Bankruptcy: Fraudulent Real Estate Conveyances in a Chapter 7 Case

     In the case of Gold v. Laines, the United States Bankruptcy Court in Alexandria ruled that a Chapter 7 Trustee may recover two properties – the debtor’s home and a rental townhouse – as voluntary and fraudulent conveyances under Virginia law and federal bankruptcy law. The Court further denied the debtor a discharge for having fraudulently transferred the property within one year of the filing of his case. 

     The Court found as facts in Laines that the debtor bought his home and took title solely in his name. Fifteen weeks later, he married his wife, and three days later, he transferred his home to his wife and himself as tenants by the entirety with the common law right of survivorship by “Deed of Gift”. Two years later the debtor and his wife conveyed the home to the wife and a third party by deed of gift. As a result of this, husband and wife owned the home as joint tenants with the common law right of survivorship. 

     The townhouse was also solely owned by the debtor prior to his marriage. Soon after marriage he conveyed it to himself and his wife as tenants by the entirety. A little over a year later the debtor and his wife conveyed the townhouse to themselves and a different third party as tenants in common. This deed also was captioned “Deed of Gift.” The debtor filed for bankruptcy two years later. 

     The Court noted that by law the Bankruptcy Trustee could avoid the last transfer of the house and the last transfer of the townhouse if he proved his case that the transfers were fraudulent conveyances under the Virginia fraudulent conveyance statute, Va. Code Section 55-80. The Bankruptcy Trustee pointed to multiple badges of fraud. He argued that the transfers were to the debtor’s wife and himself as tenants by the entirety. The Debtor retained an interest in the transferred properties and possession of them. There was no consideration. They were made when his start-up venture, a telecommunications company, was heavily in debt, on a debt he had guaranteed. 

     The Court stated that the burden shifted to the wife to come forward and show that the transactions were bona fides and not merely contrivances to place the debtor’s property beyond the reach of creditors. She did not testify. The Court held that the debtor’s actions, in absence of satisfactory evidence of the bona fide nature of the transactions, reflected that the transactions were not undertaken for stated reasons, but were undertaken with the intent to hinder, delay or defraud his creditors. The Court found that neither of the third parties took the property in good faith. They had sufficient knowledge of the debtor’s circumstances and the unusual nature of the transactions to put a reasonable person on notice and cause them to inquire further. The Court held that the Bankruptcy Trustee could recover the house and the townhouse from the two third parties under Virginia Code Section 550 (a).

     The Court also found that the debtor’s intent to hinder, delay or defraud his creditors by the last conveyance of the home was clear. That intent was sufficient even though the transfer itself was not necessary to protect the asset from his creditors.

     The tenants by the entireties transfers of the house and the townhouse were avoided under Virginia Code Section 55-80, as implemented by Bankruptcy Code Section 544(b), and both properties were recoverable by the Bankruptcy Trustee. The debtor was also denied a discharge under Bankruptcy Code Section 727(a)(2) as a result of his last fraudulent transfer of the home.