Asian Journal- The Filipino-American Community Newspaper

If debtor acted with intent to harm one creditor, can another creditor raise this conduct to ask the Bankruptcy court to deny debtor’s discharge even if creditor was not the target of debtor’s actions? This was the question raised in In Re Kent. In this case, plaintiff sold his landscaping business to debtor in 2001 for $625,000. Plaintiff financed $100,000 of the purchase price. Debtor was doing well with the business for several years. Then he found out that his bookkeeper embezzled about $100,000 from him and had not been paying his corporate or business taxes. Debtor then worked out an installment payment plan with the IRS without knowing that he was paying little more than interest on the tax claim. He then made an offer in compromise and stopped making his installment payments. The IRS responded by serving a Notice of Intent to Levy. Debtor responded by operating under a new business name that was registered in the name of debtor’s mother and transferring assets from the old business to the new business. Debtor’s wife also transferred her interest in the real property back to her father. She had received an interest in the property, which was owned by her parents, after debtor bought the landscaping business.

By the foregoing exercise in transferring assets, debtor’s intent was to hinder, delay or defraud the IRS. But plaintiff was not the IRS and was not the target of debtor’s conduct. After debtor filed for bankruptcy, plaintiff asserted that debtor should be denied discharge because he transferred property with intent to hinder, delay, or defraud a creditor using Section 727(a)(2) as legal basis. That section states that the court shall grant debtor a discharge, unless "debtor with intent to hinder, delay or defraud a creditor or an officer of the estate charged with the custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed: A) property of the debtor, within one year before the date of the filing of the petition, or B) property of the estate, after the date of the filing of the petition." The court said the facts of the case led to the inescapable conclusion that debtor acted with the necessary intent. Although the transfers were not made to hinder, delay, or defraud the plaintiff, Section 727(a)(2) did not require the plaintiff to prove that he was the target of the debtor’s actions. In fact, he was not even required to prove that he suffered actual damage. He only needed to prove that debtor intended to hinder, delay, or defraud some creditor.

What I normally encounter are clients who decide by themselves to transfer title to houses where they lent their credit to another person to help that person buy the property. Client is placed on title as a joint tenant so that the other person can qualify with client to buy the property. However, the other person pays the entire downpayment, and all mortgage payments. When client decides to file for bankruptcy, the other person requires him to quitclaim title thinking that the prepetition transfer will protect the property from the jurisdiction of bankruptcy court, thus mistakenly thinking that the property is protected. But instead of solving the problem, a new problem is created by the transfer. An aggressive trustee may see the transfer as a fraudulent transfer that may be avoided if debtor claimed the tax deduction for mortgage interest even once, or if debtor made a real estate tax payment even once. The problem is magnified if the property transferred has substantial equity. It may be seen as a transfer to hinder or delay the trustee. If debtor really has no interest in the property, the correct argument to adopt is that debtor holds the property in trust for the real owner, thus the property is not part of debtor’s bankruptcy estate and not subject to the jurisdiction of the court.

If you need debt relief, contact my office. I will analyze your case personally.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.

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( Published on February 14, 2009 in Asian Journal Los Angeles p. C4 )