HEARTHSTONE LEGAL GROUP President, Herbert N. Wiggins
FAIR LENDING/MORTGAGES/BANKRUPTCY/TECHNOLOGY
October 22, 2024
In bankruptcy, timing is often everything. For example, the United States Code says that payment by a debtor to a creditor within 90 days of the debtor’s filing of the bankruptcy petition can be voided as a “preferential transfer,” because it appears to favor one creditor over another. Such a transaction can be undone by the US Trustee. 11 USC Sec. 547.
Similarly, a transaction made near in time to the bankruptcy, that seeks to change title to one of the debtor’s assets, or otherwise seems intended to make collection by the creditor more difficult, can be deemed a fraudulent transfer, and undone by the Trustee. 11 USC Sec. 548 (defining fraudulent transfer) and 544 (allowing US Trustee to use state law to show fraud).
In the recent case of In re O’Gorman, a homeowner in Napa Valley, in Northern California’s wine country, was on the verge of foreclosure. The home was valued at $2.5 million. The second mortgage holder paid off the delinquent first mortgage, thus becoming the only lender, but when the homeowner fell behind on the “new” mortgage, she transferred the property to a third party, and then filed for bankruptcy.
The holder of the mortgage filed a secured claim. But the US Trustee filed an “adversary proceeding,” claiming that the transfer was fraudulent. The bankruptcy Court agreed that the transaction appeared fraudulent as a matter of law, relying on several “indicia of fraud” under California law:
To establish O’Gorman’s fraudulent intent, the Trustee argued that at least six of the eleven “badges of fraud” enumerated in Cal. Civ. Code § 3439.04(b)(1)-(11) were present:
(a) the transfer was to an insider, the Lovering Tubbs Trust, in which O’Gorman held a 20% beneficial interest;
(b) O’Gorman remained in control of the property after the transfer;
(c) at the time of the transfer, Reynolds (the lender) had been pursuing a foreclosure on his deed of trust and the transfer was designed to thwart that effort;
(d) the transfer was a transfer of substantially all of O’Gorman’s assets;
(e) by transferring the property to the Lovering Tubbs Trust, O’Gorman removed the property from the reach of her creditors; and
(f) the Lovering Tubbs Trust paid no consideration for the property.
The 9th Circuit Court of Appeals upheld the bankruptcy court, noting that, while reading someone’s mind to find fraudulent intent is impossible, the indicia of fraud in the transaction were indisputable and overwhelming. The result was that the wine country home went back into the “bankruptcy estate.”
It is almost never a good idea to change title to any significant asset shortly before a bankruptcy. The odds are that the trustee or other creditors are going to cry foul. Here, the creditor and Trustee successfully did so.
In re: DEBBIE REID O’GORMAN, Debtor; THE LOVERING TUBBS TRUST, Trustee; CLC COMPLIANCE, INC., Trustee; PACIFIC EQUITIES, LLC, Appellants, v. TIMOTHY W. HOFFMAN, Chapter 7 Trustee, Appellee. No. 23-60005
Ninth Circuit Court of Appeals, Argued and Submitted 2/13/2024 San Francisco, CA
Filed September 9, 2024
Case No. 23-60005
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY
Depending upon the makeup of the House and Senate, and the occupant of the White House as of January 2025, the administration will either be more fully able to go forward with loan forgiveness plans, or will be completely stymied, and a significant portion of the Biden Administration’s recovery program may be permanently blocked.
WARNING: THIS POST DOES NOT CREATE AN ATTORNEY/CLIENT RELATIONSHIP, AND DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY
