Fraudulent Transfer?

[Ormolu611]

Thanks for the detailed reply and clear explanation LadyInTheRed. Ugh...this situation just seems to be going from bad to worse. I am very stressed about this whole thing now. The thought that by me filing bankruptcy, my Dad is bbeing dragged in is terrible. The only reason he even transferred the propert isbecuase he got a letter from his insurance company stating that the. Property was uninsurable under a corporate entity. Neither one of us ever thought that by him doing that, that it would have anything to do with me years after the corp stopped doing business.

[LadyInTheRed]

If within a certain amount of time before filing BK, a debtor transfers an asset to an insider without receiving fair market value in exchange, it's considered a fraudulent transfer. The trustee has a right to recover the asset from the insider. Your father is an insider. Your interest in the property was transferred to him and he did not pay you anything for it.

Yes, your father paid for the property and it was your intent that the corporation would pay him back. But, the transaction was not documented properly. When your dad loaned money to the corporation, the corporation should have executed a promissory note secured by a mortgage on the property. Then, when the corporation went under and the property was worth less than the mortgage, there would be no dispute that your father would be entitled to receive the property. Because there is no documentation, the trustee could take the position that your father gave the corporation a gift of cash to buy the property.

This is one reason why when family members go into business together, they should document every transaction as if they were doing business with a stranger. It's nice to trust each other that everyone will do the right thing. But, business is business and should be treated that way.

Hopefully, the trustee will be convinced that the corporation really did owe your dad money and not pursue the issue further. If not, your dad will either have to pay or fight for your interest in the property.

[Ormolu611]

Thanks by the way for all of the great replies and help!

[Ormolu611]

Okay, I spoke with my attorney today after producing five years worth of my Dad's home equity account showing that the money used to pay for the house is still outstanding. My Dad has been paying the minimum as he has not had any extra money either in the last few years since the economy slid down the tubes. In addition, I also provided the last two years of tax returns for the corporation showing that the last year in 2009, the now defunct corp essentially made no money.

My attorney explains to me that if the trustee "decides" to pursue this, he will basically go after my dad and not me. Will someone please explain to me as I am not exactly sure about how this works, but how my Dad can possibly be on the hook for more money to this trustee, when he is already stuck with a house that he can't sell because it is not worth what he paid for it? How can that be possible? He is currently upside down/under water in it and now may suddenly owe a bankruptcy trustee and be on the hook for still more money on this property???? Can the trustee just tell my Dad that he needs to pay more money, or make him sell the house for less than he paid for it? Our corporation failed to profit off of this house, and forfeited the house to my father..and mother technically... (the source of the corporations' funding), who was in turn forced to hold it due to it's rapidly declining value. We paid $40k for the house and today it is probably worth $25k.

[tobee43]

The initials of my Trustee are GPJ. I spoke with my father this afternoon (Happy Father's Day!) and we went through the documentation. It will be easy to show as there is a clear and distinct paper trail showing that the funds for the purchase of this property came from my father's personal home equity account. It is also very easy to show that this amount has not been repaid and is still outstanding.

As for why I did not mention this transfer earlier, it is easy. I have had no interest in our corporation since 2009 or so, because that is when we stopped doing business. When my attorney asked if I owned any other property, the now defunct corporation could not have been further from my mind. Years had passed. I remember my father telling me some time ago that he was moving the property into his name, and I did not think anything of it. After all, in my mind, it was his property so that only made sense.

The trustee is trying to insinuate that since I held a 50% interest in the corporation, I also hold 50% interest in the property since the property was a company asset. My understanding is that it is not an asset at all, but a liability since the corporation had no money of it's own. My Dad provided all of the funding. My Dad makes the point that if the trustee feels this way - that I own 50% of an asset that has yet to be paid for, then by that logic, I must own the liabilities of the corporation as well. The way my Dad puts it, our corporation owes him $40,000 for the purchase price of the house. Of course, the house is only worth $25k to $30k. So instead of me owning $12,500 or $15,000 of equitable interest in this property, I actually owe my Dad $20,000 (since I have 50% interest in the corporation) and he should probably be included as a creditor in the bankruptcy for that amount. Thoughts?

while understanding you had no interest in the property itself, the title transfer still may occurred within the two year look back that the trustee was examining, thus resulting in this situation. it most likely as you are stating, is going to be a wash provided you have the proofs.

it's really a matter of semantics, your understanding you had no more part of the business during that time that's why you didn't list it, the corporation had no assets, but the transfer of the title did not meet the date requirement for the bk because it fell within that 2 year time period. (timing is the real problem here).

also, can you provide documentation of the dissolving the corporation? usually, with a larger scale company that is done, and it really should be done no matter how small or large a corporation is. my point is, that document would also be helpful in your situation.

if it doesn't go your way, and a situation arises that you are turned into a chapter 13 as has been suggested, and drawn as an example, then they will approach your father to buy back your share, which actually is done first before you are thrown into a 13. the other owner has first rights if the courts find that you were the owner.

actually, your father's right to first option is, i believe without question anyway it's goes.

the other option, (worse case scenario only) which would be more likely if your father didn't chose the buy back option (if approached), will be that your no asset 7 is turned into an asset 7 as opposed to a 13, the trustee has, or is to force the sale and pay your father his share from the proceeds and then take your share for distribution to your creditors. although, it sounds like, from the docs you have, hopefully you will be successful in proving it was JUST and ONLY your fathers.

[AngelinaCat]

Those initials do not equate with any trustee that I know of in Jax part of Florida Middle. Of course, it has been almost four years since our discharge. Someone may have retired, and another person or two come on board in the meantime.

Sorry.

[Ormolu611]

Oh, and the other option of converting to a chapter 13 and making payments somewhere in the realm of $250 per month for five years would not work either. I simply could not afford such a payment. I only make $13 per hour and this is one of the reasons that I am filing bankruptcy. I am barely scraping by as it is.

[Ormolu611]

The initials of my Trustee are GPJ. I spoke with my father this afternoon (Happy Father's Day!) and we went through the documentation. It will be easy to show as there is a clear and distinct paper trail showing that the funds for the purchase of this property came from my father's personal home equity account. It is also very easy to show that this amount has not been repaid and is still outstanding.

As for why I did not mention this transfer earlier, it is easy. I have had no interest in our corporation since 2009 or so, because that is when we stopped doing business. When my attorney asked if I owned any other property, the now defunct corporation could not have been further from my mind. Years had passed. I remember my father telling me some time ago that he was moving the property into his name, and I did not think anything of it. After all, in my mind, it was his property so that only made sense.

The trustee is trying to insinuate that since I held a 50% interest in the corporation, I also hold 50% interest in the property since the property was a company asset. My understanding is that it is not an asset at all, but a liability since the corporation had no money of it's own. My Dad provided all of the funding. My Dad makes the point that if the trustee feels this way - that I own 50% of an asset that has yet to be paid for, then by that logic, I must own the liabilities of the corporation as well. The way my Dad puts it, our corporation owes him $40,000 for the purchase price of the house. Of course, the house is only worth $25k to $30k. So instead of me owning $12,500 or $15,000 of equitable interest in this property, I actually owe my Dad $20,000 (since I have 50% interest in the corporation) and he should probably be included as a creditor in the bankruptcy for that amount. Thoughts?

[LadyInTheRed]

LadyInTheRed, I am not sure precisely what the Trustee is thinking and the question that you ask is one of my own. I hope he does not think I was trying to hide anything because I certainly was not. I imagine that as anyone works as a trustee for any length of time might get jaded and probably sees a lot of attempts to mislead and obfuscate. I almost get the sense due to the questions that he was asking and how my attorney explained it to me afterwards that he is trying to get half of the property.

He probably runs an asset search for all debtors. If the transfer of the asset was not on your statement of financial affairs, he doesn't have to be jaded to suspect you were trying to hide something. The way you describe it, I think it is pretty easy to explain why you didn't think there was anything to hide. Hopefully, the trustee will understand that. If all your attorney told you is that he is trying to get half of the property, then that is probably all he is doing. Not to say that isn't a serious, but it's better than him trying to have your discharge denied because you hid assets. You should make sure you understand what is going on so you can be an active participant in your case.

The second half of the question I will have to investigate. We paid just under $40k for the property as the housing market crashed. We paid cash - originating from my Dad's home equity line of credit, of which he has documents to show where the money came from. Today, this house is worth maybe $30k on a good day. In other words, it is easy to show how much we paid for it, where that money came from, and what the house value is today.

If there is no lien against the investment property, then it isn't underwater. The trustee sees an unencumbered asset worth $15k. I think this will come down to documentation and whether your dad can prove you had no real interest in the corporation or the property. It sounds like his argument will be that even though you were a 50% shareholder in the corporation, that you had no "equitable interest" because your father contributed all of the cash. Hopefully, once you get documentation to your attorney, he'll be able to give you a better opinion as to the likely outcome.

If the trustee does not try to pursue you for intentionally omitting the transfer of an asset from your petition, but your dad is not successful in proving you had no interest in the property, you could convert to a Chap 13 in which you pay $15k (or whatever the value of your 50% interest is) plus trustee fees to your unsecured creditors over the life of the plan. So, in a 60 month plan, you would pay $250 a month plus 10% or less for trustee fees.

[tobee43]

good morning ms cat. well, maybe not so much the jacksonville area, but you the the middle district is wide and vast...stretching from tampa, orlando, up through jacksonville, it's huge!

[AngelinaCat]

Hi tobee43. Yes, our friend said he is in the Jacksonville portion of Florida Middle.

I really can't remember anyone posting anything about trustees and property in Jax Florida Middle, except for us, perhaps with all of our stupid mistakes.

To Ormolu611: can you share the initials of your trustee? We are not allowed to give proper names on the public side, and you do not yet have enough posts to be able to PM anyone.

[tobee43]

there is a question on the florida petition that specifically asks the question: (not the exact wording but similar and it may be on every petition i would think)...have YOU within the PAST TWO years been involved with any property transfers and if yes, please state the address etc.

most likely you answered NO to that question and then when the trustees office did a search on you, found the records of this transfer.

they are most likely going to approach your father on this first, not you. they will ask him to buy back your interest, and then most likely you will be able to the prove it's a lose lose situation and it will be the end of that story.

i suspect you are located in the middle district in florida; where life for those filing bk are becoming and have become living hell for many of those that file in the district. with trustees attempting to find assets that do not exist. we had one poor woman that the trustee took her rv and put it up for auction and it sold for less than it was worth after the trustee sent an appraiser out and it was suppose to be worth all this money. poor person it was ridiculous.

sorry for your troubles and welcome to forum.

you will make it through this, but you need to get all information pertaining to the property including an updated appraisal. additionally, and unfortunately, this is going to cost you more money, hard to tell how much. make certain your atty is experienced in adverse procedure motions, as many of these attys doing bk lack or do not have that type of experience although they should. otherwise, you may have to hire a different atty to do the AP.

[Ormolu611]

LadyInTheRed, I am not sure precisely what the Trustee is thinking and the question that you ask is one of my own. I hope he does not think I was trying to hide anything because I certainly was not. I imagine that as anyone works as a trustee for any length of time might get jaded and probably sees a lot of attempts to mislead and obfuscate. I almost get the sense due to the questions that he was asking and how my attorney explained it to me afterwards that he is trying to get half of the property.

The second half of the question I will have to investigate. We paid just under $40k for the property as the housing market crashed. We paid cash - originating from my Dad's home equity line of credit, of which he has documents to show where the money came from. Today, this house is worth maybe $30k on a good day. In other words, it is easy to show how much we paid for it, where that money came from, and what the house value is today.

[Ormolu611]

Thanks for the response AngelinaCat! I am actually in Jacksonville. yes, my attorney has already instructed me to gather all documents including statments of my father's home equity line of credit after the purchase of this house. he also wants to see the last two tax returns and K1's of the corporation. Hopefully this thing gets resolved without any trouble. Oh and thanks for the link!

[LadyInTheRed]

Is the trustee trying to get his hands on half of the property, or is he objecting to your discharge because he thinks you are hiding assets because you did not disclose the transfer of your interest in the property to your father?

You say that the investment property was purchased with a line of credit secured by your dad's home. But, you also say the investment property is underwater. Is there a lien recorded against the investment property securing a loan with a balance in excess of the property's value?