Asset Search Blog : Asset Search & Hidden Assets : Lawyer & Attorney Fred Abrams : Tax Fraud, Asset Investigations

"Forced Collections Against A Fraudster Like Madoff" & "Competing Over Mr. Allen Stanford's Assets" described the problem of competing claimants trying to recover from a limited pool of funds.  This same problem has been encountered by the plaintiffs in The Lautenberg Foundation v. Madoff, 09-Civ-00816, whose lawsuit I mentioned at "Suing Peter Madoff For Bernard Madoff's Securities Fraud".

 

The Lautenberg plaintiffs are damaged investors of Bernard Madoff's Ponzi scheme and their lawsuit alleges they were injured by Bernard's younger brother Peter.  As mentioned by their lawsuit, Peter Madoff is allegedly liable for his supposed tortious conduct while working as a "control person" at Bernard L. Madoff Investment Securities LLC  ("BLMIS").

 

While the Lautenberg plaintiffs argue that Peter Madoff is liable to them, a complaint filed in an adversary proceeding claims that the Lautenberg lawsuit tries to wrongly recover BLMIS assets from Peter Madoff.  This May 27, 2010 adversary complaint filed by Bernard Madoff Trustee Irving Picard, asserts that the Launtenberg plaintiffs were participants in Trustee Picard's claims process for damaged investors.

 

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This "Asset Search News Roundup" concentrates on an alleged $45 million dollar tax fraud and the conviction of Mr. Dennis Hecker's girlfriend, Christi Michele Rowan:

 

• An April 15th press release explained that property developers Mauricio Cohen Assor and his son, Leon Cohen-Levy are accused of hiding $45 million from the IRS by using nominees to maintain domestic and foreign bank accounts.  "2 Charged in International Tax Evasion Scheme Said To Involve HSBC" discussed the two but wrote that their supposed scheme was thought to have been aided by Swiss lawyers, shell companies and foreign accounts at HSBC.  "A Doctor, A Lawyer & Bricks Of Cash In Switzerland" reported on another case in which assets may have been hidden at HSBC during a tax fraud.

 

• I brought up Mr. Dennis Hecker at my January 9th and February 14th "Asset Search News Roundups" & in "Has Auto Magnate Dennis Hecker Hidden His Assets?"   An April 21, 2010 Minneapolis Star Tribune article advised that Mr. Hecker's girlfriend Christi Michele Rowan, pleaded guilty to bankruptcy fraud and bank fraud charges.   Ms. Rowan was specifically convicted of making false statements in Mr. Hecker's bankruptcy case and for lying on a federal loan application for a 2008 Land Rover vehicle.  The underlying information filed in her criminal case is shown below and can be completely viewed by clicking here.
   

 

 

 

 

 Copyright 2010 Fred L. Abrams

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My November 1, 2009 article highlighted the Chapter 7 bankruptcy case of real estate developer Michael R. Mastro.  At "Trustee in Mastro bankruptcy goes after four new targets", the Seattle Times too commented on Mr. Mastro and wrote about one of the latest lawsuits filed to recover Mr. Mastro's bankruptcy estate assets.

 

The lawsuit was commenced by Mastro Trustee James F. Rigby, Jr. on March 9, 2010 and is actually an adversary proceeding within Mr. Mastro's bankruptcy case.  Trustee Rigby's complaint in this adversary proceeding claimed that Mr. Mastro had made fraudulent and / or preferential asset transfers which the Court should set aside.  E.g. 11 U.S.C. §§544, 547 & 548. 

 

The complaint alleged that Mr. Mastro had conspired with others "to achieve the unlawful objective of hindering, delaying, or defrauding Mastro’s creditors".  It claimed that Mr. Mastro wrongfully transferred promissory notes of more than $50 million to his business partner John Mastandrea.  The transfer of these promissory notes was memorialized by a June 24, 2009 agreement: 

 

 ,(Click On The June 24th Agreement For A Complete View) 

 

 

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The January 9th "Asset Search News Roundup" provides an update on a couple of matters from Minnesota:

 

1. Both "Money Laundering By Minneapolis Managers?" and "Associated Bank Sued For Supposedly Ignoring Red Flags" described pending civil complaints against suspected securities fraudsters Trevor Cook, Patrick Kiley and their companies.  Another complaint filed against them was commenced on November 23, 2009, in Minnesota by the U.S. Commodity Futures Trading Commission.  Click here, to view the November 23rd complaint.
   
    
2. My October 20, 2009, article "Has Auto Magnate Dennis Hecker Hidden His Assets?" discussed Mr. Hecker's bankruptcy and divorce proceedings in Minnesota.  On January 6, 2010 "Judge's patience with Hecker runs out", reported that Mr. Hecker had delayed discovery sought by bankruptcy creditor Chrysler Financial.
   
   The delay was apparently caused by Mr. Hecker's claim that he was somehow entitled to Fifth Amendment protection against self-incrimination, in his civil bankruptcy case.  As "Judge to Hecker: Repay or go to jail" stated, Mr. Hecker also reportedly "looted" $125,000 which was the subject of his now finalized Hennepin County divorce proceeding.

 

Copyright 2010 Fred L. Abrams

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"Bankruptcy Fraud, Money Laundering & Hidden Assets" outlines how a Chapter 7 debtor hid his Porsche and Rolls Royce and other assets.  That debtor eventually pleaded guilty to violating 18 U.S.C. §152 (Concealment of assets; false oaths and claims; bribery) and one count of 18 U.S.C §157 (Bankruptcy fraud).  "An Asset Search For Automobiles" similarly highlights how a Chapter 7 debtor concealed his $113,000 Porsche 911, by fraudulently transferring it out of state and registering it in the name of his brother.

 

A September 29, 2009 adversary complaint filed against 84-year-old Chapter 7 bankruptcy debtor Michael R. Mastro too claims that a valuable automobile was fraudulently transferred.  As part of this suspected fraudulent transfer, Mr. Mastro's wife Linda, could have assigned Mr. Mastro's $400,000 Rolls Royce to "LCY LLC Series Automobiles".  The "Gift Statement" she reportedly executed, states that the Rolls was transferred without any exchange of consideration: 

 

 

 

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As a high-profile Twin Cities auto magnate, Mr. Hecker had been one of Minnesota's largest car dealers.  During April 2008, he sought a divorce from his wife of about fifteen years in Hennepin County Family Court, Case No. 27-FA-08-2731.  Mr. and Mrs. Hecker however, stipulated to dismiss said divorce case during October 2008. 

 

At that time, Mr. Hecker had business difficulties which later culminated in the entry of a nearly $477 million dollar judgment against him in Chrysler Financial Services Americas LLC v. Dennis E. Hecker, Hennepin County Civil Court, Case No. 27-CV-09-2152.  Given the fact of this $477 million dollar debt, Mr. Hecker filed a Chapter 7 bankruptcy petition on June 4, 2009. 

 

Mrs. Hecker meantime, applied to the Family Court for a monthly award of interim spousal maintenance and child support.  Similar to what I discussed at "Recovering Marital Assets Through A Domestic Court", page 4 ¶14 of her September 28, 2009 supporting affidavit asked the Court to "impute income" to Mr. Hecker:

 

Click On The Affidavit To Read It

 

  

 

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An "Asset Search In A Chapter 7 Bankruptcy Case" talks about researching a debtor's bankruptcy petition and other court filings to help determine whether there is any fraudulently concealed bankruptcy estate property.  This type of research recently resulted in the filing of a bankruptcy fraud complaint against Kelvin Daniels, who is a New York City cop. 

 

Mr. Daniels is accused in U.S.A. v. Daniels 7:09−mj−02103, of fraudulently concealing bankruptcy estate property during his New York bankruptcy in the summer of 2005.  A Department of Justice press release claims that Mr. Daniels failed to schedule and otherwise disclose his deeded property on Third Street in Newburgh, New York. 

 

A bankruptcy debtor who conceals an asset, fails to list an asset on schedules, undervalues an asset or provides a misleading description of an asset, may violate 18 U.S.C. §152 (1) Fraudulent Concealment (punishable fine up to $500,000 for corporations and $250,000 for individuals and /or imprisonment up to five years).

 

Other bankruptcy fraud statutes which commonly relate to asset concealment include:

1. 18 U.S.C. §152 (2) (False oath or account);
2. 18 U.S.C. §152 (3) (False declarations);
3. 18 U.S.C. §152 (7) (Fraudulent pre-petition transfers or concealment);
4. 18 U.S.C. §157 (Bankruptcy fraud).

 

Copyright 2009 Fred L. Abrams

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I discussed "clawback" in my July 18, 2009 "Asset Search News Roundup" as well as in "Clawback Caused By A Ponzi Scheme".  These articles explained that assets may be recovered by clawback which can force an investor to return presumptively fraudulent profits, as mentioned by In re: Bayou Group LLC, et. al., 396 B.R. 810 (Bkrtcy S.D.N.Y. 2008).

 

The September 1, 2009 article "Madoff Liquidator May ‘Claw Back’ Charities’ Profits" similarly talks about clawback.  It explained that SIPC trustee Irving Picard may file a new round of clawback claims to recover assets dissipated during Bernard Madoff's Ponzi scheme.  If filed as adversary proceeding complaints in bankruptcy court, trustee Picard's new clawback claims would probably be based on:

1. 11 U.S.C. §542 (Turnover of property)
2. 11 U.S.C. §544 (Trustee as lien creditor)
3. 11 U.S.C. §547 (Preferences)
4. 11 U.S.C. §548  (Fraudulent transfers and obligations)
5. 11 U.S.C. §550 (Liability of transferee of avoided transfer)
6. 11 U.S.C. §551 (Automatic preservation of avoided transfer)
7. N.Y. Debtor Creditor Law §§270 et. seq.

  

Trustee Picard's effort to recover assets through clawback claims in the Madoff case, has already included his filing of these two adversary proceeding complaints:

  

(Click On Each Image To View The Clawback Complaints)

 

 

 

 Copyright 2009 Fred L. Abrams

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Suspected Ponzi schemer Allen Stanford may have facilitated one of the largest financial frauds known to date.  Any receivers, investors or other stakeholders with claims against Mr. Stanford under bankruptcy or other laws, are of course trying to interdict Stanford's assets.  As I mentioned in my "March 25, 2009 Asset Search News Roundup", these competing interests of numerous stakeholders / plaintiffs can be a significant problem. 

 

Some of these problems are highlighted by S.E.C. receiver Ralph Janvey's April 23, 2009 Report in S.E.C. v. Stanford International Bank Ltd et. al., Index No.: 3-09-CV-0298.  The April 23rd Report explains that receiver Janvey lacked standing to intervene in proceedings related to Mr. Stanford's assets in Antigua, according to the Antiguan Court.  (Report of the Receiver, dated April 23, 2009, at page 19).  The report also stated that despite an April 1, 2009 meeting, there was no "concrete cooperation agreement" between receiver Janvey and Antiguan liquidators searching for Stanford's assets. 

 

As was also reported, Mr. Stanford seeks to disqualify opposing counsel Baker Botts L.L.P. -- which is one of the law firms working for receiver Janvey.  Through his motion and / or accompanying brief, Mr. Stanford claimed that Baker Botts was his attorney and that it set up the very business entities / bank involved in Stanford's alleged fraud. (Accompanying Brief, at pp. 2-4).  Mr. Stanford additionally argued that Baker Botts: "turn[ed] on its former client to dismantle and disembowel the very corporate structures and product lines the law firm created, likely using privileged information in the process.  (Id. at p. 4).

 

Adding to the above-mentioned complexities, is the fact that about 400 individuals or entities, (possibly defrauded out of more than $100 million by Mr. Stanford), had earlier filed their own intervenor motion and supporting paper, in S.E.C. v. Stanford International Bank Ltd. et. al.  Difficulties caused by competing interests in a different fraud case, are described by my local Swiss counsel in: "Forced Collections Against A Fraudster Like Madoff".

 

Copyright 2009 Fred L. Abrams

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Image: Steve Hillebrand / U.S. Fish and Wildlife Service

 

Investors who profited because of Allen B. Stanford's suspected securities fraud / Ponzi scheme may face clawback lawsuits under the Bankruptcy Code, according to Bloomberg.Com's "Stanford Receiver May Need a Decade to Pay Victims".  Investors who collected profits from Bernard Madoff's Ponzi scheme could too face clawback because of litigation by Madoff trustee Irving Picard.

 

The articles "Madoff Victims May Have to Return Profits, Principal" and "Lessons For Madoff Investors From The Bayou Fund Ponzi Scheme" both mention the idea that Madoff investors could be subject to clawback under In re: Bayou Group LLC, et. al. 396 B.R. 810 (Bkrtcy S.D.N.Y. 2008) via its October 16, 2008 Decision.  Among other things, the October 16 Decision permitted clawback from some investors in a securities fraud, by applying 11 U.S.C. § 548 (a) (1) (A) and local N.Y. law regarding fraudulent transfers. 

 

The October 16 Decision viewed funds paid-out to investors before a Ponzi scheme was discovered, as presumptively fraudulent transfers. The Decision placed the burden on these particular investors to show that their funds were received in good faith and for value, as more fully set forth in the K & L Gates article: "The Madoff Dissolution: A Consideration of the Bayou Precedent and Possible Next Steps". 

 

Furthermore, "Madoff's Investors Redemptions: Subject to Clawback", more recently asserted that Mr. Madoff's guilty plea might especially expose investors to clawback litigation as Mr. Madoff's plea demonstrates his actual intent to commit fraud.  This means that a clawback claim against an investor could be strengthened, as actual intent is one of the factors addressed by the Bayou Court's October 16 Decision.

 

Finally, (as I mentioned at my September 4, 2009 "Asset Search News" Roundup"), the clawback complaints reproduced below have been filed by Madoff trustee Irving Picard against some former Madoff investors:

 

 

(Click On Each Image To View The Clawback Complaints)

 

 

 

Copyright 2009 Fred L. Abrams

(Edited October 11, 2009)

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A beneficial owner's transfer of funds through banks in multiple jurisdictions, can be a red flag that assets have been hidden.  Purchasing large amounts of portable valuable commodities, hoarding cash, forming a shell company, etc, can also be red flags as mentioned by "Asset Search Indicia for Divorce, Debt Collection & Bankruptcy".  The weight that should be given to these red flags however, depends on the facts and circumstances in a particular case.

 

It is also true that the ability to recognize red flags can be critical to a post-judgment creditor, divorcing spouse, bankruptcy creditor, or other litigant searching for hidden assets.  Such a litigant could for example, use red flags at a deposition to develop a line of questions about assets, liabilities and net worth.  By recognizing red flags, a litigant might even more efficiently use the computer-based research described at "A Low Cost Asset Search".

 

As the list below also indicates, Financial Intelligence Units, U.S. Trustees, the IRS and U.S. banks, all rely on red flags to help uncover / interdict hidden assets:

1.  Financial Intelligence Units across the globe use red flags to detect assets hidden via money laundering, as more fully set forth by my above-mentioned post "Asset Search Indicia For Divorce, Debt Collection & Bankruptcy ".

 

2.  U.S. Trustees look for red flags to detect a debtor's bankruptcy fraud / the concealment of bankruptcy estate assets.  These specific red flags are described in the U.S. Trustee Manual at 5-10.7.2 Red Flags/Common Characteristics in Cases of Concealment and False Statements.

 

3. The IRS uses red flags to search for undeclared revenue and hidden assets.  The IRS Manual describes the same at 25.1.2.3 (01-01-2003), Indicators of Fraud.

 

4.  U.S. Banks are required to look for red flags as part of their anti-money laundering programs as mentioned by the Federal Financial Institutions Examination Council's BSA / AML Examination Manual.

 

Copyright 2008-2010 Fred L. Abrams

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An asset search for any bankruptcy estate property hidden during a Chapter 7 bankruptcy, usually begins with an investigation of the debtor's court filings.  For example, the following court filings may contain red flags that a debtor has concealed assets / property:

• the petition;
• schedules;
• statement of financial affairs;
• tax returns.

 

Critical to an asset search for concealed bankruptcy estate property, is the creditors' meeting required by 11 U.S.C. §341.  This is true because the creditors' meeting may be used by the Chapter 7 Trustee to examine the debtor about financial issues.  At such a meeting, creditors are also permitted to similarly question a bankruptcy debtor.  Among other things, an asset search for concealed bankruptcy estate property may also include the research described at "A Low-Cost Asset Search".

 

A debtor caught concealing bankruptcy estate property could face bankruptcy fraud charges like those filed against  Michael Wamsley and Charles Wamsley, Jr. of Hendricks in Tucker County, West Virginia.  According to InterMountain.Com, the Wamsleys were charged with bankruptcy fraud and / or  making false statements.  As more fully described by their indictment , the Wamsleys allegedly concealed real property and farm equipment during bankruptcy proceedings.  According to the Court's docket, the Wamsleys were scheduled for their initial court appearance and arraignment on September 10, 2008, in Clarksburg, West Virginia.

 

Copyright 2008 Fred L. Abrams

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Harold is an asset recovery agent, ("repo man"), who works in New England.  He sometimes lives out of his tow truck for a couple of days while searching for a particular debtor's automobile.  When I recently called Harold on his cell phone, he said: "Until I put the GPS in my tow truck, I had boxes and boxes of road maps.  I've also been doing most of my skip-tracing from the truck, right on my laptop.  I am in the middle of a repo right now and a lady is running out of her house into the street.  She is yelling at me, can I call you right back?"


Harold does Internet research on his laptop via the website of IRB, at www.irbsearch.com.  IRB is a comprehensive search service similar to SmartLinx and DEBTORDiscovery, which were mentioned at my post "A Low-Cost Asset Search".  Harold often uses IRB to identify the name and address of a relative, friend or neighbor who may be hiding an automobile as a debtor's nominee.  Some debtors, divorcing spouses, etc. however, do not just simply use a nominee to conceal their automobiles.  In some debt collection, divorce or bankruptcy proceedings, an automobile may even be registered in or moved through multiple jurisdictions in order to conceal it.


In U.S.A. v. Henry, U.S. District Court for the District of Columbia, Index No. 1:06 Cr 00079, Mr. Henry for example, was accused of concealing his $113,000 dollar Porsche 911 during his Chapter 7 bankruptcy.  According to pages 11-14 of his Second Superseding Indictment, (and other documents), Mr. Henry had concealed his Porsche by temporarily registering / insuring it out of the District of Columbia in the name of a nominee-- his brother in New York. 


The Second Superseding Indictment further alleged that Mr. Henry had engaged in a health care fraud scheme, and had  purchased his Porsche with illicit proceeds from the same.  He was also accused of using his purchase of the Porsche as a means to launder money from his health care fraud.  Mr. Henry ultimately pleaded guilty to charges of health care fraud and agreed to forfeit his Porsche, as mentioned by paragraph "7" of the Government's plea offer.  As the Court's December 13, 2007 Judgment mentioned, Mr. Henry was sentenced to twenty months of prison.


Copyright 2008 Fred L. Abrams

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With the lawsuit ending in a large money judgment in favor of the Judgment Creditor, the Debtor filed for bankruptcy in order to protect his personal assets.  To collect on its judgment against the Debtor, the Judgment Creditor then filed a proof of claim as an unsecured creditor in the bankruptcy.  The Judgment Creditor thought that it would eventually receive the proceeds of the bankruptcy estate with the Debtor's assets, upon its liquidation by the bankruptcy court.


An investigation however, suggested that in order to cheat the Judgment Creditor out of its fair share of these proceeds, the Debtor had earlier mortgaged and given liens on all his property in favor of an offshore lender, Sham Creditor.  The Debtor had agreed to these mortgages and liens in consideration of phony loans which he had defaulted on.  Because of these phony loans and mortgages, Sham Creditor filed a secured proof of claim for millions in the Debtor's bankruptcy.


Nobody knew at the time Sham Creditor filed its secured proof of claim that, (in anticipation of his bankruptcy), the Debtor had transferred millions prepetition to Sham Creditor through offshore bank accounts and a nominee.  Nor did anyone initially know that Sham Creditor was just a shell corporation controlled by the Debtor through bearer shares, like the attached sanitized copy.
 

In fact, the Debtor pretended throughout his bankruptcy that his phony loans, mortgages and liens were all legitimate and that Sham Creditor was an ordinary arm's-length lender.  The Judgment Creditor soon realized that it would not be able to successfully compete with Sham Creditor for the limited assets in the bankruptcy estate.  This was true because Sham Creditor had filed a secured proof of claim, (unlike the Judgment Creditor), and therefore had priority over the Debtor's assets in the bankruptcy estate. 


The Judgment Creditor finally accepted a settlement offer from the Debtor, who had agreed to pay just a small amount of the large money judgment / unsecured proof of claim.  The Judgment Creditor had thrown in the towel because it lacked legally sufficient evidence that the Debtor had essentially filed Sham Creditor's proof of claim by using: bearer shares, phony loans, a shell corporation and a nominee.


Copyright 2007-2008 Fred L. Abrams

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People don't typically think of the money laundering indicia when searching for hidden assets the subject of a: divorce; bankruptcy; commercial collection or other legal proceeding.  Such indicia can however be effectively used as part of an asset search even in situations where there is no money laundering.  In the United States, the indicia or red flags of money laundering are described at Appendix "F" of the Bank Secrecy Act / Anti-Money Laundering Examination Manual.  They are also described in Money Laundering Prevention, A Money Services Business Guide, at pages 16-24. 


Money laundering indicia are sometimes used outside of the United States.  For example, India's Financial Intelligence Unit relies on "broad categories of reason for suspicion"; the Belgian Financial Intelligence Unit ("CTIF-CFI") uses Money Laundering Indicators; the Swiss Federal Banking Commission has the Schedule: Indicators of Money Laundering ; and the Asia / Pacific Group on Money Laundering also uses such a list.  Recognizing the following money laundering indicia however, may lead to the discovery of assets concealed in a divorce, commercial collection or bankruptcy case:

• Domestic Or Foreign High-Risk Geographical Locations.
• Large Amounts Of Portable Valuable Commodities (Gold, Diamonds, etc.).
• False Invoicing In A Trade Or Business.
• Offshore Asset Protection Services.
• Offshore / Foreign Bank Accounts.
• Multiple Jurisdictions.
• Fraudulent Conveyances / Transfers.
• Shell Companies.
• Sham Trusts.
• Nominees.
• Bearer Instruments like Bearer Shares.
• Informal Banking Systems, (Hawala, Hui Kuan, etc.).
• Hiding Or Smuggling Cash.
• Offshore Credit Cards.
• Gambling Activities.
• Misuse Of Businesses (i.e. Commingling Personal With Business Assets).
• Structuring Bank Deposits, (a.k.a. "Smurfing").

(Last Edited 5/4/10)

Copyright 2007- 2010 Fred L. Abrams

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According to page nine of the 2005 U.S. Trustee's Annual Report:  "Every year since 1996, more than one million individuals and businesses have filed bankruptcy, making  the bankruptcy caseload the largest in the federal court system".  Since it detects and combats bankruptcy fraud, the U.S. Trustee Program is a critical part of the bankruptcy court system.  According to its June 2007 Report to Congress, the U.S. Trustee Program referred 925 criminal cases for prosecution in 2006.  This was a 24 percent increase from the 744 criminal referrals made by the Trustee Program in 2005. 


One kind of  fraud the Trustee Program is concerned with occurred when husband and wife Terry and Susan Brunning hid assets and laundered money the subject of their 2002 Chapter 7 bankruptcy case.  As their June 3, 2003 indictment explains, the Brunnings were suppose to disclose all their assets at the time of their Chapter 7 bankruptcy so that the bankruptcy court trustee could then liquidate the same for the benefit of creditors.  The Brunnings however instead hid over $1 million dollars in accounts at: San Diego National Bank; Abbey National Treasury Limited in the Isle of Man, Great Britain; and at Lloyds Bank, PLC in London.  The Brunnings had also concealed a $155,000 promissory note; a 1981 Rolls Royce; a 1990 Jaguar; and their 57-foot sailing yacht.  According to their indictment, the Brunnings had even concocted the fictitious creditor "Donna Kerns", in an effort to falsely claim the monies from the bankruptcy trustee's sale of their $155,000 promissory note.

On October 23, 2006, Terry Bruninng was finally sentenced to thirty-three months in prison plus three years supervised release after pleading guilty to two counts of 18 U.S.C. § 152 (Concealment of assets; false oaths and claims; bribery), and one count of 18 U.S.C §157 (Bankruptcy fraud).  At that same time, Susan Brunning similarly pleaded guilty to one count of 18 U.S.C § 152, and was sentenced to a prison term of six months plus three years of supervised release.


Copyright 2007 Fred L. Abrams

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When financial transactions hide assets the subject of a debt collection, divorce, or bankruptcy case, the Court looks for badges of fraud.  As explained in Wall Street Associates v. Brodsky, 257 A.D.2d 526, 529 (1st Dept 1999), the badges of  fraud for fraudulent asset transfers are: 

• A Close Relationship Between The Parties
• A Transfer Outside The Ordinary Scope Of Business
• Inadequate Consideration
• Knowledge Of A Creditor’s Claim
• Retention Of Control Of The Property

For example, in AMP Servs. Ltd. v. Walanpatrias Found. a.k.a. Doraw, 2006 slip op. 7985 ; 34 A.D.3d 231; 824 N.Y.S.2d 37 (1st Dept,  2006), the Appellate Division upheld an injunction against a debtor dodging a debt collection proceeding.  In applying New York Debtor and Creditor Law, the Appellate Division ruled that the debtor could not transfer a stock portfolio offshore to Europe because there were badges of fraud as mentioned by Wall Street Associates, 257 A.D.2d 526.


In another Appellate Division case, Dempster v. Overview Equities, Inc., 2004 slip op. 01149 ; 4 A.D.3d 495; 773 N.Y.S.2d 71 (2d Dept 2004), a divorcing husband transferred his residence to a Delaware corporation just before his valuation/equitable distribution hearing.  Since the Delaware corporation had filed for bankruptcy, the residence was eventually sold by the bankruptcy court as a corporate asset.  The husband in Dempster had also diminished his net worth by alleging he had a $1,473,362.74 debt because of two confessions of judgments from construction loans.


Since the the above transfer happened just two weeks before the valuation hearing, the Appellate Division found it "replete with badges of fraud".  The Appellate Division further stated that the Delaware corporation had been created only two days before the residence was transferred to it and that the corporation had operated from the very same address as the husband's other businesses.  According to the Appellate Division, the husband's residential transfer and construction loans also violated New York Debtor and Creditor Law because they had occurred without any monies ever being paid, (i.e. without "fair consideration").


In Allan J. Bentkofsky, Trustee v. Ralph J. Malandra, et. al., United States Bankruptcy Court, N.D.N.Y.,  Adv. Pro. No. 00-80221, the Court also found there were badges of fraud when a husband and wife transferred their residence to their children.  Despite the transfer, the husband and wife continued to live at the residence because they had retained a life estate interest.  Since the couple had filed a Chapter 7 bankruptcy petition, the Bankruptcy Court analyzed the residential transfer only to discover that it had occurred without any payment of money/was without "fair consideration".  The couple had also made the transfer at a time they had been insolvent.  Given these facts, the Court found there were badges of fraud and set aside the transfer as it violated New York Debtor and Creditor Law.


Finally, badges of fraud can sometimes be used in debt collection, divorce, or bankruptcy cases to demonstrate that an opposing party has hidden assets or removed property with "actual intent" to defraud.  Robert M. Morgenthau v. A.J. Travis Ltd., 708 N.Y.S.2d 827, 842 (N.Y. Sup. Ct. 2000); Wall Street Associates, 257 A.D.2d at 529.  The badges can also become important in court because a concurrence of several badges always makes a strong case for fraud. Gafco Inc. v. H.D.S. Mercantile, 47 Misc. 2d 661, 665 (N.Y. Civ. Ct. 1965).


Copyright 2007 Fred L. Abrams

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