Bankruptcy: Dischargeability - False Oath

In the case of Federal Deposit Insurance Corp. v. McFarland, the United States Bankruptcy Court, sitting in Arlington, Virginia, Judge Tice, denied the debtor, a real estate developer, a discharge in bankruptcy because of false testimony.

The creditor had brought a complaint objecting to dischargeability because of allegedly false testimony given by the debtor in examinations under oath after the filing of the debtor's bankruptcy petition.

The Court found as fact that the debtor gave false testimony under oath 1) that he did not receive from a closely held corporation any proceeds of a $440.00 certificate of deposit, when in fact he and his co-shareholder each received $220,000 and 2) that he had no bank accounts in nor made any deposits to offshore banks, when in fact he drew checks in amounts in excess of $300,000 payable to a Cayman Island bank. 

Although the debtor denied that he had any fraudulent intent when he testified, the Court found it "highly implausible" that the debtor forgot about the withdrawal of the $220,000. The debtor also failed to produce any credible evidence refuting the natural presumption that some $300,000 worth of checks admittedly drawn by debtor payable to an offshore bank were transfers of funds to the bank or to an account in the bank.

Accordingly, Judge Tice found the evidence sufficient to warrant denial of the debtor's discharge.

Collections: Construction Case Garnishments

The United States District Court in Alexandria has reviewed a matter important to many supplier and contractor creditors: the garnishment of funds due their debtors from another party. The case was U.S. v. Harkins Builders Inc. In Harkins a material supplier was pursuing a garnishment proceeding against a builder who owed money to the judgment debtor, a drywall subcontractor. The Court ruled that the supplier was not bound by a mandatory arbitration clause in a separate contract between the builder and the drywall sub.

In Harkins a materials company supplied drywall materials to drywall subcontractors. When the drywall subs failed to pay for the materials, the supplier obtained a federal court judgment for $278,520. The supplier then initiated a garnishment proceeding against a builder to attach monies owed by the builder to the drywall sub under a contract between them. As garnishee, the sub confessed assets but argued that the amount it owed to the drywall sub should be reduced by setoffs totaling $50,853 allegedly owed by the sub to the builder under their contract. The garnishee also argued that any dispute about these setoffs must be resolved through arbitration, as provided in the contract between the drywall sub and the builder.

The Court rejected the contention that the resolution of the amount of money owed by the builder to the drywall sub and subjected to garnishment must be accomplished through arbitration. As a judgment creditor of the drywall sub, the supplier was not a party to the contract between the sub and the builder, and its interest was limited to the drywall sub's property interest in the builder's hands. The parties to the drywall builder contract agreed to arbitration as an efficient procedural mechanism for resolving contractual disputes, including disputes over amounts owed. The agreement to arbitrate, however, does not add or subtract value in the calculus for determining the value of the contract right. The Court ruled that since the judgment creditor was afforded court procedures for determining the value, the fact that the property before the court was created by a contract containing an arbitration clause did not require a non-party to the contract to follow the contract's procedural mechanisms for dispute resolution. Accordingly, the federal courts assumed jurisdiction to make the decision.

Foreclosure: Be Prepared to Conduct Foreclosures

While foreclosure may not be a topic that debtors (or even creditors) want to discuss, like all other aspects of proper business planning, you should.

With more creditors engaging in loans secured by real estate (which I strongly advocate), be that first deeds of trust, second or subsequent deeds of trust, refinances or credit lines, a certain amount of default is to be expected. Being prepared to react to default is imperative.

We represent creditors - from start to finish. We are a full-service creditor’s rights firm. While many attorneys do “collections”, few attorneys have the trained expertise and staff to represent creditors in all four areas of Creditor’s Rights—Collections, Bankruptcy, Real Estate and Foreclosure. WE DO FORECLOSURES. We will handle foreclosure proceedings from demand to final accounting.

Real Estate: Criminal Liability for Misuse of Construction Funds

Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor or any officer, director or employee of such contractor or subcontractor who, with intent to defraud, retain or use the funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid, and may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.

The use by any such contractor or subcontractor or any officer, director or employee of such contractor or subcontractor of any moneys paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.