fraudulent transfer

by on

Debtor May Avoid Tax Sale under 548 but Loses Equity

The debtor has standing to avoid a tax sale under section 548 but only to the extent of her exemption and allowed claims. She may not recover her equity in the property. Morawski v. Effect Lake, LLC., No. 20-1125 (Bankr. D.N.J. April 11, 2022).

On October 3, 2016, Effect Lake purchased a tax sale certificate encumbering the debtor’s home. In January, 2019, Effect Lake filed a tax sale foreclosure action in the state court and a lis pendens for the foreclosure action with the Essex County Register’s Office. The state court entered final judgment on September 30, 2019. The debtor filed her chapter 13 bankruptcy petition on February 7, 2020. Effect Lake filed a proof of claim for $141,947.88. At the time the debtor filed for bankruptcy, the redemption amount for the tax sale certificate was $90,323.88 and the property was valued at between $544,000 and $600,000.

The debtor filed an adversary proceeding seeking a finding that the tax sale was a fraudulent conveyance under section 548. The parties filed cross-motions for summary judgment. The bankruptcy court held a hearing and issued the following findings. [Read more…] about Debtor May Avoid Tax Sale under 548 but Loses Equity

by on

Fraudulent Transfer Claim Precluded by Discharge Injunction

Because an action for fraudulent transfer is not merely a collection action, the creditors were precluded by the discharge injunction from pursuing their state court appeal of that action even though the predicate debt was found to be nondischargeable in the debtor’s bankruptcy. SuVicMon Dev. Inc. v. Morrison, No. 20-11681 (11th Cir. March 25, 2021). [Read more…] about Fraudulent Transfer Claim Precluded by Discharge Injunction

by on

Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee

Funds fraudulently transferred during a chapter 13 case remain in the debtor’s “constructive possession” and become part of the chapter 7 estate upon conversion. Brown v. Barclay, No. 18-60029 (9th Cir. March 23, 2020).

The chapter 13 debtor received an inheritance while in bankruptcy which he divided between himself and his three brothers without notifying the chapter 13 trustee. When the trustee learned of the unauthorized transfer, he moved the court to convert the debtor’s case to chapter 7 as a sanction. Finding the debtor had acted in bad faith, the bankruptcy court ordered the conversion. The chapter 7 trustee sought turnover of the funds from all the brothers. One of the brothers, the appellant in this case, fought turnover on the basis that because the debtor was not in control of the funds at the time of conversion, they did not become part of the chapter 7 estate. The bankruptcy court disagreed, and the bankruptcy appellate panel affirmed. [Read more…] about Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee

by on

Tuition Payments for Adult Daughter Subject to Claw Back

The chapter 7 trustee could use his strong-arm powers to “claw back” tuition payments the debtors had made for their adult daughter’s education. DeGiacomo v. Sacred Heart University, Inc. (In re Palladino), No. 17-1334 (1st Cir. Nov. 12, 2019).

Steven and Lori Palladino made college tuition payments for their adult daughter within two years of filing for chapter 7 bankruptcy. The bankruptcy trustee filed an adversary proceeding against Sacred Heart University seeking to recover almost $65,000 in tuition payments. Both the trustee and Sacred Heart filed motions for summary judgment and the bankruptcy court granted judgment to Sacred Heart. The First Circuit granted direct appeal. [Read more…] about Tuition Payments for Adult Daughter Subject to Claw Back

by on

Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party

The chapter 7 trustee may “recover money from the entity who received the proceeds from the sale of fraudulently transferred property, but to whom the property itself was never transferred.” Rajala v. Husch Blackwell LLP, No. 08-20957, Adv. Proc. No. 18-6016; Rajala v. Spencer Fane LLP, Adv. Proc. No. 18-6020 (Bankr. D. Kans. Aug. 14, 2019).

Three couples started GRHC, a company designed to explore the possibilities of wind-generated electricity. GRHC initiated a wind-energy project in Pennsylvania called Lookout Windpower. The three couples then created the Lookout Windpower Holding Company (LWHC) and transferred Lookout Windpower from GRHC to LWHC rendering GRHC insolvent. LWHC then sold Lookout Windpower to Edison Mission Energy for over $6.7 million, and GRHC filed for chapter 7 bankruptcy. From the Lookout Windpower sale proceeds, LWHC paid the law firms of Husch Blackwell over $1.3 million and Spencer Fane over $700,000. The trustee in GRHC’s bankruptcy case successfully avoided the transfer of Lookout Windpower from GRHC to LWHC and sought to recover the funds paid to the law firms out of the proceeds from LWHC’s subsequent sale of the property. The law firms moved to dismiss the adversary complaints.

[Read more…] about Proceeds from Sale of Fraudulently Transferred Property May Be Recovered from Third Party

by on

Tax Sale May Be Avoided as Constructively Fraudulent

A tax sale was avoidable as constructively fraudulent where the state tax foreclosure sale procedures did not include notice and bidding procedures likely to result in the debtors’ receiving “reasonably equivalent value.” Hampton v. Ontario County, No. 17-6808, and Gunsalus v. Ontario County, No. 17-6810 (W.D. N.Y. July 18, 2018).

In two separate cases with substantially identical facts, the Western District of New York addressed whether the bankruptcy court improperly dismissed the debtors’ adversary proceeding seeking to avoid the transfers of the debtors’ homes in tax sales. [Read more…] about Tax Sale May Be Avoided as Constructively Fraudulent

by on

Loan Paid Directly from Dept. of Educ. to Penn State Not a Fraudulent Transfer

A Parent Plus loan made directly from the Department of Education to Penn State University prior to the debtor’s bankruptcy filing is not a fraudulent transfer where the funds were never in the debtor’s possession and would not have been available to his creditors. Eisenberg v. Pennsylvania State Univ. (In re Lewis), No. 16-12372, Adv. Proc. Nos. 16-0282, 16-0284 (Bankr. E.D. Pa. April 7, 2017). [Read more…] about Loan Paid Directly from Dept. of Educ. to Penn State Not a Fraudulent Transfer