Fraudulent Transfer?

[Ormolu611]

I have filed for chapter 7 bankruptcy, hired an attorney, and just had my 341 meeting of the creditors. Well, in this meeting, the trustee who I was assigned to asked a question about a rental property that my Dad owns. My Dad and I owned a corporation several years ago, 50%/50%, and we flipped house through this corp. When the market crashed in 2007, the last house that we bought was suddenly not salable as it has immediately lost a bunch of equity as values plummeted. We bought it for about $40k and it was now worth maybe half that. We were out of business.

My Dad had financed the purchase of the houses we bought with a home equity line of credit taken against his own personal residence, and this house was no different. I guess you could say that he “loaned” the corporation the money, and the corporation “repaid” him after selling the asset (house). We split the profits 50%/50%. Well after the market crashed, I got a call from my Dad saying that we were out of business because his equity line was revoked by his bank. We had no more funding. My Dad had to do something since his borrowed money was tied up in this most recent house, so he rented it out. The rental payments were made to him, not the corp. I never saw any $$ from this house nor did I expect to.

My Dad eventually deactivated the corp’s status as we were essentially not in business anymore. Some time later, in September of 2012, my Dad transferred the deed of the property into his name from the corp’s name for insurance reasons. He could not maintain the home’s insurance otherwise.

So, nearly a year later, I am filing chapter 7, and the trustee blindsides me (and my attorney) and asks about this property and the transfer of title with apparently no exchange of money. He argues that I have a 50% interest in the property. Now I have to attend a adversarial hearing (I think that is what it is called). It seems he thinks this was a deliberate attempt to hide something and this is just not the case.

I don’t see what the issue is for the following reasons, and perhaps someone out there can give me some feedback. Number 1, the house has no equity. It is upside down/ under water. That’s why we did not sell it back in the day – my Dad did not want to be a landlord. It is in fact not an asset at all but rather a liability to this day. Secondly, since my Dad funded his house purchase with his own personal equity account, and our corp essentially defaulted since we could not sell it, was it not in my Dad’s rights to take steps to protect his own personal residence, whose equity was now partially invested into this rental house? I, after all, had no money invested in the thing from the get go. I always viewed it as his house after we could not sell it. He, after all paid for it. 100% of his own money.

The trustee asked if my father knew about my financial difficulties and I said yes. He then asked why my dad did not help out when he knew this. At the time, I could only answer that “I could not answer that question.” But now after the fact, I would have said that because I understood that my Dad had a lot more to lose than I did. His own residence is on the line as a result of this purchase. My attorney says on one hand that he is not sure how this will play out, but on the other hand he does not see how they can go after this property. Any thoughts? This whole thing to me sounds ridiculous but I am concerned. i don't want to drag my Dad into this thing.

[Ormolu611]

Oh, and I am in Florida by the way.

[Ormolu611]

Anyone?

[AngelinaCat]

Hi Ormolu611. Welcome to the forum!

From my limited experience with property issues here in the state of Florida, I would say that the trustee is on a fishing expedition. I don't know for sure, but I bet that when he/she finds out there is no equity and a lot of details to untangle before a sale can be made, this property will be dropped like a hot rock.

However, there are some hurdles you have to jump first. You likely will be ruled to be an Asset Case. You said that you will have to go to a hearing. It sounds like it might be a 2004(b) Examination. Here is some reading material courtesy Cornell University:

http://www.law.cornell.edu/rules/frbp/rule_2004

When there, if you are asked why your Dad didn't step in to help you financially, be honest and say that at the 341, your mind went blank, and you gave the answer that you did, and that now you have had time to think about it, state what you said in your post.

As to the technicalities of what you are asking, I will have to defer to someone more knowledgeable about partnerships and property ownership than I am. With that said, keep in mind that this is the weekend, and Father's Day is tomorrow, so many of our regulars will be engaged with other activities this weekend.

I would suggest, if your attorney has not already told you this, get all of your paperwork together regarding the partnership and this property. Will you be represented at this hearing by your attorney? I hope so. But it is possible that he/she may charge extra for this service.

I am curious. What part of Florida are you in. Florida Middle District covers much, but not all, of the peninsula. We are far enough north that our courthouse is Jacksonville. Florida Middle has courthouses in Orlando and Tampa.

Good luck to you!

[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?

[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!

[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.

[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.

[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]

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!

[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.

[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?

[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.

[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.

[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.