How the Bankruptcy Trustee Investigates Fraud Allegations

The federal bankruptcy laws are designed to give you a second chance. They’re not a sign of failure—some pretty famous and successful people have filed for bankruptcy—some more than once. But the laws are taken seriously. If the bankruptcy trustee has any suspicion that your claim is fraudulent or that you have misrepresented your true financial condition, there are specific steps the trustee can take to determine if there’s any merit to those concerns.

A Bankruptcy Rule 2004 Examination

Often, the first step the trustee will take is to request that a debtor submit to a Rule 2004 examination. Under this provision, a debtor may be required to testify and to produce documents.

In addition, the trustee may solicit testimony and documents from other parties to discern whether there has been fraud. Specifically, the rule allows a trustee to investigate:

  • Any matter that may affect the administration of a bankruptcy estate
  • Any matter related to or affecting a debtor’s right to discharge a debt
  • Any acts, conduct, property, liabilities or financial condition of a debtor

Adversary Proceedings

An adversary proceeding is essentially a lawsuit filed in the bankruptcy court. Typically, the adversary proceeding is brought against a debtor, but the trustee has the authority to bring such an action against anyone.

Temporary Injunctions

If the trustee obtains evidence that assets are being wrongfully depleted or other fraud is being perpetrated, the trustee may ask the court for an injunction. The injunction is an order of the court prohibiting a person from engaging in specific actions, such as the transfer of property.

Criminal Proceedings

Fraud is both a civil and a criminal offense. If there’s evidence that you have engaged in bankruptcy fraud, the U.S. Attorney’s Office can prosecute you for violation of federal law.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we provide a free initial consultation to every client. To set up a meeting, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

What Constitutes Bankruptcy Fraud

The bankruptcy laws are in place to help honest folks get a fresh start after circumstances present them with financial challenges. As long as you follow the rules, you won’t have any problems. There are, however, a number of ways that you can run afoul of the bankruptcy rules. If your actions are determined to be intentional, you may even face criminal charges.

Here are some of the most common ways people commit bankruptcy fraud:

  • Hiding assets or income or failing to include all property on the application for bankruptcy protection
  • Destroying, withholding or falsifying any documents related to income or assets, or that would have an effect on the disposition of the bankruptcy
  • Setting up a straw, or sham, transfer of property, such that you still retain control and use of the property, even though it appears you no longer own it—for example, you may “give” a boat or vehicle to a friend or family member, but still use it on a regular basis. Often, this involves property “given” before the bankruptcy, so that you don’t have to report it on your application.
  • Creating any type of false document related to your income, debt or assets
  • Paying a third party to hide, destroy or disguise assets
  • Making any type of false representation to the bankruptcy court or as part of the bankruptcy process

There are serious penalties for engaging in bankruptcy fraud. If convicted of certain crimes, you can face up to 20 years in prison and as much as $250,000 in fines.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we know that the bankruptcy process can be intimidating and confusing. We offer a free initial consultation to every client. For an appointment, call our office at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

What to Do If You Have Been Sued on a Fraudulent Transfer

Fraudulent Transfer

Under the federal bankruptcy laws, there are very tight restrictions on the transfer of property, both before and after you file. If the bankruptcy court determines that you improperly conveyed property to keep it out of your bankruptcy estate, you could face legal action alleging fraudulent transfer, a form of bankruptcy fraud. What should you do if you are sued for fraudulent transfer?

First and foremost, don’t ignore or minimize the seriousness of an allegation of wrongful transfer. Start by gathering all the documentation you have related to the item or transfer in question. Find anything that confirms when the item as transferred, why the transfer was made, and what the perceived value of the item was at the time of transfer.

It’s not uncommon for people to make transfers without knowing what they are doing. The key, with respect to fraudulent transfers, is that they require intent. If you can demonstrate to the court that you had no knowledge that your transfer was wrongful, or you had no intent to hide assets or wrongfully keep assets out of the hands of creditors, the transfer may not be considered fraudulent. The court may still have the power to recover the asset, but you won’t be personally liable.

Another situation where you may avoid liability is where there’s no perceived value in the property. For example, if you have a home that has no equity, a court may rule that there’s no fraudulent transfer as there was nothing of value for a creditor.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Third Circuit Court of Appeals: Reckless disregard for truth may be enough to keep a debt from being discharged

When an individual debtor files a bankruptcy, creditors who were duped into extending credit based on a false statement, fraud or false pretenses can sue to keep that debt from being discharged, based on 11 USC 523(a)(2)(A). On July 23, 2015, the Third Circuit held in In re Bocchino that the creditor does not have to prove the debtor making the statement knew it was false. Instead it is enough if the statement was made with reckless diregard of its truth.

Mr. Bocchino was a stockbroker who recommended that his clients invest in two private placement stock purchases. He recommended both based on rumors and little or no actual investigation into what they were about, even though he was aware of facts that should have raised questions about their legitimacy. Both investments turned out to be fraudulent ventures. The principals of both companies were convicted. The investors lost their money. The SEC sued Bocchino and others for various violations of securities laws and got judgments against Bocchino for almost $179,000.00.

Mr. Bocchino then filed a Chapter 13 bankruptcy, and the SEC filed suit in the bankruptcy court asking it to find that the judgments were non-dischargeable. The Bankruptcy Court recognized that Bocchino believed his statements to investors were true, but held that his gross recklessness in not pursuing an independent investigation into the quality of the product he was selling was enough to prevent a discharge of the resulting liability. It was enough that as “an experienced stockbroker, he knew or should have known, that an independent investigation…was imperative”. On appeal, the Third Circuit agreed.

The Court also agreed that Bocchino could not rely on the fraud of the company principals to escape liability. Bocchino claimed that it was this fraud and not his lack of due diligence that caused his clients losses. The Third Circuit disagreed. Instead, the collapse of the investments was “neither abnormal nor extraordinary given Bocchino’s lack of due diligence” and that the “woeful state of the entities when Bocchino solicited the investments…the losses were manifestly foreseeable”. In other words, Bocchino was a substantial cause of the losses, which would not have occurred had he done his job.

This case addresses what had previously been an unsettled question in the Third Circuit. It eases the way for victims of fraud to preserve the collectibility of their judgments.

However, prompt action is critical. The ability to keep such debts from being discharged requires the filing of a bankruptcy lawsuit (called an adversary proceeding) within a relatively short time (usually about 90 days after the bankruptcy filing). Anyone in this situation should retain experienced bankrutpcy counsel right away.

Avoiding being a fraud victim shopping during the holidays

We came across this timely article about avoiding fraud or other problems in making holiday purchases, in the December 3, 2014 edition of The New York Times:

The article is well worth reading. Too many of our clients are victims of one or another forms of fraud. We have had some firsthand dealings with some of the perpetrators. Credit card fraud and financial fraud are a continuing problem.

We wish all our readers well for the holidays and hope none of them have to deal with these types of problems. Still, forewarned is forearmed.



Resurrection of the subprime mortgage mess-this time in car loans

In the run up to the 2008 financial crisis, investment bankers were telling us they were flush with cash. In a real estate boom fueled by easy availability of credit, even buyers with poor credit histories could get mortgage loans, often with exotic terms and overstated income or values put onto credit applications by less than scrupulous mortgage brokers. The whole thing was fueled by securitization, in which large bundles of questionable loans were created for investors, with the risks hidden by overstated appraisal values and credit rating agencies that for one reason or another did not expose the risk.

The result was the crash in real estate and the crisis in financial markets that started in late 2008. The real estate market is only now starting to recover.

But subprime credit targeting the most vulnerable borrowers has come back. In a  July 21, 2014 report in the New York Times, In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates  we learn that in the past 5 years, auto loans to borrows with tarnished credit have gone up 130 percent, and that these loans are 25% of the total of auto loans being made. The Times investigation found loan rates as high as 24%, with the amounts borrowed typically about double the value of the car being purchased. The borrowers frequently default and the cars are repossessed. Many of the borrowers have a previous bankruptcy that prevents them from discharging the resulting deficiency debt.

As the Times reports, the money to make these loans is fueled by same process of loan securitization and investors looking for high rates of return in a difficult investing environment. Indeed, in some respects, auto loans are less risky that mortgage loans. A car can repossessed and sold in many states in a small fraction of the time to foreclose on a mortgage and sell the home at Sheriff Sale.

The victims of this process are the most vulnerable of borrowers. Most need reliable transportation in order to get to work and to feed themselves and their families. Without access to a ready chunk of cash, they have to borrow the money to buy a car.

We constantly counsel our bankruptcy clients to start with and keep a budget, and to accumulate cash for important needs such as auto repairs. But even the most diligent often find themselves backed into a financial corner, where getting an auto loan is the only option.

So availability of credit for this purpose is not necessarily bad. What is deplorable is the way that used car sellers and lenders are pawning off overpriced vehicles of questionable value on those who seek credit.

For the regulators, some controls on the credit industry and its used car seller partners is called for. For those who need to borrow money for basic transportation, the lesson is that “buyer beware”, and to borrow money for these purposes carefully and with full knowledge of the traps that unscrupulous dealers and lenders have lying in wait for them.


Ways That You Can Risk Losing Your IRA in a Bankruptcy Filing

How an Individual Retirement Account Can Lose Its Protection in Bankruptcy

Under the revisions to the Bankruptcy Code in 2005, individual retirement accounts (IRA’s) are exempt from attachment in a bankruptcy up to a specific dollar amount. Accordingly, those funds generally cannot be seized by the bankruptcy court or trustee, and used to pay your creditors. In New Jersey, IRA’s have broader protection as “excluded” assets. See NJSA 25:2-1(b). There may be circumstances or transactions, however, that could provide a trustee an opportunity to seize IRA funds.

Using Money from an IRA Rollover

Suppose that you have funds from one IRA that you want to roll over into another IRA. Under the law, you have 60 days to roll those funds over without incurring penalties or tax consequences. If you use those funds to pay for living expenses or other immediate needs, but replace them with income earned during the 60 day period, the trustee could argue that the rollover funds amounted to a savings account equivalent, and should, therefore, be accessible to creditors. There are reports that trustees have made this very argument, though no reported rulings yet on whether this attempt will be successful.

The best advice is not to use rollover funds for any purpose, unless you are prepared to lose them. You should place rollover funds in a separate account and leave them untouched until they are transferred to the new retirement account.

Making Fraudulent Transfers into Retirement Funds

The protection for IRA’s can be lost if contributions can be characterized as a “fraudulent transfer” used to evade payment of debts. There are annual limits to the maximum allowable tax free contributions thad can be made to such accounts. Exceeding those dollar amounts is a sure-fire way to attract assertions that the transfers were fraudulent to creditors. This could result in the loss of the protection IRA accounts enjoy.Inherited IRA accounts may not be protected.

When someone other than your spouse dies and has named you as the beneficiary of their IRA, one of your options is to transfer the funds into an “IRA Beneficiary Designated Account” or “IRA-BDA” account. There are major tax advantages to doing this. However, unlike a regular IRA, these funds are freely available without penalty. Several courts have recently held that these accounts are more like regular investment accounts and do not have the protection afforded to IRA’s. The question is still open in New Jersey, where New Jersey law has been held to extend extra protection to IRA’s created under specified sections of the Internal Revenue Code.

We are not tax advisers. These are matters that should be reviewed by a tax professional.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Lenny Dykstra pleads guilty to bankruptcy fraud and could get 30 months in prison for stripping his house of valuables

Too often, I hear clients who feel that if they/we do not tell about the things they want to hide, they will not get caught. Former Mets outfielder Lenny Dykstra plead guilty to bankruptcy fraud and if the prosecutor has his way, will be sentenced on December 3, to 30 months in prison. What did he do? He cleared valuables out of his California mansion, hid them in his bankruptcy filing, then  secretly sold them. We don’t know what he got for the purloined items but I doubt it was worth it.

Reputable attorneys will tell their clients that this behavior is not worth it, especially for high-visibility, or formerly-high-income debtors. Why doesn’t this work? First, there is always someone else who is involved or who knows what you did or what you had. Second, many people “tell lies to their lawyer, and tell the truth to the judge”. (As a trustee I saw this often, and the poor lawyer is sitting there, dumbfounded.) Third, trustees spend their professional lives as lie-detectors, and some are very good at it. Going in you have no idea who your trustee will be, or who else may be whispering in her ear about you.

Here is my take on this: There are worse things in life than having to pay your creditors something. Usually there is something that can be done, and some good deals that can be cut with a trustee to “redeem” (or buy back) things the trustee would otherwise sell. The key is to be honest, and to follow the lead of the knowledgeable and reputable lawyer you should be dealing with.

Or you can do what Mr. Dykstra did, and hope that you get lucky. ( and hope that no one notices all the stuff that is missing, or sees you selling it).  The prosecutor told his sentencing judge that he had an “arrogant world view”, feeling that he was untouchable because of his celebrity. The judge might very well throw  the book at him.

Any lawyer who suggests or recommends that you skirt the road of honesty is likely to be one who already has a reputation among the trustees. By being represented by such persons, you may unwittingly be putting a target on yourself. And the collateral damage could include the lawyer who counsels such behavior, or even the one who winks and looks the other way. I never want to put myself in a situation where what I did could be used as my client’s bargaining chip in plea negotiations.

Most people, when they understand the risks, take the high road, and make a better deal for themselves that Lenny Dykstra did.

The continuing obligation to accurately list all claims and property in bankruptcy: what you do not list can cost you plenty.

In a bankruptcy, I often tell clients they are entering a “fishbowl” in which they have to list and disclose all property. Not doing so can get debtors in plenty of trouble. When what is not listed happens to be a valuable lawsuit, non disclosure can also cost them and the unfortunate attorneys who handle such claims plenty. This is the message from two recent Circuit Court cases, Guay v Burack, 677 F.3d 10 (1st Cir. 2012), and Love v. Tyson Foods, Inc.  677 F.3d 258 (5th Cir,2012). In both cases, a failure to list pending lawsuits in a timely fashion caused the courts to dismiss those suits, under the doctrine of judicial estoppel. In both cases, the debtors in bankruptcy did disclose the lawsuits, but in both cases, the courts held that “too little, too late” was not enough to save the day.

In Guay v Burack, the debtors initially filed under Chapter 11. While they were in Chapter 11,  police executed search warrants and caused alleged damage to their property. Their case was converted to Chapter 7, and 3 days later, Mr. Guay filed a pro-se civil rights suit in federal court. His wife followed with a similar suit. The Guays did not list these claims in their original bankrutpcy filing because the incidents had not occurred. However, they were required to amend to list them, and were later ordered to do so. Instead, they refused, and in fact filed affidavits stating that there was no need to do so as their original papers were accurate. Even though the Chapter 7 trustee learned about the suit and later abandoned the claim as not being of sufficient value, the courts held that judicial estoppel required that their complaints be dismissed, as they had taken inconsistent positions in the bankruptcy and district court, playing “fast and loose” with the system. Interestingly, the suits were not a secret for very long. At the First Meeting of Creditors, the debtors disclosed the existence of the suits to the Chapter 7 trustee, but only after being questioned by counsel appearing for the State of New Hampshire. The Trustee later gave up the claims by filing an abandonment.

In Love v Tyson Foods, Mr. Love filed a federal suit alleging violations of his civil rights and employment discrimination, while he was a debtor in a pending Chapter 13 case. Love did not disclose his claims against Tyson and affirmatively stated “NONE” on Schedule B, item 21, which required the identification of “[o]ther contingent and unliquidated claims of every nature.” On September 22, 2008, the bankruptcy court confirmed Love’s Chapter 13 plan, which did not mention the then-pending EEOC matter and provided that Love’s unsecured creditors would receive no payment. Only after Tyson moved to dismiss the lawsuits did Love file amendments listing these assets. By that time, his Plan had been confirmed. He never moved to amend it to make any money from the lawsuit available for his creditors. The District Court and later the Circuit Court agreed that this was “too little too late”, and that under the circumstances, judicial estoppel should result in the suits being dismissed.

Debtors in bankruptcy have a continuing duty to disclose assets and claims such as these, in the Schedules they file with the bankruptcy court. Disclosure should include assets acquired or claims that arose while a debtor is in Chapter 11 or Chapter 13. Not doing so, these courts emphasize, is playing with fire.

Judicial Estoppel is a doctrine that punishes those who say one thing in one court, and say something materially inconsistent in a later proceeding, in bad faith. Where once a court has accepted the position asserted and acts on that position, a litigant cannot “play fast and loose” by then taking a different position in another court to gain some advantage or with a motive to do so.

Attorneys who handle these types of suits for debtors in bankruptcy have to be careful as well. The risk of judicial estoppel dismissal is only one of the risks or issues presented. Early consultation with experienced bankruptcy counsel is essential.

Bankruptcy & Law Suits

Estate Planning property transfers and gifts-the hidden trap of fraudulent transfer liability

Lately I have read two articles in bar journals discussing aspects of “estate planning” involving transferring property to relatives or into self-settled “special needs” trusts. Neither article mentions much less discusses the New Jersey Uniform Fraudulent Transfer Act. Yet the prospect of a transfer being unwound by a creditor or creditor representative (such as a bankruptcy trustee) is a real concern. Both those engaged in such planning activites and their lawyers need to keep this in mind.

Under both state and federal law (11 USC 548), a transfer can be “avoided” and the transferred property or its value recovered by creditors where the transfer was either with intent to “hinder delay or defraud” creditors, OR the transfer was made for less than “reasonably equivalent value” in exchange, at a time the person making the transfer was insolvent, rendered insolvent, or put into a position of not being able to meet current or reasonably anticipated future debts.

Stated in simpler terms, you cannot give away your property that creditors could seize to pay your debts, unless you get money or value in exchange that is roughly equivalent to what it is worth. Of course, if you pay off all your debts and stay debt free for a reasonable period of time afterwards, this may not be a problem.

Claiming that you intended to do estate planning rather than depriving your creditors is a defense that any good attorney can defeat, especially if the transfer was made to close family members, or creditors were starting to hound you. Intent to defraud can (and usually is) proven by looking to various “badges of fraud”. Not getting fair value in exchange is one of them.

Transferring your assets into a trust for your own benefit does not protect them from the claims of creditors. These “self-settled” trusts cannot, under New Jersey statutes, be used to insulate the property from creditors.

Most importantly, the creditors who can pursue fraudulent transfer claims include “future” creditors, not just those who were owed money when the transfer was made. While a 4 year statute of limitations applies to many such  state law claims, even after the 4 years is up, a creditor can sue up to a year after he or she learns of the transfer. And federal agencies, such as the IRS (or a bankrutpcy trustee in a bankruptcy case where taxes are owed) has up to 6 years.

We often say that those who want to engage in “asset protection” need to do it at a time when they do not need it. Usually, the impetus to these efforts is some impending problem, legal, medical or otherwise. Like so much else, timely counselling by someone who knows this area and has both pursued and defended these types of claims is invaluable. With proper guidance and planning, the problems I have outlined here can be minimized or avoided.

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