LET’S assume that you lost your job and are no longer able to make the mortgage payments on your house, so you quitclaim the house to your son who takes over the mortgage payments. Your house has equity of $70,000. Next week, you decide to file for Chapter 7 relief because you owe $50,000 of credit card debt. The bankruptcy trustee then sues your son to get the house back into your bankruptcy estate because he argues that the transfer to your son was preferential and at the expense of your credit card creditors. Trustee intends to sell the house and use the net proceeds to pay off your credit cards. After suing your son, the trustee also sues you to get the $70,000 from you as an alternative saying the transfer to your son was fraudulent. Note that there are two different legal issues here. The first issue is the FRAUDULENT TRANSFER to son. The second issue is RECOVERY of the amount transferred from the right person, the debtor father or the son.
§550 of the bankruptcy code is the applicable law on this matter. It states that “…the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from- (a) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. What this means is if it is found that there is a fraudulent transfer, the trustee can recover the property from the son, the transferee, but not the debtor father, the transferor, unless it was for the father’s benefit that the transfer was made. If the father testifies that he made the transfer to his son because he could no longer make the mortgage payments because he lost his job that would mean that the transfer may not have been made for his own benefit.
In Re Krepps, the Chapter 13 debtor’s bankruptcy schedules said he owned his home, and planned to surrender it in full satisfaction of the mortgage. He affirmed these statements at the meeting of creditors. He did not disclose either in his schedules or at the meeting that he conveyed the property to his son 11 days before he filed his bankruptcy. He also failed to disclose that the property was destroyed by fire five days before his plan was confirmed. The trustee filed an adversary proceeding against the debtor and his son seeking to avoid the transfer as fraudulent pursuant to Section 548 which provides for the avoidance powers of the trustee relating to fraudulent transfers. The trustee also sought either to set aside the transfer or recover its value pursuant to Section 550. The debtor timely responded to the complaint and the trustee’s interrogatories. However, he failed to file timely respond to either the trustee’s Request for production of documents or the Request for admissions. Consequently, it was deemed admitted that the debtor transferred the property to his son for no consideration with the intent to defraud, hinder or delay his creditors; that the debtor retained possession of the property following the transfer; that the debtor had been sued or had been threatened with suit prior to the transfer; and that that the property was substantially all of the debtor’s assets. Given the admissions, the court found that the transfer was fraudulent.
However, the court did not agree that the trustee could recover the transfer or its value from the debtor. “Section 550 expressly allows recovery from the initial transferee (son), not the initial transferor (debtor). The trustee has not asserted (the debtor) is an ‘entity for whose benefit such a transfer is made.’ In fact, (the debtor0 denies receiving any benefit from the transfer… Therefore, at this point, I find the trustee has failed to establish as a matter of law that she is entitled to recover from (the debtor) the property or value of the property…”the court said.
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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.
