High Court Bankruptcy Fraud Ruling May Have Broad Effects

May 2016

IN THIS ISSUE

— Investigating Bankruptcy Fraud and Piercing its Defenses
— High Court Ruling May Tip Scales Toward Creditors

GREETINGS!

Welcome to the May edition of our newsletter! In this issue we’ll examine bankruptcy fraud and how a recent U.S. Supreme Court ruling affects criminal prosecution and civil asset recovery efforts.

INVESTIGATING BANKRUPTCY FRAUD AND PIERCING ITS DEFENSES

The voluntary bankruptcy process is one that has been susceptible to manipulation by fraudsters since its implementation. Whether a “bust out” scheme — where a fraudster will buy massive amounts of inventory on credit, only to declare bankruptcy and vanish before paying any creditors — or simply an unscrupulous owner diverting company assets for personal use before filing a bankruptcy petition, bankruptcy courts are rife with civil adversary proceedings filed by creditors seeking to recover some of what they’re owed.

One method fraudsters have used to further such schemes is to transfer assets to other entities, and in a recent ruling the U.S. Supreme Court held that a creditor does not need to prove that an actual fraud had occurred at the time of a transfer, only that the intent of the transfer was the concealment of an asset, instead of the standard of proving that a misrepresentation has been made.

HIGH COURT RULING MAY TIP SCALES TOWARD CREDITORS

The effect of the recent ruling, Husky International Electronics Inc. v. Daniel Lee Ritz, may be to more broadly define fraudulent intent to mean efforts, including assets transfers, meant to deprive creditors of collecting a debt. This language could make it easier to attach assets of other entities, such as single purpose limited liability companies, if counsel can demonstrate that the single purpose vehicle was used to shield an asset from discovery — that the debtor moved an asset to it simply to avoid detection when creditors started looking for assets.

This broader scope should help creditors combat, and possibly deter, fraudulent conveyances during the bankruptcy process. Diligent asset research during the bankruptcy process can help your clients recover as much as possible, including assets a fraudster may have previously believed to be safely “off-limits” from collection.