What Is The Standard For Affirmative Defenses To Fraudulent Transfers Under Section 548?

Overland Park Bankruptcy Lawyer

Under certain situations, a bankruptcy trustee may try to recover transfers made by a debtor to creditors before the filing of his case.  These types of conveyances are termed “fraudulent conveyances.”  But does an innocent transferee, who had no knowledge of a debtor’s coming bankruptcy, have any way to prevent a trustee from recovering this kind of a transfer?  Under Section 548( c) of the Bankruptcy Code, a transferee can have an affirmative defense in such a situation.  The transferee (who bears the burden of proof in this situation) would have to demonstrate that he received the transfer “for value” and “in good faith.”  When cash payments are involved, the “for value” element is easily met.  But what does “good faith” mean for a transferee?   Case law over the years has laid down some broad principles for ascertaining “good faith” in the context of Section 548(c ).  To simplify things, courts will essentially ask if the transferee (the person who received the money) knew or should have known that the transfer was made to them (1) when the debtor was insolvent; or (2) with a fraudulent purpose.

When probing into the issue of whether a transferee “should have known” about a debtor’s fraudulent plans, the Court will basically look to the existence of any “badges of fraud” or “red flags” that might have given some indication of something being amiss.  A transferee cannot simply close his eyes to what simple inquiry might have revealed.

In a recent Fourth Circuit case, In Re Taneja (4th Circuit, Feb. 21, 2014), the court held that the appropriate standard of good faith in the section 548(c) context is whether the “transferee actually was aware or should have been aware, at the time of the transfers and in accordance with routine business practices, that the transferor-debtor intended to hinder, delay, or defraud any entity to which the debtor was or became . . . indebted.”  In the Taneja case, there were very large transfers that had been made by an insolvent mortgage company to a Tennessee bank before the mortgage company filed for bankruptcy.  The trustee for the mortgage company sought to avoid some of the large transfers made to the Tennessee bank as fraudulent transfers under Section 548( a) of the Bankruptcy Code.

The bankruptcy court in the Taneja case found that the transfers made to the Tennessee bank were made for value and in good faith, and so could not be avoided by a trustee under Section 548 (a).  The court essentially applied a subjective test to evaluate whether the bank should have known that the mortgage company’s payments were fraudulent.  The bank’s witnesses offered testimony that the bank had acted reasonably and properly based on the information they received.  A truly objective test would have been for the court to ask whether the bank’s actions were reasonable based on a comparison with all other types of similar lenders.  In other words, the court applied a subjective standard, rather than an objective one.  And a subjective standard is much more lenient.  All the bank had to show was that it had acted “reasonably” based on the information it was getting.  The bank never really had to prove that its practices conformed to good industry standards, or that its responses to the mortgage company’s communications were truly reasonable considering prevailing industry practices.

This ruling is not in keeping with the usual objective test used to evaluate Section 548 transfer issues.  However, it does seem to follow the depressingly familiar pattern that has been observed since the onset of the financial crisis in 2009:  big institutional lenders and mortgage companies are, in practice, not being held accountable for much of the conduct that created the financial crisis in the first place.

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Can A Creditor Who Doesn’t File A Bankruptcy Proof Of Claim Be Denied Chapter 11 Voting Rights?

Olathe Business Bankruptcy Attorney

When in doubt, file a claim.  This is the take-away lesson from a recent bankruptcy court case coming from Nebraska.  Proofs of claim in a Chapter 11 case are handled somewhat differently than those in Chapter 7 or Chapter 13 cases.  Under Fed. R. Bankr. P. 3003(b)(1) and Section 1111(a) of the Bankruptcy Code, a creditor is permitted to have an allowed claim without actually filing a proof of claim with the bankruptcy court (provided, of course, that the claim is not otherwise disputed, contingent, or unliquidated).  A recent court case from the District of Nebraska, however, interestingly ruled that a creditor who failed to file a timely proof of claim was unable to vote on the debtor’s Chapter 11 plan.  This was so even though the plan sought to modify the creditor’s claim.

The case in question is In Re Woodward (D. Nebraska, case number 11-40936, from April 2014).  The debtor here argued that the plan was eligible for confirmation under Section 1129(a)(10) because an impaired creditor had voted in favor of the plan.  An objecting creditor argued, however, that no “class” of impaired claims had accepted the plan as required by Section 1129(a)(10).

The bankruptcy court was particularly irked by the fact that the objecting creditor had not filed a proof of claim.  Under Section 1126(a) of the Bankruptcy Code, a creditor is entitled to share in plan distributions as a result of being listed on the debtor’s schedules (even if the creditor had not filed a claim).  But this was not good enough, the court believed.  Under Section 1126(a), the only parties entitled to vote on a Chapter 11 plan are holders of claims or interests which are allowed under Section 502.

Unfortunately for the objecting creditor, a look at Section 502(a) specifically calls for claims or interests to be “filed under Section 501…”  Using this reference bank to Section 502 and 501, the court interpreted Section 1126(a) as restricting voting to creditors who have actually filed a proof of claim.  In other words, when it comes to voting, there is a big difference between scheduled claims and filed claims.

A harsh ruling?  Perhaps.  It is odd that the court did not consider Section 1111(a) of the Code, which states that a proof of claim is “deemed filed” under Section 501 if it appears on the debtor’s schedules (unless that claim is contingent, disputed, or unliquidated).  Looking at Section 1111(a) give one the impression that the ruling here may have been unduly harsh.  In addition, it appears that the court could have used its (limited) equitable powers to find an imputed or constructive proof of claim from any of the creditor’s previous filings.  This, however, did not happen.  F.R. Bankr. P 3003, after all, specifically states that a Chapter 11 creditor does not have to file a claim.

The rule in Woodward is not the majority view, it should be noted.  It seems that the court looked more towards the circumstances of the plan as a whole, and the need for a plan to be confirmed that had little opposition.  Taken as a whole, it seems to be bad precedent.  The weight of authority recognizes that Chapter 11 creditors are not required to file claims in order to assert their voting rights under a proposed plan.  But this case illustrates an important point that we would do well to bear in mind: if you are a creditor in a Chapter 11 case, it is to your advantage to participate in the case by keeping informed of developments in the case, and filing a claim.  When in doubt, file a claim, even if you are not required to do so.  Sleeping on your rights benefits no one except the opposing party.

Read More:  Buying And Selling Bankruptcy Proofs Of Claim:  Knowing The Risks

Is “Insolvency” Required Before Filing A Bankruptcy Petition?

Overland Park Bankruptcy Attorney

Does a debtor have to be insolvent in order to file a Chapter 11 case?  How is this word interpreted?  These are the key questions that were addressed in the recent Ninth Circuit Court of Appeals case In Re Marshall III, 2013 WL 3242478 (9th Cir. June 28, 2013).  The parties involved may be familiar to readers.

Texas millionaire J. Howard Marshall died, leaving almost all of his estate to his son Pierce.  His wife Vicki (pop culture figure Anna Nicole Smith) and other son Howard were given nothing.  Vicki and Howard contested the will in Texas probate court, and lost.  In the probate proceedings, son Pierce won a significant judgment against brother Howard for fraud.  Howard then filed for bankruptcy protection. Pierce tried to contest brother Howard’s bankruptcy and plan.  He moved to dismiss Howard’s case, arguing that debtor Howard was not “insolvent” under the “balance sheet” test.  Looking at the debtor’s schedules and forms that were filed, Pierce noted that the debtor’s assets and income exceeded his liabilities.  Under the Bankruptcy Clause of the Constitution, Pierce argued, a bankruptcy court could only deal with situations where a petitioner was insolvent.  But what does the word actually mean?

The bankruptcy court first addressed the meaning of “insolvency.”  Pierce believed that the court should apply the definition contained in section 101(32)(A) of the Bankruptcy Code.  That section provides, in relevant part, that “insolvent means . . . with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at fair valuation.”  Section 101(32)(A) basically uses the “balance sheet test” as the test for insolvency.

But this isn’t the end of the story.  The word “insolvency” does not appear often in the Bankruptcy Code.  One such instance is in Section 109(c)(3), which requires a municipality to be insolvent prior to filing for bankruptcy protection.  But the meaning of “insolvency” in this section is governed by Section 101(32)(C) of the Bankruptcy Code, which uses a “cash flow test” for solvency.  The cash flow test is thus the only measuring stick that has some authority in the Code.  And even there, it was only to describe a yard stick for a municipality.  Should the same test be applied to persons or corporations?  The bankruptcy court in the Marshall case rejected the “balance sheet test” as a proper guide for a debtor’s solvency.

The court noted that the Bankruptcy Code is designed to help people who have cash flow difficulties, even if they are “solvent” when looking at their balance sheet.  Trying to apply a “balance sheet standard” would be unfair and inappropriate.  The cash flow test (even assuming we should apply any test at all) would be the more appropriate test.  There are sound reasons for this logic.  The prospects of crafting an effective reorganization are better when a debtor is still solvent by any measure; erecting roadblocks and tests as barriers to filing a case would not be good policy.

A debtor should not have to wait until he is insolvent before filing a case.  From studying other nations that had adopted such rules, the court found that substantial economic value was lost in applying those rules.  In addition, a review of American and British common law demonstrated that “insolvency” was never a determinative factor in filing a petition until the 1978 adoption of the Bankruptcy Code.  Balance sheet insolvency is irrelevant even there; under Section 303(h)(1), an involuntary filing, for example, only requires a showing that the debtor is “not paying such debts as they become due.”

Thus, a debtor who is solvent (under any test) can file a voluntary Chapter 11 case and seek to have a plan of reorganization confirmed.  A debtor is not required to wait until things are hopeless or nearly so.

This case highlights a principle that should be understood clearly:  there is no reason for a debtor to wait until he becomes insolvent before filing a bankruptcy case.  In almost all situations, his situation will be dramatically improved by getting a case filed as soon as cash flow problems begin.  Waiting too long is neither required, nor advisable.

Read More:  With Bankruptcy, School Cannot Deny Transcript

 

Arbitration, Mediation, And Bankruptcy: What Are The Limits?

Overland Park Business Bankruptcy Attorney

Judges in general are believers in mediation.  It can be a highly effective way of identifying differences between litigants, crafting solutions to sticking points, and permitting litigants to vent their grievances.  Bankruptcy judges can and do order mediation in situations where contested matters are in need of a push forward.  But there are qualifications and limitations on arbitration, like anything else.  A recent Kansas bankruptcy case laid out some of these standards, and it is useful for us to discuss them.  These issues were discussed in a memorandum opinion written by Judge Somers in the case of In Re Brooke in 2013.  The opinion discusses who can compel arbitration, how a litigant can waive his ability to compel arbitration, and what things can be arbitrated in bankruptcy court.

The disputes in the Brooke case were complicated, of course, but essentially they involved problems that developed between the debtor Brooke, a corporation, and two of its franchised insurance agencies (Bucheli Insurance Agency and Hosford Insurance Agency).  Another entity named Fausto Bucheli was the principal equity holder of these agencies.  Bucheli and the two franchised agencies had filed claims in the Brooke Chapter 11 case, stating they were owed unpaid commissions and also seeking reimbursement for other monies spent.  They also claimed they were owed monies as a result of the debtor’s breach of contract.  The Brooke Chapter 11 case was later converted to a Chapter 7 case.  The Chapter 7 trustee filed adversary actions against the franchised insurance agencies (and an individual affiliated with the agencies) for recovery of fraudulent conveyances under section 11 U.S.C. 548(a)(1), 11 U.S.C. 550.  The Chapter 7 trustee also objected to the proofs of claim filed by the agencies.

But this was not all.  About two years after the adversary actions had been commenced by the Chapter 7 trustee, the defendant agencies asked the court to dismiss the complaints, arguing that the claims should first have gone to arbitration as stated in their old contract.  The original franchise agreement between Brooke and the agencies had a boilerplate arbitration provision in it.  These are often found in business contracts, and state that if the parties have a dispute, they must first seek to have their claims mediated or subjected to binding arbitration before taking further legal action.

Judge Somers’s opinion addressed many issues involving arbitration and bankrtupcy.  He analyzed the language of the original franchise agreements and found that simply having a guaranty’s signature there cannot compel the guaranty to participate in arbitration.  To enforce arbitration, a person should be an actual party to the original agreement.  A signature alone, without any additional language of incorporation, was not sufficient under Kansas law.  The individual guaranty (Bucheli), therefore, could not be compelled to arbitrate.

The second issue addressed by the Court was the idea that a party can actually waive its right to arbitrate if it sleeps on its rights for too long.  The doctrine of laches is alive and well.  The gist of the finding here was that, because the agencies had been participating in the adversary case for two years and never brought up arbitration before, they could not do so now in support of a motion to dismiss.  Commenting on an old proof of claim filed by the defendants at the outset of the case, the Court found that it made no attempt “to preserve the right to arbitrate.”  The fact that the defendants had been litigating the case for two years also did not sit well with the Court.  Under these circumstances, raising the arbitration issue looked like nothing more than a litigation tactic.

Furthermore, the matters at issue—fraudulent conveyances, transfers, etc.—were pure bankruptcy issues.  They were “core issues” arising out of the very act of filing the bankruptcy.  Arbitration was not the right forum for such contested matters.  Thus, even if the defendants had raised the arbitration issue in a timely fashion, it is unlikely that the bankruptcy court would have permitted arbitration.  Some things are the exclusive province of the bankruptcy court.  We can make some general conclusions from all this regarding arbitration, bankruptcy, and the interplay of one with the other:

  •  A bankruptcy court is not necessarily bound by arbitration language in a contract. Besides the usual issues of unfairness, adhesion terms, and disclosure, there are some issues that don’t belong in arbitration.  They are issues specifically arising out of bankruptcy law, and belong in front of the bankruptcy judge.
  • To be bound by an agreement, a person must have been a party to that agreement. This is the old contract principle of “privity” raising its head again.  Privity doctrine is alive and well.
  • Even if a contract provision (arbitration) is enforceable, that provision can be waived by the conduct of the party. Here, one of the litigants took no action to raise an issue for two years, and by its conduct waived the right to raise that issue.

All in all, the Brooke case has as much to say about contract law as it does about bankruptcy and arbitration.  If you a legal claim or defense, you need to raise it at the earliest possible opportunity.  Not doing so may eventually act as a constructive waiver of the issue.  In the Brooke case, however, it appears unlikely that the bankruptcy court would have been persuaded even if the defendants had raised the issue.  Why?  As noted above, the transfer issues and preference issues were core matters inherent to the bankruptcy case, and were not really appropriate for arbitration.

Read More:  Buying And Selling Bankruptcy Proofs Of Claim

Buying And Selling Bankruptcy Proofs Of Claim: Understanding The Risks

Overland Park Business Bankruptcy Attorney

Attorneys who deal with Chapter 13 and Chapter 11 cases will often see, in the claims registers listing the filed proofs of claim, corporate entities that have “bought up” proofs of claim from smaller creditors.  There are many companies, businesses, distressed debt investors, and hedge funds that specialize in purchasing bankruptcy debt.  There are also situations where larger creditors in Chapter 11 cases will make offers to buy the claims of smaller creditors, in an attempt to control the voting and direction of the Chapter 11 case.  Small creditors in bankruptcy cases may find themselves in confusion about what to do if they are contacted by a large organization asking to buy their claim.

What issues should be considered?  What are the advantages and disadvantages of selling a proof of claim?

Claims buyers can scrutinize bankruptcy court records and comb cases to see if it makes economic sense for them to purchase claims.  Claims buyers will prefer to purchase claims that are listed as “undisputed” rather than “contingent” or “disputed”, since undisputed debts are less likely to subject to litigation in a bankruptcy case.  They are seen as less of a risk.

Claims buyers will frequently sent out documents called “claim assignment agreements” or “confirmation” documents.  These documents should be reviewed carefully with an attorney with bankruptcy experience, before the claim is sold.  Things are not often what they appear.  Claims buyers have as their goal the maximization of their profit with a minimization of their risk.  With this in mind, let us examine the pros and cons of selling a bankruptcy proof of claim.

Pros

One of the most attractive reasons for selling a claim is the prospect of cash now, rather than the uncertainty of knowing when (if ever) the creditor will recover any funds in the bankruptcy estate.  Cash now has a real attraction to many small creditors who may not want to participate in the bankruptcy process.  Small creditors are enticed with the prospect of immediate liquidity, rather than dealing with the possibility of drawn-out legal proceedings.  Selling a claim now carries with it the perception of cutting one’s losses and eliminating future risk.  This “immediacy” value is the primary attraction of selling a claim.

Cons

But this immediate liquidity can be deceptive.  For one thing, it is important to remember that claims buys always want to buy at a steep discount.  It is a numbers game to them, and they buy claims in volume.  The amount you may be offered for your claim will be a fraction of what it may be worth.  Bankruptcy cases can be unpredictable.  Many cases that initially appear to offer nothing to unsecured creditors can generate significant funds down the road.  You never know when assets can and will be recovered.  To sell your claim too early can be a mistake.

  • Claims buyers often put crafty language into their “claim assignment agreements” that shift their risks back on to you, the seller.  Some of these provisions are buried in the fine print of the agreements.  Sometimes, language will be inserted that give the buyer the option of dumping the claim back on you (the seller) if an objection is filed to the proof of claim, even if the objection is later defeated.  Basically, the claims buyer can often use the fact of a claim challenge (by a bankruptcy debtor) to get its money back from a claims seller.  Objections to claims, preference actions, and other things that create work for a claims buyer can be used as a way of bailing out of their agreement with a claims seller.  Remember, the claims buyer is interested in making money with as little effort as possible.  Their goal is not to litigate claims in bankruptcy court.  Faced with a challenge, they will move on.
  • Another tactic used by claims buyers is to insert language in their agreements to require you (the seller) to defend the claim against possible objections at your own expense, and to pay the claims buyer back for any portion of the claim that might be disallowed.  The bottom line is this:  even after selling your claim, there is a possibility that you could incur costs in a bankruptcy case.
  • Your setoff rights may also be limited in a claim assignment agreement.  Some provisions of these agreements contain provisions limiting your rights to assert a setoff or recoupment against the bankruptcy debtor, or requiring you to pay back some (or all) of the purchase price if you do assert a setoff .
  • Unsecured creditors who may be serving on a creditors’ committee in a Chapter 11 case may have limitations on their rights to sell claims.  In some circumstances, there are confidentiality or other issues that will prevent such sales.  It is important to get legal advice in this type of situation.  Bankruptcy courts also sometimes restrict the rights of creditors from selling their claims.  Such rules are intended to prevent large institutional creditors from buying up claims and controlling the voting dynamics in Chapter 11 cases.  Another reason is to preserve the tax benefits of a debtor’s net operating losses (NOL), which can be lost if ownership of large amounts of claims changes.
  • When a claim is sold, a document called a “evidence of transfer of claim” is produced which is filed with the bankruptcy court.  As a safeguard against fraud, when such a document is filed, the seller is given an short opportunity to object to the transfer,  just in case the transfer was fraudulent.

Buying debt in bankruptcy cases, for large claims buyers, is all about making a profit.  Their goal will be to maximize their profit potential, while minimizing their risk.  Small creditors in bankruptcy cases should be aware of this.  The enticement of immediate money may be an illusion.  A small creditor who ignores the risks may find that he got more than he bargained for.  It is critical to consult with a bankruptcy attorney before selling your claim, so that you are aware of all the risks involved.

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Identity Theft And Identity Fraud Crimes In Kansas And Missouri

Identity Theft Attorney In Overland Park

Identity theft has been a growing problem for years.  Factors driving the increased prosecution of these types of cases is greater awareness of protecting personal information, the increasing use of identity theft in furtherance of undocumented labor, and the improved electronic security systems that are being implemented in the public and private sectors.  Both Kansas and Missouri have a specific set of statutes that are used to prosecute identity theft crimes, which are similar in some ways but different in others.  There are also federal criminal penalties for identity theft.

Missouri

Under Missouri’s laws, a person commits the crime of identity theft by possessing, using, or transferring (or attempting to possess, use, or transfer) the means of identification belonging to another with the intent to deceive or defraud (obtain something of value by deception).  RSMo. Section 570.223.

“Means of identification” is another way of saying “personal identifying information” and includes such things as social security numbers, drivers licenses, passports, birth certificates, bank accounts, credit cards, and any other information used to gain access to financial accounts.  Simply taking the information, with the intent to deceive or defraud, is enough to complete the crime, even if the information is never used.

Missouri also has a law which forbids the obtaining of a credit device by fraud.  Under RSMo. Section 570.135, it is a crime to (1) make a false statement regarding another person to procure a credit or debit card, or (2) to use another person’s personal identifying information (name, address, telephone number, driver’s license number, social security number, place of employment, mother’s maiden name, bank account number, or credit card number) to buy or try to buy goods or services or obtain credit in the victim’s name without the victim’s consent.  This law was primarily designed to target people who use others’ information to open false accounts or gain access to services.

In Missouri, it is a crime to use or possess means of identification in order to manufacture or sell false identification to people under the age of 21 for the purpose of purchasing alcohol. A teenager who possesses a fake identification card in order to visit bars has not committed identity fraud, but the person who made and sold the card may have committed a crime.  RSMo. Section 570.223.

A person who manufactures, transfers, buys, sells, or possesses with intent to sell means of identification in order to commit identity fraud commits the crime of trafficking in stolen identities. Possession of five or more means of identification for one person or the means of identification for five or more people without the victims’ consent and other than the defendant’s own means of identification is considered evidence of intent to commit identity theft.   RSMo. Section 570.224.)

The punishment for identity theft in Missouri depends on the amount of the resulting loss. For example, identity theft that results in theft of more than $50,000 is a class A felony, punishable by a minimum of 10 years in prison and a maximum of 30 years’ or life imprisonment. Identity theft that does not result in any losses is a class B misdemeanor, punishable by up to six months in jail and a fine of up to $500. For second and subsequent convictions, the penalties can be enhanced.  Trafficking in stolen identities is a class B felony.  It is a Class A misdemeanor to (1) make a false statement in order to obtain a credit or debit card; or (2) use a person’s personal identifying information to buy things or obtain credit without the person’s consent, or (3) use or possess means of identification in order to make false identification cards for minors.  See RSMo. Section 570.135, 570.223, and 570.224.  Class A misdemeanors are punishable by up to one year in jail, a fine of up to $1,000, or both.

Kansas

The relevant statutes are:

Making false information (K.S.A. 21-3711), forgery (21-3710), false impersonation (21-3824), and dealing in false documents (21-3830).

In Kansas, “identity theft” is defined as obtaining, possessing, transferring, using, selling, or buying another individual’s personal identifying information in order to (1) defraud anyone for the defendant’s benefit, or (2) impersonate or misrepresent the individual, causing economic or bodily harm.  See K.S.A. 21-6107.

In Kansas, however, “identity fraud” is distinguished from “identity theft.”  Identity fraud is defined as (1) using false information in order to obtain a document that contains personal identifying information, or (2) altering, counterfeiting, copying, or manufacturing a document that contains personal identifying information with the intent to deceive.  See K.S.A. 21-6107.

In Kansas, it is also a crime to (1) supply false information to obtain a copy of a vital record, or (2) manufacture, counterfeit, or alter any vital record, or (3) possess, obtain, or sell a vital record, intending to use it to deceive, or (4) copy, manufacture, or sell identification documents (including driver’s licenses, bank or credit cards, vital records, and social security cards) that contain fictitious names or false information.  “Vital records” include birth, death, marriage, and divorce certificates.  The primary intent here was to stop the trafficking in false records and documents.

Identity theft that results in monetary loss of more than $100,000 is a severity level 5 felony. Otherwise, identity theft, as well as identity fraud, dealing in false identification documents, and vital records fraud, is a severity level 8 felony.  But Kansas’s sentencing guidelines mean that possible punishments can differ from case to case, depending on a large number of factors.

Federal Level

The Department of Justice prosecutes cases of identity theft and fraud under a variety of federal statutes. In the fall of 1998, for example, Congress passed the Identity Theft and Assumption Deterrence Act. This legislation created a new offense of identity theft, which prohibits “knowingly transfer[ring] or us[ing], without lawful authority, a means of identification of another person with the intent to commit, or to aid or abet, any unlawful activity that constitutes a violation of Federal law, or that constitutes a felony under any applicable State or local law.”

18 U.S.C. § 1028(a)(7). This offense, in most situations, carries a maximum term of 15 years’ imprisonment, a fine, and criminal forfeiture of any personal property used or intended to be used to commit the offense.

Schemes to commit identity theft or fraud may also involve violations of other statutes such as identification fraud (18 U.S.C. § 1028), credit card fraud (18 U.S.C. § 1029), computer fraud (18 U.S.C. § 1030), mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), or financial institution fraud (18 U.S.C. § 1344). Each of these federal offenses are felonies that carry substantial penalties ­ in some cases, as high as 30 years’ imprisonment, fines, and criminal forfeiture.

If you have been accused of an identity-related crime at the state or federal level, or are the victim of such a crime, it is important to consult with an attorney experienced in handling these cases.  Call us for a free consultation.

Read More:  White Collar And Financial Crimes

Recent Decision Sheds Light On Bankruptcy Courts’ Ability To Render Final Judgments On Fraudulent Transfer Claims

Overland Park Bankruptcy Lawyer

The Supreme Court’s recent (June 2011) opinion in Stern v. Marshall left open questions regarding the scope of a bankruptcy court’s jurisdiction to enter final judgments in adversary proceedings. Another recent case from the Ninth Circuit Court of Appeals, Executive Benefits Insurance Agency v. Arkison, shed additional light on the issue. The Ninth Circuit interpreted Stern itself. It held that a bankruptcy court cannot enter final judgment on a claim to avoid a fraudulent conveyance against a non-creditor to a bankruptcy estate.

Many fraudulent conveyance claims involve similar sets of circumstances. In Executive Benefits Agency v. Arkison, a debtor transferred assets (insurance commissions) to a recently formed company. The debtor then filed for bankruptcy. The Chapter 7 Trustee then sought recovery from the recently formed company (which was a non-creditor) by filing an adversary proceeding, to try to recover the insurance commissions for the benefit of the estate. During the litigation in bankruptcy court, the court granted the Trustee’s motion for summary judgment in the amount of $373,291 against the transferee (the company). The transferee appealed to the Ninth Circuit, disputing the authority of the bankruptcy court to enter a final judgment under Stern.

The issues were complex, but basically the Ninth Circuit held that fraudulent transfers do not fall within the “public right” exception laid out in Stern. There was an issue regarding the ability of bankruptcy courts to render final judgments on fraudulent transfers under the Bankruptcy Code as opposed to final judgments on transfers arising under state law. The Ninth Circuit held that there should not be a blanket “public right” classification for any claim based on federal law.

The Court went on to say that, although federal law authorizes bankruptcy judges to “hear and determine all cases under Title 11 and all core proceedings arising under Title 11,” the Constitution prohibits bankruptcy judges from entering a final judgment in core proceedings when the primary cause of action is not against a creditor to the estate.

The Ninth Circuit, having found an absence of authority for a bankruptcy court to enter a final judgment against a non-creditor on a fraudulent transfer claim, also held that another section of the Bankruptcy Code (§157) permits bankruptcy courts to submit reports and recommendations to the district courts in core proceedings. The Court was aware that this holding created some conflict and confusion among the other circuits, most notably the Sixth Circuit.

Although the Ninth Circuit found that a bankruptcy court lacked the authority to enter a final judgment in such a case, it nevertheless affirmed the district court’s opinion. It held that the defendant waived its right to an Article III hearing by litigating in the bankruptcy court without having raised any objection to that court’s jurisdiction to hear the fraudulent transfer claim. Since the Supreme Court issued its opinion in Stern in June 2011, there has been much dispute and discusson on the ultimate impact of the Stern opinion. Many voices have weighed in on this issue. With the Ninth Circuit’s recent ruling, it is now clear that litigants must be aware of how their circuit is interpreting Stern so that no rights or benefits are accidentally waived.

In the Ninth Circuit, following the Executive Benefits decision, a bankruptcy court’s constitutional authority may not extend to entering judgment on fraudulent transfer claims against a noncreditor. It seems advisable now that plaintiffs asserting fraudulent transfer claims in bankruptcy should either (1) bring their claims in the first instance before the district court or (2) request that the bankruptcy court propose findings of fact and conclusions of law, rather than enter a final judgment. In addition, defendants in all jurisdictions should be careful not to waive any Article III objections.

These types of litigation decisions are of particular concern to plaintiffs who may benefit from asserting fraudulent transfer claims before bankruptcy courts, which routinely hear such claims and will be experienced with handling them. In the end, it all comes down to a cost-benefit analysis. Every creditor will have to make his own decision in this regard. The convenience of bringing such litigation before a bankruptcy court will need to be weighed against the procedural issues that may arise because the bankruptcy court cannot issue the final judgment on such claims.

Read More:  Debts From Ponzi Schemes:  Dischargeable In Bankruptcy?

With Bankruptcy Discharge, School Cannot Deny Transcript

Overland Park Bankruptcy Attorney

Can a school refuse to issue a transcript to a debtor who had wiped out his outstanding balance owed to the school in a bankruptcy case?  No.  A recent case demonstrates the power of the bankruptcy discharge in dealing with all types of collateral issues that might come about from the wiping out of debts in a case.  In In re Moore, 407 B.R. 855, 861 (Bankr. E.D. Va. 2009), the United States District Court for the Eastern District of Virginia found that Novus Law School violated a discharge injunction by refusing to issue a transcript or award a degree to Moore, a law student, until he paid his outstanding tuition balance, which had been discharged in Moore’s chapter 7 proceeding.

The school in question here was an internet, non-accredited institution.  The debtor had completed his program at the school but still had an outstanding balance (about $6000) from his tuition bill (which was not part of a federally-insured loan obligtion).  The school inappropriately told Moore that they would not grant him a degree or issue him a transcript until his tuition was paid, even though the tuition was to be wiped out in the bankruptcy.

Moore, undeterred, filed a motion for contempt and sanctions against Novus, claiming that they had no right to refuse him his transcript or certify his graduate status to prospective employers, since such conduct was a violation of the bankruptcy discharge.  Novus disagreed.  The Court first had to find out if Moore’s debt was in fact a “student loan” that did not qualify for discharge under the bankruptcy rules.  Applying 11 U.S.C. Section 523(a)(8), the court found that the loan was not an educational debt within the meaning of the Bankruptcy Code.  Why?  Because it was not an “educational benefit overpayment” or a loan made by a governmental unit as a part of a government-funded program.  It was also not “an obligation to repay funds received as an educational benefit.”  Thus, the debt was discharged in the bankruptcy.

The next step in the analysis was deciding whether Novus’s actions (refusing to issue a transcript) were “attempts to collect a debt”.  The Court found that they were.  By refusing to issue Moore a transcript, the school was basically trying to compel him to pay his discharged debt.  This is the majority view.

By analogy, a good argument can be made that any attempt by a creditor, whose debt has been discharged, to compel a debtor into paying a discharged debt is a violation of the discharge injunction.  Refusing to release property, holding security deposits for debt collection purposes, stonewalling on information, denying rightful services, and any number of similar actions may all constitute violations of the discharge injunction.  Debtors should be aware of their rights, and bring such behavior to the attention of their bankruptcy attorney.

Read More:  Redemption Of Secured Collateral In A Chapter 7 Case

Recovering A Repossessed Vehicle After Filing A Chapter 13 Bankruptcy

If your automobile is repossessed before you file a Chapter 13 bankruptcy, the creditor will need to return the vehicle to you in most situations.  In some Chapter 13 scenarios, a case is filed right after a repossession has taken place, and a debtor will need to have the asset returned to him or her so that it can be taken care of in the Chapter 13 plan.  Can a creditor continue to hold the collateral, or must it be turned over to the Chapter 13 debtor? One case is illustrative.  In Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), a court was called upon to determine whether an asset lawfully seized pre-petition must be returned to the estate after debtor files for chapter 13 bankruptcy, and if so, whether the asset must be returned even without a showing by the debtor that he can adequately protect the creditor’s interest.

In Thompson, the creditor (GMAC) repossessed a motor vehicle.  A few days later Thompson filed for chapter 13, and sought the return of his vehicle from GMAC through the automatic stay provision of § 362(a)(3), which provides that “a petition filed [for bankruptcy] . . . operates as a stay . . . of any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.”  GMAC refused because it claimed that Thompson could not adequately protect its interest.  The court initially ruled against Thompson, but on appeal the Seventh Circuit reversed, finding that GMAC had violated the automatic stay by exercising control over the vehicle.  The court also found that GMAC could always ask for adequate protection payments from the court, so that its claim that its interests were in jeopardy was highly exaggerated.  In making its ruling, the court looked at the plain meaning of Section 542(a), as well as a Supreme Court decision (U.S. v. Whiting Pools Inc).  Basically, before any creditor can claim a need for adequate protection of its interests, the asset must be returned to the debtor.  Short of that, no rational way exists to evaluate a creditor’s assertions.   It should be noted, however, that another court has ruled differently.  In the Eleventh Circuit, a different position was taken in another recent case.

In Bell-Tel Federal Credit Union v. Kalter,  292 F.3d 1350, 1351–52 (11th Cir. 2002) the court approached the problem from a different angle.  It held that a secured creditor does not have to return a vehicle that was seized pre-petition.  While the Thompson court analyzed whether the car must be returned without a showing by the debtor that the creditor’s interest is protected, the Bell-Tel court focused on whether the car was even part of the estate. The Eleventh Circuit stated that if the property was not part of the bankrupt estate, then the debtor had no right to have the car returned. Section 541(a)(1) states that property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”

Since property seized before filing can be considered property of the estate only if the debtor still had a legal or equitable interest at the time of filing, the Eleventh Circuit looked to state law to determine whether the debtor had a legal or equitable interest in the car.  Specifically, the court looked to see if the creditor took legal title to the car when it was repossessed. The Eleventh Circuit found that, following repossession, the debtor held a very tenuous ownership claim on the car.  Because the car was not part of the estate, the court held that the secured creditor did not have to return the car.  Regardless whether we agree with the Eleventh Circuit’s analysis (shouldn’t any prepetition transfer, even an auto repossession, be part of the bankruptcy estate?  Why are voluntary transfers part of the estate, but not involuntary ones?)  the fact remains that this issue is an important one.

In our experience, it almost always happens that an auto repossessor will gladly return a vehicle to a debtor after the filing of a Chapter 13 case, as long as some provision for resuming payments is made in the plan, and as long as a case is filed without undue delay.  Creditors do not want to have to deal with used cars.  They want payments, not collateral.  Time matters as well. Once a vehicle is repossessed, it is critical to get a case filed as soon as possible.  The longer a debtor waits, the more it looks like he or she is not serious about getting the vehicle back.  Like so much else, those who fail to take timely action will lose out.

Read More:  Can Utility Service Be Disconnected In A Bankruptcy?

Violent Crimes

Overland Park Violent Crimes Attorney

Violent crimes are defined as those crimes involving force or the threat of force, or those that involve bodily harm to another.  It is not a precisely defined category, and authorities differ precisely on what may or may not be a “violent” crime.  Some types of offenses can be in more than one category of crime:  for example, aggravated sexual battery is both a sex crime and a violent crime.  Basically, a violent crime is one viewed as violent activity against a person or property that intentionally threatens or inflicts, or attempts to inflict, physical harm. Because of the seriousness of such acts and the potential damages that can result, violent crimes are typically prosecuted very aggressively by state and federal prosecutors.  In addition, alleged victims of violent crimes often have more involvement in the prosecution of these offenses than with other types of criminal offenses.

The following are some of the most common violent offenses.  Each of these offenses has a very precise definition, with very specific elements, that may vary between the states of Kansas and Missouri.  This listing is meant for general informational purposes. Some of these offenses are also commonly found as “inchoate” offenses:  that is, they are charged as “attempts” or “conspiracy” to commit the underlying offense.

Homicide.  The unlawful killing of a human being, which includes first degree murder, second degree murder, and the three forms of manslaughter.

Robbery.  The use of force, or threat of force, in the act of taking money or other property of another.  Bank robbery is prosecuted as a federal crime, as it involves federally insured depository institutions.  In many robbery situations, arrests are not actually made at the scene of the crime, but are dependent on surveillance videos, eyewitness recollections, and evidence left at the scene.  Evidentiary issues in these cases can be complex, and it is important to have an attorney who is aware of the nuances.

Assault.  The unlawful and intentional threat of inflicting violence on another.

Battery.  The actual and intentional touching or striking of another against their will, or the intentional causing of bodily harm.  This can be charged as an “aggravated” offense if certain other conditions are met.

Child Abuse.  The infliction of bodily harm on a minor child.

Kidnapping Or Criminal Restraint.  Abducting, imprisoning, or confining another against his or her will, by force or threat of force, and without legal authority.

Vehicular Homicide or Manslaughter.  Vehicular homicide cases can come about when someone is accused of reckless operation of a motor vehicle that has resulted in the death of another.

Because these charges are aggressively prosecuted and carry serious possible penalties, it is absolutely critical to contact an attorney at the earliest possible stages of the development of a case.  Under no circumstances should a person sit for law enforcement interviews, agree to polygraph examinations, or otherwise discuss possible criminal accusations with doctors or social workers, without first consulting a defense attorney.

Read More:  Sex Crimes In Kansas City