UNDERSTANDING FRAUDULENT TRANSFERS BEFORE FILING BANKRUPTCY

11 USC §548 and §544 of the Bankruptcy Code governs fraudulent transfers of property or interests in property. This article will break down the major factors and will help the reader/debtor identify these issues prior to filing for bankruptcy. Since there are serious implications and consequences that rise from any fraudulent transfers, filing for Bankruptcy might harm some debtors. There are two types of fraud (actual fraud and constructive fraud).

Actual Fraud requires the Bankruptcy trustee to prove that the Debtor had the actual intent to hinder, delay or defraud present or future creditors. This article will only touch on Constructive Fraud which can be shown by proving that the transfer was made for less than “reasonably equivalent value,” and the debtor was insolvent or became insolvent because of the transfer.

Prior to filing for Bankruptcy ask yourself these questions in the order that they are listed below. If your answer is Yes then continue to the next question.

1) Did you transfer or convey any property in the last 4 years prior to filing for a Bankruptcy?

a. (Examples of Property--House, Car, Money, Stocks, Business, License or Franchise, Copyrights…basically ANYTHING)

b. Transfer or convey means either sell or give away as a gift or even create a lien.

2) Did the Property have value?

a. The value of the property is a question of fact, meaning it is determined by the Judge or the Jury. A good rule of thumb is what the debtor could have received for the property in a competitive auction.

3) Did you receive fair and reasonable consideration for the transfer.

a. In the case of a gift the answer will always be NO, since it was given away for free.

If the Answer is NO to questions 1 and 2 and Yes to question 3, then chances are you will not have an issue with fraudulent transfers. However, still consult an attorney.

If your Answer is Yes to Questions 1 and 2 and No to Question 3 then you might be in the category of fraudulent transfers.

Avoidance Powers of The Trustee in Fraudulent Transfers

The Bankruptcy Code is designed to invalidate transactions that unfairly diminish the Debtor’s assets available to pay creditors.

Therefore, the Bankruptcy trustee has the power to invalidate that transfer and revert the property back to the bankruptcy estate. Then sell the property for the benefit of Creditors.

ALWAYS SEEK THE ADVICE OF A LICENSED BANKRUPTCY ATTORNEY

INTERPLAY BETWEEN FEDERAL COURT AND BANKRUPTCY COURT

The US Bankruptcy Court is a Subordinate court of the US District Courts as allowed in Article 3 of the US Constitution. Technically each filed bankruptcy begins in the US District Court and automatically gets transferred to the US Bankruptcy Court. (The Bankruptcy Court of the Central District of California is made up of 5 Courts; Los Angeles, Riverside, Santa Ana, San Fernando Valley, Santa Barbara).

Where the Debtor files the Bankruptcy Petition depends on where that Debtor resides. The Court’s link http://www.cacb.uscourts.gov/ identifies the proper venue based on Debtor’s zip code. Filing in the wrong venue can possibly lead to a dismissal of your case, however most Courts simply resolve to transfer your case to the proper venue.

District courts are authorized, but not required, to refer to bankruptcy judges cases under title 11, and proceedings arising under title 11, or arising in or related to cases under title 11. 28 U.S.C. § 157(a). Schulman v. Cal. Water Res. Control Bd. (In re Lazar), 200 B.R. 358, 366 (Bankr. C.D. Cal. 1996) (each district court is authorized to adopt general order of reference for bankruptcy cases). See Walls v. Wells Fargo Bank, N.A., 255 B.R. 38 (E.D. Cal. 2000) (district court exercising discretion not to refer claims involving FDCPA which might require jury trial).

If a party wishes to appeal a decision made in the Bankruptcy Court at the District level, that party has two possible venues to appeal the decision. 1)Bankruptcy Appellate Panel or 2) US District Court.

1. BAP(Bankruptcy Appellate Panel)

a. BAP appeals are thought to be quicker because they are heard by a panel of three judges with bankruptcy law expertise who do not have a backlog of criminal and civil case assignments as is common in the U.S. District Court.

b. Both parties need to agree to stay in. A party agrees to BAP if there is not a rejection filed within 30 days.

c. Reversing Court: This court is more likely to reverse decisions made in the lower level Court then the US District Court. Thus if a party is seeking to reverse then that party should elect to stay in BAP.

2. US District Court

a. 1 Panel Judge.

b. Affirming Court: Because the judge does not have expertise in bankruptcies he/she is more likely to affirm a decision made by a Judge who has Bankruptcy law expertise.

3. Appeals for BAP or US District Court

a. If a Party chooses to appeal the decision made by the BAP or the US District Court the proper venue for that appeal will be the 9^th Circuit Appellate Court.

4. Appeals from 9^th Circuit Appellate Court

a. Writ of Cert. for US Supreme Court( This topic of applying for Writ of Certiorari to the highest Court in the United States will be discussed in greater detail in a different post).

ALWAYS SEEK ADVICE FROM A LICENSED BANKRUPTCY ATTORNEY.

Differentiating HAVE TO file Bankruptcy clients and WANT TO file Bankruptcy clients.

Although bankruptcy is ONE option to deal with certain financial difficulties, sometimes doing nothing might be a better option. Thus, in an average case the general client’s will fit into one of three categories: 1) Shouldn’t file 2) Have to file 3) and Want to file. Following is a discussion on factors used to differentiate between the Have to File for bankruptcy clients and the Want to file for bankruptcy clients.

A HAVE TO Bankruptcy client generally has an urgent matter usually pertaining to that client’s loss of control over the asset. Including but not limited to;

1. Foreclosures

a. If facing a pending foreclosure, bankruptcy might be an option to consider in order to stop the pending sale and allow some breathing room.

2. Evictions (Unlawful Detainers)

3. Leases with defaults.

4. Judgment collections

a. Garnished Wages, Judgment Liens on Property, Bank levy.

5. Imposition of Judgment

6. Tax liens

If a client falls into the Have to file category, time is of the essence and seeking professional advice should not wait until it is too late. However, if a client does not fall into the Have to file category, Bankruptcy could still be an advantageous option. In this case the client should still consult with a professional to get a better understanding of the benefits and harms of filing for a Bankruptcy.

ALWAYS SEEK ADVICE FROM A LICENSED BANKRUPTCY ATTORNEY.