HIDING an asset in bankruptcy may involve different types of smokescreens. Debtor may actually be the true owner of a house even if title and mortgage may be in someone else’s name. To illustrate, 10 years ago, debtor gave $50,000 to friend to purchase a house in friend’s name, and friend agreed to get a mortgage loan of $150,000 to purchase the house for $200,000. Debtor lives in the house as a tenant and pays friend “rent” of $1,200 monthly which friend uses to pay the mortgage of $150,000. Friend delivers a private and confidential document to debtor that friend is holding title to house in trust for debtor and that debtor is the true owner of house. Debtor puts this document in a shoebox under his bed and does not record it. Friend uses the mortgage payments as deductions to reduce his income tax payments. So, nobody knows that debtor is the true owner of house. On paper, it looks like friend owns the house and debtor is just a tenant. In the meantime, the house is now worth $500,000 while the balance of the mortgage is $100,000. Thus, the house has equity of $400,000. Debtor files for chapter 7 relief to wipe out $120,000 of credit card debt without disclosing in his petition that he actually is the true owner of the house he lives in as a renter and he actually has $400,000 of equity in his residence which is not in his name. Should debtor be rewarded with a bankruptcy discharge of his credit card debts of $120,000 when he is hiding the fact that he owns a house with $400,000 of equity?
In Re Ballasai, the Chapter 7 debtor presented himself as a retired gentleman who had been unemployed since 1995. It looked like he had no visible means of support and defied the laws of gravity. Normally, a person without income would end up homeless living in a cardboard box on the streets; but not Mr. Ballasai. Was he the next David Copperfield? In 1995, when he stopped being employed, debtor sold his business to his girlfriend, Ms. Bello. Since then, the business paid many of the debtor’s expenses as well as Bello’s expenses. It also enabled Bello to drive nice cars, instead of her 1975 Yugo. The business also allowed her to buy antiques and live in a nice house similar to the house in Bakersfield that Arnold gave his mistress. At the time of the sale, the business was subject to a federal tax lien of $69,000 and the debtor was finalizing a divorce. Bello paid $25,000 to acquire the business as a going concern. She did no due diligence prior to the sale, and knew little about the business she was getting into. At the time of the debtor’s bankruptcy in 2011, it appeared that she still knew little about the business. While she said she oversaw the business, she testified that she did not review profit and loss statements, did not know what happened to invoices, did not review receipts as a usual practice, and did not review the business’s bank statements. On the other hand, the debtor had more than 40 years experience in the business, and still appeared to be in charge. A creditor holding a judgment against the debtor asked the court to deny the debtor’s discharge pursuant to Section 727(a)(2) which states that debtor will not be given a discharge if debtor effectively hides an asset.
The court ruled in favor of objecting creditor, finding that “the debtor and the lovely Ms. Bello have artfully concocted a story and stuck with it, but the reality of their situation is clear. The debtor has placed the fruits of his labors beyond the reach of his creditors by continuing to operate his car care and towing business under a new corporate shell and under the nominal stewardship of Ms. Bello, who has remained largely uninvolved with the operation of that business. DISCHARGE DENIED.
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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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