Georgia Bankruptcy Blog

Georgia Bankruptcy Blog

What?!? Debtors Claim Fraudulent Conveyance For Benefit Of Daughter Was In Return For (Theoretical) Future Care, And They Won!

Click here for .pdf of opinion. This opinion just seems a little crazy on the surface.  The short version of the facts — The debtors paid for their daughter’s college education to the tune of almost $65,000, and the Trustee filed suit against the school, Sacred Heart University, to recover that amount as a fraudulent conveyance under §548 and the Mass. UFTA.  The basis for the “fraud” element, the Trustee contended, was that the Debtors were actively engaged in a Ponzi Scheme at the time and, therefore, all fruits of the scheme were considered as part of the fraud.  As the debtors were convicted of the scheme, that element was met.  The Judge, however, found that the Debtors received “reasonably equivalent value” for the transfers because…

I find that the Palladinos paid SHU because they believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency. I find that motivation to be concrete and quantifiable enough. The operative standard used in both the Bankruptcy Code and the UFTA is “reasonably equivalent value.” The emphasis should be on “reasonably.” Often a parent will not know at the time she pays a bill, whether for herself or for her child, if the medical procedure, the music lesson, or the college fee will turn out to have been “worth it.” But future outcome cannot be the standard for determining whether one receives reasonably equivalent value at the time of a payment. A parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.

Thanks to Mark Duedall at Bryan Cave for the initial tip on this case.  His article on the case can be found at the Bankruptcy Cave Blog. I would expect the decision to be appealed.  While not all parents are convicted of running a Ponzi Scheme,  Bankruptcy Courts are probably full of parents who have paid their child’s educational expenses (or for housing, vehicles, and living expenses).  As Mark points out, this new twist on the defense could create a safe haven for many otherwise fraudulent transfers to children.  It could also lead to some novel pre-Bankruptcy planning.

Future debtors, please take note of this remarkable opinion.  If you want to help a family member, then give them money before bankruptcy, for any plausible (or implausible reason).  Sick relative?  Down on their luck relative?  Relative that wants to invest in uranium stock, purchase the Brooklyn Bridge, or bail a Nigerian prince out of jail?  The Palladino ruling creates a debtor-friendly “it tugs on your heartstrings” / “blood is thicker than water” defense to fraudulent transfer actions.  And preferences too!  Why not?  Palladino is a safe haven for most or all of these wrongful actions.

The case is Degiacomo v. Sacred Heart, Case No. 15-01126 (Bankr. E.D. Mass. August 10, 2016). Click here for the .pdf of the opinion.

Thanks to Mark Duedall at Bryan Cave for the initial tip on this case.  His article on the case can be found at the Bankruptcy Cave Blog.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Who Owns The Money In Joint Bank Accounts?

bank accountFunds in joint bank accounts can generally be accessed by all account-holders — each of them can withdraw all of the money in the account regardless of who actually deposited the funds in the account.  This is often the reason for having a joint account.  This can create a huge problem for the account holders when one of them is subject to a garnishment or files a Bankruptcy case.  If the account is garnished because one of the account holders has a judgment against them, neither the bank nor the creditor have to determine the source of the funds prior to attaching them.  If one of the parties files a Bankruptcy case, the Trustee may lay claim to all or a portion of the funds as property of the Bankruptcy estate.

Georgia law provides that “[a] joint account belongs, during the lifetime of the parties, to the parties in proportion to the net contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.” O.C.G.A. §7-1-812(a).  If a creditor or Bankruptcy Trustee of one account holder makes a claim to the funds in the account, the other account holder(s) will often have to come forward to show that the money, or a part of it, really belongs to them.  In a garnishment, the debtor account holder will have to complete the answer to the garnishment and state that the funds at issue belong to another party.

In a recent Bankruptcy case in the Northern District of Georgia, the Court addressed the “intent” clause in the statute. The Chapter 7 Trustee claimed that the funds in a Debtor’s joint account were property of the estate.  However, the other account holder objected and claimed that the funds were his, rather than the Debtor’s, as he had deposited the money in the account.  Prior to the filing of the Bankruptcy case, the non-debtor testified under oath in a garnishment case that both he and the Debtor would deposit money into the account, but the Debtor was the only one who ever withdrew money from the account. He also stated that the Debtor would use the money in the account for her personal expenses, and the account’s purpose “was to have a convenient place to deposit a reasonable sum of money for safekeeping and that…she could use it, or I could use it as we may need to.”  Before the state court ruled on the matter, the Chapter 7 case was filed.  The Trustee alleged that the testimony above evidenced an intent of the non-debtor to transfer ownership of the funds to the Debtor.

Judge Drake ruled that the state court testimony was not sufficient to overcome, by clear and convincing evidence, the presumption that the fund belonged to the non-debtor account holder.

In determining the intent of the parties to the account, the Georgia statute “creates a presumption that a party funding a joint account does not intend to make a gift of the funds of the account during her life.” Caldwell v. Walraven, 268 Ga. 444, 448 (1997); accord Wallace v. McFarland (In re McFarland), 619 F. App’x 962, 970 (11th Cir. 2015) (per curiam). However, as the statute itself states, this presumption may be overcome by clear and convincing evidence of a contrary intent. See Caldwell, 268 Ga. at 448; Lamb v. Thalimer Enters., Inc., 193 Ga. App. 70, 71 (1989)…

The Trustee maintained that Sylvester’s testimony that only the Debtor ever withdrew funds from the account, and that the Debtor used the funds in the account for her personal expenses, showed that Sylvester must have intended his deposits into the account as gifts.

While that testimony is certainly some evidence of intent to make a gift, the Court cannot conclude that it is clear and convincing proof of such intent. To begin with, the fact that only the Debtor ever withdrew funds from the account is immaterial because the “authority to withdraw funds from a joint account does not equate to ownership of the funds.” In re McFarland, 619 F. App’x at 970-71 (citing Parker v. Kennon, 242 Ga. App. 627, 629 (2000))… What is more, [the non-debtor account holder] testified at the State Court hearing that both he and the Debtor intended to make use of the account when they opened it. That he failed to withdraw funds in the relatively short time between the opening of the account in February and the initiation of the garnishment proceeding in August, on its own, is not clear and convincing evidence that he never intended to withdraw the funds he deposited…

[The non-debtor account holder] proffered at the hearing before this Court that he and the Debtor had an understanding that each spouse was to deposit funds into the account to cover that spouse’s withdrawals from the account. The Trustee did not call the Debtor as a witness or present any other evidence suggesting that there was no such arrangement between Sylvester and the Debtor.

Based on the evidence submitted at the hearing, Judge Drake ruled that the Trustee did not overcome the presumption, by clear and convincing evidence, that the non-debtor account holder intended that the deposit of the funds constituted a gift or voluntary transfer to the Debtor.  Therefore, the account funds were not property of the Bankruptcy estate.

The case is In re Thornton, Ch. 7 Case No. 11-13222-whd (Bank. N.D. Ga. March 25, 2016).

Photo credit:

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Southern District of Georgia: Absolute Priority Rule Applies In Individual Chapter 11 Cases

ch 11After a hearing on the approval of a disclosure statement, Judge Edward J. Coleman of the Middle District of Georgia ruled that the absolute priority rule and new value exception apply in individual Chapter 11 cases.  In re Rogers, Ch. 11 Case No. 14-40219, 2016 WL 3583299 (Bankr. M.D. Ga June 24, 2016) (click here for .pdf of opinion).

Debtors were the sole owners of Wetdog LLC, which in turn owns the Foley House Inn in Historic Savannah.  After a default in payments to Wetdog’s secured creditors, Wetdog filed a Chapter 11 petition.  Wetdog’s Chapter 11 Plan was confirmed in September 2014.  The individual Debtors, because they were guarantors of the Wetdog debt, filed their own Chapter 13 petition in February 2014 and subsequently converted their case to a Chapter 11 case.  Their principal asset was their 100% ownership interest in Wetdog.  Debtors filed a Plan and Disclosure Statement that called for a 25% distribution to unsecured creditors other than the two secured creditors of Wetdog.  Debtors’ Plan called for no distribution to those creditors as they were being paid in full in the Wetdog Plan.  Debtors also proposed to retain all non-exempt, pre-petition property, including their interest in Wetdog which they valued at $00.00. Continue Reading

11th Circuit: District Court Must Use Federal Rules of Bankruptcy Procedure, Not Civil Procedure, When Trying Case “Arising Under” Title 11.

BR RulesIn a published opinion entered on April 8, 2016, the Eleventh Circuit Court of Appeals held that District Courts are obliged to use and apply the Federal Rules of Bankruptcy Procedure rather than the Federal Rules of Civil Procedure when trying a case that “arises under” Title 11 (28 U.S.C. §1334).  In Rosenberg v. DVI Receivables, LLC, et al., No. 14-14620, 2016 WL 1392642 (11th Cir. April 8, 2016) (click here for .pdf of opinion), the issue before the Court was the timeliness of the Defendants’ Motion for Judgment as a Matter of Law after a jury trial.  Pursuant to Civil Procedure Rule 50(b), the deadline to file the Motion was 28 days after the entry of judgment.  However, under Federal Rule of Bankruptcy Procedure 9015(c) the deadline is reduced to only 14 days after the entry of the judgment.  The Defendants’ Motion was filed 28 days after the judgment against them was entered, making it timely under the Civil Rules, but not the Bankruptcy Rules.  The District Court granted the Motion on the merits, and the Plaintiff appealed.

The underlying case involved an involuntary petition filed against the Plaintiff by the Defendants.  The case was dismissed, but the Bankruptcy Court retained jurisdiction to determine damages pursuant to 11 U.S.C. §303(i).  Plaintiff filed an adversary proceeding to recover damages, and requested a jury trial.  The District Court withdrew the reference and conducted a jury trial that resulted in an award of $1,120,000 in compensatory damages and $5,000,000 in punitive damages. Defendants subsequently filed their Motion 28 days after entry of the judgment. The District Court granted the Motion on the merits, and the Plaintiff appealed and argued the Motion was filed out of time. Continue Reading

11th Circuit Issues Important Opinion On What Constitutes A “Return” For Purposes Of Determining What Taxes Are Dischargeable Pursuant to §523(a)(1).

tax_returnThe question of what constitutes a tax “return” for purposes of 11 U.S.C. §523(a)(1) has been the subject of conflicting Circuit Court cases the last several years.   The Eleventh Circuit Court of Appeals addressed the issue in In re Justice, No. 15-10273, 2016 WL 1237766 (11th Cir. March 30, 2016) (click for .pdf of opinion).  The Debtor sought to discharge taxes for tax years 2000-2003, but had filed the returns for those years several years late and only after the IRS had issued notices of deficiency and assessments.  The Bankruptcy Court held that the taxes were non-dischargeable and the District Court affirmed.

Section 523(a)(1) excepts from discharge any debt:

(1) for a tax or a customs duty – (B) with respect to which a return, or equivalent report or notice, if required— (i) was not filed or given; or (ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition….

The question that has led to conflicting Circuit opinions is the definition of “return.” Continue Reading

11th Circuit: FDCPA Requirements Apply Equally To Communications with Debtor’s Lawyer

FDCPA2The Eleventh Circuit recently addressed three issues of first impression in the Circuit regarding the application of the  Fair Debt Collection Practices Act (FDCPA) to letters to consumers’ lawyers.  Not surprisingly, the court ruled in favor of the consumer although the arguments made by the collector did seem somewhat weak.  In Bishop v. Ross Earle & Bonan, P.A., — F.3d —-, 2016 WL 1169064 (11th Cir. 2016) (click here for .pdf) the Debt Collectors (on behalf of an HOA) sent a collection letter to the Plaintiff’s attorney rather than the Plaintiff debtor.  The letter informed the Plaintiff that she had 30 days to dispute the debt, but it did not specifically inform her that the dispute must be in writing as required by §1692g of the FDCPA.

The three questions of first impression in the Circuit that were addressed are:

The first is whether a debt-collection letter sent to the consumer’s attorney—rather than directly to the consumer —qualifies as a “communication with a consumer” so as to trigger § 1692g of the FDCPA.

The second is whether omitting the “in writing” requirement set forth in § 1692g amounts to waiver of that requirement by the debt collector, and, if so, whether such a waiver advances the purpose of the FDCPA.

The third is whether omission of the “in writing” requirement states a claim for “false, deceptive, or misleading” behavior in violation of § 1692e.

Continue Reading

Georgia Supreme Court: Foreclosure Confirmation Requirements Can be Waived By Borrowers And Guarantors

foreclosure bank ownedDid the Georgia Supreme Court effectively repeal the foreclosure confirmation statute by affirming the rights of lenders to include waivers in their standard loan documents for both borrowers and guarantors?  That appears to be the case.  In PNC Bank, NA v. Smith, No. S15Q1445, 2016 WL 690406 (GA 2016) (download .pdf), the U.S. District Court for the Northern District of Georgia asked the Georgia Supreme Court to answer two questions regarding the Georgia foreclosure confirmation statute (O.C.G.A. §44-14-161):

(1) Is a lender’s compliance with the requirements contained in OCGA § 44–14–161 a condition precedent to the lender’s ability to pursue a borrower and/or guarantor for a deficiency after a foreclosure has been conducted?

(2) If so, can borrowers or guarantors waive the condition precedent requirement of such statute by virtue of waiver clauses in the loan documents?

Continue Reading

Bitcoin – Currency or Commodity For Purposes of §550 And Avoidance Actions? What About Claims?

bitcoin-logo-3d-1024x1024Bitcoin – currency, the equivalent of U.S. dollars, or a commodity more similar to a product or stock? (What is Bitcoin?).  If a Trustee sues to avoid and recover a transfer of Bitcoin, is the claim amount for the value of the transfer at the time of the transfer, or increased (or decreased) value at the time of the proceeding?  That is the question in the adversary proceeding of Hashfast Technologies, LLC v. Lowe, Adv. Proc. No. 15-03011 (Bankr. N.D. Ca. filed February 17, 2015).

According to the Complaint, the Debtors “design, develop, manufacture and sell certain computer chips and equipment, including Application Specific Integrated Circuit, or ASIC, semiconductors, for the sole purpose of auditing transaction data for the Bitcoin networks, also known as ‘Bitcoin mining.‘”   Defendant Lowe, a medical doctor, purchased “four terra-hash per second of hashing power through the acquisition of eight GN1 chips or three to four fully assembled BabyJets (the “Computers”) for the sum of $36,000, inclusive of sales tax—a $7,150 discount off of the list price (the ‘Sale’). The Defendant paid the discounted purchase price for the Computers by personal check dated July 29, 2013.‘”  Defendant also agreed to promote the Debtors’ products on online forums (including in exchange for 10% of the gross sale proceeds of the first 550 “BabyJets” sold by the Debtors, payable in Bitcoin (“BTC”).  At the time, the BabyJets sold for $5,600, or 56 BTC. Continue Reading

Arrested For Not Paying Student Loans? No – The Paul Aker Story Was Essentially Fabricated

akers“Believe it or not, the US Marshals Service in Houston is arresting people for not paying their outstanding federal student loans.”  So says Fox 26 Houston reporter Isiah Carey.  The problem is, this statement is absolutely false.  Paul Aker owed student loans, and was apparently in default.  Paul Aker was sued for the student loan debt, and a judgment was entered.  Paul Aker was later arrested by the U.S. Marshal’s Service.  From there, a gullible, incompetent or dishonest reporter filled in a few details of his own, ignored the actual facts that were easily available online to anyone, and simply created a story whereby Aker was arrested merely because he was not paying his student loans on time.  Of course, the story then exploded over the internet, as such stories tend to do, and were even picked up by national agencies and reporters who could not be bothered to check out the basic facts before passing them off as the truth.  How did Fox 26 in Houston and their reporter Isiah Carey come up with the false details to make their story when the basic facts are easily available online and virtually any lawyer could have explained the situation to them (had they been interested in the true story)?  Here we go… Continue Reading

Filing Proof Of Claim For Time Barred Debt Violates FDCPA, Says Eleventh Circuit, But They Leave An Escape Hatch.

fdcpa1In the last couple of years, claims against creditors for alleged violations of the Fair Debt Collection Practices Act (FDCPA) have become a hot item in Bankruptcy Courts.  One such question is whether the filing of a proof of claim for a stale debt (i.e., one that has become unenforceable pursuant to the applicable statute of limitations) constitutes a violation.  The Eleventh Circuit Court of Appeals appeared to have answered the question for federal courts in Georgia, Alabama and Florida in the case of Crawford v. LVNV Funding, 758 F.3d 1254 (11th Cir. 2014)(cert. denied) (read opinion here).  According to the Court’s introductory paragraph (which provides a hint to the outcome), there had been a deluge of debt buyers “armed with hundreds of delinquent accounts purchased from creditors—… filing proofs of claim on debts deemed unenforceable under state statutes of limitations.”

The Court began by acknowledging the many courts that have held that the filing of a lawsuit by a collector to collect a stale debt was a violation of the FDCPA. Continue Reading