“No harm, no foul” can explain a “no call” in basketball, but the “concept does not have a parallel” in bankruptcy, the Tenth Circuit Bankruptcy Appellate Panel said.
The record in bankruptcy court was rife with evidence that the debtor had transferred his property and his company’s property with actual intent to hinder, delay or defraud creditors. The BAP described the debtor as arguing there were no grounds for denial of discharge because “no creditors were harmed by the transfers.”
The debtor was sunk by gambling. In denying discharge, Bankruptcy Judge Sarah Hall of Oklahoma City found that the debtor had a “pattern of removing and dissipating [his company’s assets] at gambling venues . . . that could have been paid to creditors,” as Bankruptcy Judge Michael E. Romero recited in his September 14 nonprecedential opinion for the BAP.
The debtor owned an incorporated construction business. In financial trouble and in default on secured loans, he transferred the corporation’s assets to himself as a sole proprietorship. However, he continued operating under the corporate name. The debtor admitted that he had used the assets of the business as though they were his own, saying that he and the company were one and the same.
The owner and his corporation ended up in chapter 7 with the same trustee. The owner and the corporation both listed the same debts.
As the corporation’s trustee, the trustee sued the owner for receipt of fraudulent transfers with “actual intent.” At the same trial, Judge Hall heard the trustee’s separate complaint to deny the owner’s discharge.
Judge Hall concluded that the owner was not a credible witness. Identifying badges of fraud, she found that he made transfers with “actual intent” under Section 548(a)(1)(A). Although giving judgment to the trustee on the fraudulent transfer claims, Judge Hall declined to award the trustee a recovery under Section 550 because there was no equity in the property.
Judge Hall also denied the owner a discharge under Section 727(a)(2) and (7). The debtor appealed.
For the BAP, Judge Romero found “at least four badges of fraud.” Circumstantial evidence, he said, supported a finding of fraudulent intent. Given that the owner was not a credible witness, he ruled that the finding of fraudulent intent was not clearly erroneous.
To rebut the allegation about fraudulent intent, the owner contended that he had relied on the advice of counsel, who had died before trial and therefore could not testify.
Judge Romero found it “difficult to believe” that the attorney would have advised the owner to disregard corporate formalities. Citing prior BAP decisions, he said that advice of counsel is not a defense when “intent is clearly fraudulent.”
The owner contended he had no fraudulent intent because no creditors were harmed, given that he had scheduled the company’s debt in his individual case. He also argued that the transfers gave rise to no depletion in the estate because the assets were fully encumbered. In other words, unsecured creditors would have received nothing even had there been no transfers.
Judge Romero responded by saying that “[a]ctual harm to creditors is not an element under Section 548(a)(1)(A)” and the “lack of equity in the Transferred Property does not render the Bankruptcy Court’s ultimate finding of fraudulent intent clearly erroneous.”
Finding no abuse of discretion, Judge Romero upheld the denial of discharge and the judgment finding fraudulent transfers with “actual intent.”
“No harm, no foul” can explain a “no call” in basketball, but the “concept does not have a parallel” in bankruptcy, the Tenth Circuit Bankruptcy Appellate Panel said.
The record in bankruptcy court was rife with evidence that the debtor had transferred his property and his company’s property with actual intent to hinder, delay or defraud creditors. The BAP described the debtor as arguing there were no grounds for denial of discharge because “no creditors were harmed by the transfers.”
The debtor was sunk by gambling. In denying discharge, Bankruptcy Judge Sarah Hall of Oklahoma City found that the debtor had a “pattern of removing and dissipating [his company’s assets] at gambling venues . . . that could have been paid to creditors,” as Bankruptcy Judge Michael E. Romero recited in his September 14 nonprecedential opinion for the BAP.
The debtor owned an incorporated construction business. In financial trouble and in default on secured loans, he transferred the corporation’s assets to himself as a sole proprietorship. However, he continued operating under the corporate name. The debtor admitted that he had used the assets of the business as though they were his own, saying that he and the company were one and the same.
The owner and his corporation ended up in chapter 7 with the same trustee. The owner and the corporation both listed the same debts.