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Fraudulent Transfers And Bankruptcy
This article is my opinion, and not legal advice. I am a judgment broker and am not a lawyer. If you ever need any legal advice or a strategy to use, please contact a lawyer.
Over time, fraud against average people is legal, because there are time limits on how long one has to attempt to undo a suspected fraudulent transfer. In most states, the fraudulent transfer limitation is four years, some other states have limits of 3, 5, and 6 years. With few exceptions, after the time limit has passed, the laws allow typical fraudulent transfers.
Even if you suspect a fraudulent transfer, asserting this is not enough. Bankruptcy filing or not, you or your lawyer need to succeed in filing a lawsuit in civil court, or an adversarial action in bankruptcy court; to get an adjudicated fraud judgment.
Setting aside a fraudulent transfer is a separate request from the court after fraud is proven to the court. Often, additional post-judgment fraudulent transfer lawsuits are required to get another decision and order from a court. Fraudulent transfer cases are always against the reciever of the property; in some cases the debtor if the property was transferred back to them.
In a bankruptcy situation, who has standing to bring a fraudulent transfer claim, the creditor or the BK trustee? And, should they make such a claim? Either can start the process of bringing a fraud situation to the attention of the BK court. You may want to consider a deal with the trustee if there is some mutual interest, or even a potentially competing claim in the property. In bankruptcy court, an adversarial action can be filed, to request a fraud-related judgment court ruling with one of these three goals:
A) Get your fraud judgment declared nondischargeable, so the other creditors lose, and your judgment survives the debtor's successful bankruptcy.
B) Get the debtor's bankruptcy dismissed because of the fraud, if you can prove they defrauded the bankruptcy court by not disclosing all their assets to the court.
C) Get the debtor's fraudulently transferred property back into the bankruptcy estate for the benefit of all the creditors, especially the secured creditors. This option is always much easier to accomplish, especially if the trustee is interested in the asset. If the newly discovered fraudulently transferred asset is large and within the trustee's statute of limitations, they will likely be very interested and may foot the bill for an adversarial action. If the regular BK trustee is not interested, the U.S. Trustee might be.
The BK court may deny these kinds of requests, or might decide a different course of action. The end result depends on the strength of the filed adversarial proceedings, and the bankruptcy court trustee and/or judge. Every day, creditors bring fraudulently transferred assets to the attention of bankruptcy courts, and the courts sometimes decide to add them to the asset pool for the benefit of all eligible creditors.
Generally, a seasoned claim to property based on a lien or other secured interest is not the property of the estate, absent other issues or facts. If you have a prior (seasoned) lien recorded at least 90 days before their bankruptcy filing, the trustee may not do anything, because they will probably will not get anything. If it is real property (or sometimes non-real property), and you are within the statute of limitations, you can move for a relief from stay for a forced sale, with an adversarial proceeding.
Even within bankruptcy, an abstract of judgment can attach to fraudulently transferred property (equitable interest), if this is acknowledged and endorsed by the bankruptcy court. If the court agrees, the transfer of property in cases of fraud against a creditor may be disregarded and the property levied upon. If the transfer is disregarded; a judgment lien reaches the interest of a judgment debtor in property that has been fraudulently transferred to another, even if the transfer took place before the judgment lien attached. (See Liuzza v. Bell (1940) 40 CA2d 417, 429, 104 P2d 1095, 1102; First National Bank of Los Angeles v. Maxwell (1899) 123 C 360, 371, 55 P 980, 983).
The bankruptcy opinion in Daff v. Wallace (In re Cass), 476 B.R. 602 (Bankr. C.D. Cal. 2012) again cites Liuzza v. Bell (1940) 40 CA2d 417. The outcome of this fraudulent transfer case was that the court ruled in favor of the creditors, allowing them to keep their abstract of judgment intact, in their claim against the trustee.
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