Transfers avoided and discharge denied due to fraudulent transfers

In re Wheeler
U.S. Bankruptcy Court District of Idaho
Chief Justice Terry L. Myers
Case No. 08-02835-TLM
Decision Date: 2/11/2011
Chapter 7
Full Text HERE

Debtor and his wife own and control 2 closely held entities: BW, LLC, managed by Debtor, and L&B, inc., majority owner is Debtor’s wife. Debtor filed an individual petition for relief under Chapter 13 and later converted it to a Chapter 7.

The chapter 7 Trustee sought to avoid transfers as fraudulent pursuant to section 548. The Trustee bears the burden of proving the transfer occurred within 2 years and was made with actual intent to hinder, delay or defraud creditors. Courts look to the circumstances surrounding the transfer to determine actual intent to hinder, delay, or defraud.

The Court found a quitclaim deed fraudulent as it was recorded 4 months prior to Debtor’s filing bankruptcy. The Court found actual intent to hinder, delay or defraud creditors because the transfer was between a married couple, Debtor was defending against a lawsuit at the time of transfer, transfer was only on paper, Debtor received no consideration, Debtor retained possession and used of the property, and Debtor failed to disclose the transfer on either of Debtor’s original or amended SOFA. Trustee was allowed to avoid this transfer.

The Court allowed the Trustee to avoid as fraudulent a $10,000 transfer when Debtor deposited a check he received from services performed through BW into an L & B account. The Court found intent to hinder, delay or defraud creditors because Debtor had a close relationship with L & B, Debtor continued to exercise control over the money, and although debtor disclosed the $10,000 gift in his amended SOFA, there was no disclosure of the subsequent transfer to L & B in either the original or amended SOFA.

The Court allowed the Trustee to avoid as fraudulent the removal of his name from the certificates of title on 3 motorcycles. By removing his name from certificates of title the Debtor transferred his interest in the motorcycles. The Court found intent to hinder, delay or defraud creditors because the transfer occurred the day before the petition date, no consideration was given, a civil judgment was already entered against Debtor, and Debtor continued to exercise possession and control over the motorcycles.

The Court dismissed the Trustees attempt to avoid a transfer of vehicles from BW to L & B pursuant to section 548, essentially requesting the court to “pierce the veil” of a non-debtor entity- BW and for the equitable remedy of substantive consolidation of Debtor’s estate with that of a non-debtor- BW. The court found that the Trustee did not specifically plead substantive consolidation nor presented evidence sufficient to meet the requirements for such extraordinary relief.

The Court granted Trustee’s request for an order denying Debtor’s discharge under 727(a)(2)(A) because all the above transfers occurred within 1 year of the petition date and as discussed above each transfer was found with the intent to hinder, delay, or defraud creditors.

Debtor’s discharge was also denied under 727(a)(2)(B) when the court found the concealment of a post-petition lease transaction that was executed the day after Debtor filed his petition. The Court found intent to hinder, delay, or defraud creditors because this transaction was not in the ordinary course of business, the lease transaction was structured in an unusual way, and rental income was omitted from Schedule I.

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