Recovering Fraudulently Transferred Business Assets for a Bankruptcy Trustee

We assisted a Chapter 7 trustee with recovering real properties that the debtors fraudulently transferred to their son.

A married couple owned two properties: a commercial property in Marysville, California (Marysville Property) and a 67-room hotel in Mansfield Texas (the Hotel). In August 2017, the couple filed a Chapter 7 bankruptcy petition, seeking to discharge several millions of dollars of debt.

During an investigation, the trustee learned that the debtors had transferred the two properties to separate limited liability companies and then transferred their membership interests in the companies to their son. The documents effectuating the transfers all had “effective dates” in 2012, 2013 and 2015.

The trustee filed complaints in the Bankruptcy Court for the Eastern District of California against the son to recover the assets transferred to him by the debtors. Both the debtors and the son repeatedly insisted during their depositions that all documents transferring the assets were executed on or around the “effective dates” listed.

The trustee filed two motions for summary judgment to avoid the transfers as fraudulent conveyances (i.e. transfers made with intent to hinder delay or defraud creditors). The court granted the motion for summary judgment with respect to the Marysville Property and entered judgment allowing the trustee to recover the membership interest in the company that owned the Marysville Property. However, the court denied the motion for summary judgment with respect to the Hotel. The court found that there was a dispute as to the value of the Hotel and therefore, the trustee had not satisfied one of the necessary elements. The court also raised an issue that had not been raised by the parties. The court found that the limited liability company that owned the Hotel had gone through a Chapter 11 bankruptcy in Texas, and in 2015, a plan was confirmed that called for the debtors’ ownership in the Hotel to be transferred to their son. The court noted that a Chapter 11 plan can only be revoked or modified within a short window after a plan is confirmed, even if the fraud is not discovered until after the short window has passed. A few months later, in response to a motion for summary judgment filed by defendant, the court transferred to the Texas bankruptcy court all of the claims for relief related to the Hotel.

After extensive briefing regarding jurisdiction and venue, the bankruptcy court in Texas transferred the case back to the bankruptcy court in California. The Texas bankruptcy court found that the trustee was not seeking to revoke or modify the Chapter 11 plan. Any action by the trustee to avoid and recover the transferred assets would not have any impact on the closed Chapter 11 bankruptcy case or the confirmed Chapter 11 plan.

Meanwhile, we continued to examine the transfer documents and investigate who prepared them and when they were prepared. We served several attorneys with subpoenas for their records. After three motions to quash the subpoenas were filed in the district court for the Northern District of Texas, a magistrate judge denied the motion to quash and ordered one of the attorneys to produce virtually all documents, including emails with the son. Upon reviewing the attorney’s documents, we discovered that the attorney prepared the transfer documents in early 2018 (after the debtors filed their bankruptcy petition) and, upon the instructions of the son, backdated the documents to 2012, 2013 and 2015. The debtors and their son then executed the documents a day before they turned them over to the trustee.

Through careful review and analysis of documents at trial, we established a timeline of events and were able to prove to the court that the transfer documents had been fraudulently backdated. Our examination of both the parents and the son caused the judge to declare them “not credible witnesses.” The court further found that the debtors’ and defendants’ conduct demonstrated that the fraudulently backdated documents were the operative documents effectuating a transfer of the properties.

The judge ruled in our client’s favor, agreeing with our assessment that the business transfer documents had been fraudulently created, received, and signed after the debtors filed their bankruptcy petition, and that they then backdated the documents to appear as though they had been prepared and signed prior to the date of bankruptcy. Based on the date of execution, as opposed to the date stated in the documents, the court determined that the transfers were post-petition transfers, and therefore, the transfers could be avoided and the properties recovered by the bankruptcy estate.

As a result, our client was able to recover the properties so they can be liquidated and the funds used to pay creditors of the bankruptcy estate.