation for the precarious position of many people.

How do folks deal with an income shortfall?  Some tap into their credit cards, and increase their debts.  Then they use other credit cards to pay the new credit card debt, and eventually things spiral out of control.

However, a growing number of people are turning to loan sharks for extra cash.  The breathtakingly high interest rates on Payday loans, Cashcall loans, and loans from Don Corleone guarantee a bleak financial future.  In the April 24, 2013 Los Angeles Times, Alejandro Lazo reported:

Payday loans often trap consumers in a cycle of debt, a new report by the federal government finds.  The Consumer Financial Protection Bureau found that the average consumer took out 11 loans during a 12-month period, paying a total of $574 in fees — not including loan principal. A quarter of borrowers paid $781 or more in fees.
Continue Reading Bankruptcy: What’s In your Wallet? It’s A Loan Shark!

In Part 1 of my two-part series discussing the issue of filing for bankruptcy after a previous bankruptcy had been filed, I mentioned “disposable monthly income” in the context of Chapter 13 bankruptcy and told you that this post would discuss it in detail.  This isn’t the first time I have promised to discuss this topic.  I have put it off because of the somewhat esoteric, indeed recondite, dare I even say arcane, nature of the subject.  However, there have been some very recent developments in the case law on “disposable monthly income” that make it ripe for discussion.  Therefore, this post makes good on my promises.
Continue Reading Disposable Monthly Income In A Chapter 13 Bankruptcy

An ongoing source of distress for debtors is truly abusive debt collectors.  Many of these alleged humans ignore the due process rights of debtors, lie, and break the law in their efforts to shake down debtors.  Can anything be done?  Finally, the federal and state governments are starting to take some action.

I.          The Problems

A.        Collectors Fail To Follow The Due Process Rules

I regularly have clients show me abstracts of judgment from state court cases in which they knew nothing about the suit until receiving the judgment.  Are my clients lying?  I don’t think so.  In fact, a California state senator had the same thing happen to him.  According to Jim Puzzanghera, in the August 20, 2012 Los Angeles Times:

Several years ago, debt collectors began pursuing state Sen. Lou Correa (D-Santa Ana) for an unpaid Sears bill they said he owed.  He told them they had the wrong man, but the debt collectors never wavered.  “These folks are very aggressive,” Correa said. “They’ll call back repeatedly and say, `Tell us some personal information so we can tell it’s not you.’  When all of a sudden is the burden of proof on me?”  Last year, Correa discovered his Senate paycheck was being garnisheed [sic] because of a $4,329 lien for the Sears debt.  Brachfeld had obtained a default judgment in court, even though, Correa said, the lawsuit was never served on him and he knew nothing of the claim or the court hearing.  He later learned that the debt belonged to a Luis Correa from Santa Ana. The man had a different Social Security number, different address, even different first name — the senator is legally Jose Luis Correa.  “I always pay my bills on time.  Then to have somebody garnish my wages, I thought was pretty astounding,” the lawmaker said.  He later resolved the problem and stopped the wage garnishment.  Now Correa is supporting a bill by state Sen. Mark Leno (D-San Francisco) to require debt collectors to document that they are pursuing the right person for the correct amount of money.  The bill passed the Senate and is pending in the Assembly.

If these entities can abuse a state senator, where does that leave the average person without any political clout?
Continue Reading A Crackdown On Abusive Debt Collectors