Be Careful With Bankruptcy
Columnist Les Gold warns readers to be careful with filing for bankruptcy.
A recent case in the United States Bankruptcy Court discusses a situation where a bankruptcy court refused to allow the party who had been discharged in bankruptcy from discharging the debt.
After the discharge in bankruptcy, a lawsuit was filed for a claim objecting to the discharge. The plaintiff claimed that the debtor should be denied a discharge because he transferred real property within one year of his bankruptcy petition with the intent to hinder, delay or defraud his creditors; failed to keep and preserve adequate business records; and failed to keep track of the assets.
Although this case has nothing to do with the security industry, because of the current state of the economy and the possibility of a number of insolvency and reorganizations, the findings of the court are useful to make certain that any party filing for a reorganization or bankruptcy make certain that appropriate records are kept and that debts may not be discharged because of improper activities of the debtor in bankruptcy.
In the case at hand, the plaintiff was left a jewelry, mineral and fossil store that was run by her husband until he passed. The plaintiff ran the business for nearly a year and then hired the debtor’s wife and made her responsible for the general store operations. After working for several years the debtor’s wife approached the plaintiff about purchasing the store’s assets. While the debtor was privy to the discussions, most of the negotiations were handled by his wife.
The plaintiff and debtor entered into an Asset Purchase Agreement (APA) to acquire substantially all of the assets, and the debtor signed both in his individual capacity and as president of the new business where the assets were conveyed. Under the terms of the APA, the buyers were required to keep a detailed description of each item purchased and the cost and quantity, and to insure the assets against theft and other losses. The debtor then defaulted and filed bankruptcy.
The purpose of the bankruptcy process is to afford the honest, but unfortunate, debtor a “fresh start.” In a Chapter 7 setting it is presumed that a debtor will be granted discharge at the conclusion of their case, releasing “a debtor from personal liability with respect to any discharged debt by voiding any past or future judgments on the debt and by operating as an injunction to prohibit creditors from attempting to collect or to recover the debt.” A creditor may object to a debtor’s discharge on a variety of grounds. The objecting creditor must establish why the debtor should not be granted discharge.
In this case, the debtor transferred his home, for which he was the sole owner, to himself and his wife as tenants by the entireties within the year of the petition date, which made the property immune from execution by a creditor holding a judgment against only one spouse; the debtor failed to maintain or preserve adequate records; the debtor did not maintain a basic ledger of recorded sales and acquired inventory; the debtor failed to satisfactorily explain any claimed loss or deficiency of assets to meet the debtor’s liabilities; and the debtor promised to pay $100,000 the plaintiff upon receipt of his IRA disbursement, but refused to pay when that occurred.
In consideration of these factors, the court found that the plaintiff proved by a preponderance of the evidence that the debtor intentionally deceived her into signing the APA. With reference to the transfer of the property, the court found that the debtor conveyed an interest in the property to his wife with the intent of thwarting creditor collection efforts within one year of the bankruptcy case.
Accordingly, the plaintiff was entitled to judgment notwithstanding the discharge in bankruptcy.