Summary:
The Debtor’s corporation filed Chapter 7 and the Debtor agreed to buy the assets of the corporation from the Chapter 7 Trustee for $3,400.00. The Trustee was later contacted by an auctioneer, who informed the Trustee that the Debtor was attempting to sell additional corporate assets, that had not be listed in the bankruptcy petition filed by the corporation. The Debtor eventually did sell these non-disclosed assets for $4,000.00 and also filed his own personal Chapter 7 bankruptcy, with the same Trustee being appointed. The Trustee eventually settled with the Debtor for an additional $2,300.00, but then brought an adversary proceeding to deny the Debtor his discharge pursuant to 11 U.S.C. § 727(a)(2). (The Trustee was later replaced by te Bankruptcy Administrator.)
To prevail on a Section 727(a)(2) cause of action, the Bankruptcy Administrator had to establish
that the debtor:
(1) transferred or concealed,
(2) his property,
(3) with the intent to hinder, delay or defraud a creditor,
(4) within one year before filing the petition.
While the Debtor must have had an actual intent to hinder, delay or defraud a creditor, that intent can be shown through the "badges of fraud", which include:
(1) family, friendship or insider relationships between the parties;
(2) the debtor’s retention of possession, benefit or use of the property in question;
(3) the lack or inadequacy of consideration for the transfer;
(4) the debtor’s financial condition before and after the transfer;
(5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors;
(6) the general chronology of the events and transactions under inquiry;
(7) the debtor’s attempt to keep the transfer a secret; and
(8) the proximity of the transfer to the debtor’s filing bankruptcy.
Here the Debtor concealed the corporation’s property and then transferred it secretly to third parties, with those proceeds going to him, the owner of the corporation. Accordingly, the Debtor’s discharge was denied.
Commentary:
While not meant as any excuse for the Debtor’s concealment of assets, it may be worth noting that the corporation, which filed the original bankruptcy, had in scheduled debts in the amount of $94,526.52. Even excluding any costs of sale or fee for an attorney for the Trustee, after payment of the Trustee’s commission, only $2,550.00 would have been available to creditors. Including the concealed assets, worth $4,000.00, the total available to the estate after Trustee commissions would have been $5,990.00. Based on scheduled claims this would have resulted in a whopping 6.3% dividend. (It goes without saying that following the Debtor’s improper and obstructionist concealment of assets and the resulting additional Trustee costs, that the unsecured creditors will receive much less in this case.)
Perhaps rather than hiding and then surreptitiously selling assets, the Debtor would have been better served by seeking to require the Trustee to abandon these assets under 11 U.S.C. § 544, as burdensome and inconsequential to the estate. The burden to the estate would have been heightened if the individual Debtor could have argued that some or all of the assets (largely consisting of untitled personal property such as chain saws, leaf vacuums, and other landscaping tools) were his property and not that of the corporation.
For a copy of the opinion, please see:
Abdelaziz- Denial of Discharge under 11 U.S.C. § 727(a)(2) for concealment of assets.PDF
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