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.

Collections: Bank Deposits -- for Deposit Only

     The United States District Court at Alexandria reviewed a liability question regarding a bank's treatment of a check marked "for deposit only". In the case of Qatar v. First Am. Bank of Va., the Court ruled that a depositary bank violated a restrictive endorsement stating "for deposit only" when it deposited a check into an account other than the account belonging to the named payee of the check. In Qatar, a foreign embassy employee defrauded the embassy over a six-year period by various methods, including depositing checks written to other parties into his own personal accounts with defendant banks. After the embassy discovered this fraudulent scheme, it sued the depositary bank for conversion. The bank succeeded on summary judgment in establishing that it was not liable as a matter of law with respect to two categories of checks in dispute, and it prevailed on a factual issue at trial that relieved it from liability for yet another category of checks. 

     Only one category of checks remained in dispute. These checks all bore the forged endorsement of the payee named on the face of the check, followed by a stamped "for deposit only" restriction. At trial, the depositary bank raised no defenses, but instead challenged for the first time the Court's assumption that the phrase "for deposit only," without further specification, directs a depositary bank to deposit the funds only into the account of the named payee. The Court reasoned that the question then presented was whether the bank complied with the restrictive endorsement "for deposit only" when it deposited the check bearing that restriction into any person's account, or whether that restriction requires the bank to deposit the check's proceeds only into the account of the named payee. The Court held that the unqualified language "for deposit only" following an endorsement on the back of a check required the bank to place the check's proceeds into the payee's account, and the bank violated that restrictive endorsement when it credited the check to another account. In this cases, specifically, the bank violated the restrictive endorsement in depositing into the employees account checks made payable to others and restrictively endorsed "for deposit only", and thus was liable to the plaintiff for the money converted.

Bankruptcy: Voluntary Conveyance - Debtor's Inheritance

     In the case of Shaia v. Meyer, the United States Bankruptcy Court, Eastern District of Virginia, Richmond Division, Judge Tice ruled that a bankruptcy trustee may recover funds a debtor inherited from his father and used to pay off two mortgages on property the debtor owned with his wife in a tenancy by the entirety. Essentially, the Court ruled that the debtor's payments constituted a voluntary or fraudulent conveyance that could be recovered by the bankruptcy estate.

Collections: Fraudulent Conversion or Removal of Property Subject to Lien or Title

     If a creditor is a lien holder, that creditor should be aware of a lesser known remedy available if a debtor fraudulently sells, removes, or hides the property subject to the lien. Virginia Code §18.2-115 states that a debtor is guilty of larceny if he/she fraudulently sells, pledges, pawns, removes from the premises agreed upon, removes from Virginia, disposes of, or hides the property subject to a lien without the written consent of the owner or lienor or the person in whom the title is, or, if the writing is a deed of trust, without the written consent of the trustee or beneficiary in such deed of trust. Unlike civil fraud, this statute’s fraud contemplates an act by a debtor intended to deprive a secured creditor of his collateral by appropriating it to the debtor’s own use.
     There must be proof that the debtor’s fraudulent intent was directed against the lienor or person in whom the title is. The statute also states that failure or refusal to disclose the location of the property or surrender the property shall be prima facie evidence of a violation of this statute. In Lewis v. First National Bank, the Fourth Circuit clarified that even the existence of written permission to remove the collateral is immaterial under this section, as the creditor need not show the lack of such permission to make out a prima facie case.
     The final provision of the statute provides that the venue of prosecution against persons fraudulently removing any such property, including motor vehicles, from the Commonwealth shall be the county or city in which such property or motor vehicle was purchased or in which the accused last had a legal residence.
     Debtors may argue that the debtor did not actually receive the demand for return of the collateral; however, in Lewis, failure to leave a functional forwarding address or contact with the creditor constituted a waiver of the debtor’s right to deny that the demand was made.
     Debtors have also argued that criminal charges such as these cause emotional distress or are extreme and outrageous. In Lewis¸ the Fourth Circuit stated that creditors should not be fearful of a debtor’s claim that these charges cause emotional distress. To hold such would render the statute useless, which was not intended by the legislature. The court held that the initiation of criminal proceedings against someone under this section with probable cause is not extreme or outrageous as a matter of law.