Fraudulent Transfer?

[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.

[Ormolu611]

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

[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 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.

[AngelinaCat]

Do you or your father have that letter from the insurance company? If not, see if you can get a copy from the insurance company. Every little scrap of information that you can provide about this transfer and the reasons be hind it may help in the long run.

[Ormolu611]

The only thing that I can hope is that it is clear that I had no interest in the property from th time that the corporation of which I was part owner failed to sell the property. As for our intent, it is true that the situation was not properly documented, but we have a clear record prior to this property of buying and selling perhaps 30 properties over several years with the corporation re-paing my father everytime. It is clear looking at the record that this is how we did business, and this is what the record shows our business model was.

Only with this property did we not sell, and the time that we acquired this property coincides with the downturn of the market in 2008. Hopefully, this is a sufficiently strong argument.

[Ormolu611]

Do you or your father have that letter from the insurance company? If not, see if you can get a copy from the insurance company. Every little scrap of information that you can provide about this transfer and the reasons be hind it may help in the long run.

Yes, AngelinaCat, I do have a copy of the letter and will forward it to my attorney, now that I have a better idea of what we are up against. I need to show that my father and I were not up to any funny business when that property was transferred - which is the truth!

[Ormolu611]

Good info everyone.

One more thing, it should be easy (I am thinking) to prove that the idea of my Dad's money being a gift is just absurd. He has been making interest only payments on the thing for five years - does that sound like a gift? His payment history has already been verified as I have already produced 60+ statements (5 years worth) of my Dad's equity acount. The fact is, that when a corporation goes belly up, the shareholders (me) are the last to claim assets. My argument is that there was nothing left for me since my dad (the lender) got stuck with a net $15k liability. House worth $25k bought with a $40k loan. This is the argument that I with the help of my attorney, will make to the trustee. Thanks everone as usual!

[tobee43]

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.

i think i tried re-read my post, it explains exactly how it works. i have seen done before and was hoping although long you would read the post.

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.

[tobee43]

does matter who loan whom anything, one would have to audit the corp books to find out if this situation was a "loan"

[Ormolu611]

Thanks for the helpful info Tobee43!

[tobee43]

doesn't matter who loaned whom anything, one would have to audit the corp books to find out if this situation was in fact a "loan".

sorry i had to rewrite that mess!!! typing is NOT me LOL!!

as lady points out documentation was the key. however, once again, and i have seen it work as follows:

this was us: you own property with someone else in our family and we need file bk, you do want to transfer it out of your name in our case the property was free and clear; but we personally took a mortgage on it. we advised the family member that we were going to file bk. the family member paid off the mortgage, at the time that payment, was worth MORE than half the property's value. after the mortgage was paid in full the property transfer took place. it was outside that 2 year period therefore was absolutely listed on our petition, absolutely followed with a written explanation of the situation. actually, we had to list that family member on our petition, as even after paying off the mortgage WE took out against the property, was well over the amount of half the value it would appear as though we still owned our family partner over 30k, which is the amount we listed on our petition. however, we never failed to list the transfer, that's the key here. also we never failed to inform the family member to prepare if we had to go into court their atty could negotiate a buy back amount if value was found. also all of our paperwork was in order. just because it was a family thing didn't excuse it from keeping excellent records.

results: nothing from the trustee, why, because we also provided an updated appraisal of the property, all records and the fact there was no equity, even after the property was purchased back.

what i learned from all this was the other property owner had first rights to buy back from the trustee if we hadn't resolved the sale prior to. secondly, if we hadn't handle it that way the trustee could put the property up for sale to get our share of the equity. however, our proofs were clear enough to the trustee there was no equity to be had.

[Ormolu611]

Wow. I just got two letters in the mail. One from the trustee and the other from my attorney's office. The letter from the trustee is an order authorizing the trustee to employ another attorney to "file all necessary objections, motions, applications, notices,...to pursue fraudulent conveyance and/or preference actions; determining and liquidating estate's interest in business, etc."

The letter for my attorney is a letter that was sent to the creditors, alerting them that "a dividend now appears possible in this case."

Does anyone know what I should expect now?

[AngelinaCat]

Yes.

Expect that your case will be ruled an Asset Case, and expect that the expected date of your discharge will be pushed back 30 or more days to allow this new notice to get to all of your creditors so that they may file claims, should they wish to.

Once you are declared an Asset Case, you may be given the opportunity to purchase the Asset back from the BK Estate. The trustee may or may not offer you a discounted price. If this happens, and you accept the deal, you will be expected to make 12 monthly payments, that will equal the total amount of the purchase.

Since an attorney has been hired to investigate matters, expect that you will be called to meet with that attorney for a '2004b Exam'.

If the investigative attorney determines that this was a fraudulent transfer, the trustee will likely seek to have to transfer 'Avoided' or undone. That would likely hurt your father, and I understand that you want to keep him out of this. The trustee will then, most likely, offer you the chance to make a payment to the trustee for the value of the item. Again, this amount, may or may not be discounted. The problem with this one is that the trustee will want the payment in one lump sum. You may be able to negotiate this to two, maybe three large payments, but don't count on that.

I am sorry to read your update, and that you are having to go through this. However, we went through something very similar, that is why you have gotten this step-by-step epistle.

Good wishes to you.....

[Ormolu611]

Thanks for the response AngelinaCat. Very helpful. Unbelievable how stressful this thing has become. I just need to relax a bit. Nothing I can do about any of this now. My Dad is aware of everything that is going on and would likely want to attend such a meeting - not sure if that is allowed. I'll consult with my attorney. My attorney seems to be vaguely positive. he has expressed doubts as to the validity of such a claim by the trustee.

Here's the deal - It will be very easy to prove that the house was paid for by my Dad's home equity account, and that he had funded all of our company's purchases this way, with the company paying him back after each house sale. There is a well documented record of this over the course of say 20 - 25 houses over three years or so. Since the investment money used to purchase these houses belonged to my Dad, he and I split the profits 50%/50% since our company only owned and could only lay claim to the profits, not the home equity funds which were always without exception returned to my Dad's personal home equity account after each sale. The acquisition of this particular house which is causing all of these problems coincides with the market downturn. There were suddenly no profits to split, and the means by which the company operated disappeared. Suddenly, the property was worth less than the purchase price, and this coincided with my father's equity account being scaled way back without warning by his bank/lender since so much equity everywhere in the housing market evaporated seemingly overnight. We were out of business as we had no more access to funding. Under these circumstances, there was an implicit understanding between my father and I that the property belonged to my Dad - he was after all the one exposed to all of the risk. I had no money invested at whatsoever. I basically felt bad for my Dad because I could just walk away. At the time, I didn't even have the money to help him make the payments.

A couple of years passed - our defunct company becomes the furthest thing from my mind (I've other problems to worry about). My Dad dissolved the corporation. I didn't think anything of it. He received a letter from his insurance company stating that because the property was in the name of a corporation, it was not going to be insurable. He changed it into his name. I thought nothing of it - until the Trustee asked me about it at the 341 meeting. Wow! Imagine my surprise...

The thing is, my Dad has not had much money either for the past couple of years, and he has been making the minimum payment on that stupid house that he can't afford to get rid of ever since we bought it. Every 6 months or so, he asks me to perform another market analysis on it - hopeful that some value has been regained. Much to his dismay, the value remains just too low. Now, with all of that said, the real question will be will these circumstances (which are all true and verifiable) matter? The thing is, I have no money, my Dad has no money, and the trustee is wanting to go after a house that my Dad can't afford to get rid of...sheesh. I guess I'll find out the answers to these questions soon.