A Seventh Circuit decision shows that sloppy planning by a fraudster will allow a trustee to mount a simple turnover action as opposed to a more complex fraudulent transfer suit. In other words, merely parking money in a corporate account abroad does not by itself require a trustee to sue for recovery of a fraudulent transfer.
The lesson to be learned: Someone planning to commit fraud should hire a shady lawyer to structure the transaction more adroitly and thereby increase the burden on a trustee seeking to set aside a fraudulent transfer.
A wealthy Indian family decided to grow their wealth in the U.S. by purchasing two banks. After the FDIC took over the banks, a lender won a $43 million judgment against senior members of the family. The senior family members thereafter filed a chapter 7 petition.
On behalf of the estate, the judgment creditor mounted a fraudulent transfer and turnover action against the debtors and their adult children. The result was a joint and several judgment for more than $50 million entered in district court after the bankruptcy judge submitted proposed findings and conclusions.
The debtors and their children abandoned many of the potential issues on appeal in the Seventh Circuit.
In an opinion on Jan. 12, Circuit Judge Daniel A. Manion penned a treatise on the circumstances for when a turnover action will suffice and a fraudulent transfer suit is unnecessary.
Among the challenged transactions, the senior family members had transferred several million dollars to the bank account in India in the name of a company they owned there. On appeal, they contended that the procedure was defective because the plaintiff had not joined the Indian company as a necessary party under Rule 19. It was not sufficient, they contended, for the plaintiff only to have pursued a turnover action against them under Section 542(a).
Judge Manion ruled that a turnover action was sufficient and that joinder of the Indian company was not necessary under the circumstances. The facts were pivotal.
Judge Manion cited black letter law for the proposition that a turnover action may not adjudicate ownership of property in dispute and “cannot substitute for a fraudulent transfer action.” He said that both lower courts properly concluded that the transfer to the company account abroad was a sham.
The parents contended that the transfer was an equity investment in the Indian company. However, the company had no records indicating that the money was an equity contribution. The parents could not point to any stock they received in exchange. In addition, the Indian company’s books and records did not account for the receipt of the money.
One of the parents testified that he controlled the Indian company.
In view of the facts, Judge Manion said that the lower courts properly concluded that the senior family members “did not transfer ownership of the funds to someone else; rather, they simply moved the funds to an overseas account they controlled.” Therefore, he said, they were obliged to turn over the funds as property of the estate because they had not shown the “minimum requirement of ‘dominion and control over the money’” necessary to require a fraudulent transfer suit and joinder of the Indian company.
A turnover suit against the debtors conferred several advantages on the plaintiff. To begin with, the court could enter an order requiring the debtors to turn over the funds without forcing the plaintiff to attempt collecting a judgment in India.
Of perhaps greater significance, the plaintiff could attempt to have the defendants held in civil contempt, and perhaps incarcerated indefinitely, if they did not comply with the turnover order.