Constructive Trusts in Bankruptcy
by Morgan M. Smith
Schwartz Cooper Chartered; Chicago
Richard M. Bendix
Schwartz Cooper Chartered; Chicago
Robert D. Nachman
Schwartz Cooper Chartered; Chicago
Since few debtors in bankruptcy have sufficient assets to pay their debts in full, times are generally tough for unsecured creditors and their lawyers. The word “haircut” crops up frequently in discussions with the debtor. For unsecured creditors, the haircut is often as close as a Sweeney Todd shave. A creative creditor’s lawyer will labor mightily to find something special about his client’s situation to elevate his or her claims above those of the sure-to-be-disappointed masses. One common tactic is to identify a particular asset or asset pool that is closely related to a particular claim, as in, “we were to be paid out of that fund,” or, “that’s the property I was swindled out of.” On the basis of such a relationship, the creditor may ask the court to impose a constructive trust over that asset for the creditor’s benefit, so that the asset becomes, in effect, collateral for the otherwise unsecured claim, or, better still, is awarded to the creditor as his or her own property. Hopeful creditors should be wary, however, for the remedy of constructive trust, in practice, is far more difficult to obtain in bankruptcy than outside it, and for good reason.
What Should You Do If You Suspect Dishonesty or Fraud by a Corporate Debtor in a chapter 11 Bankruptcy Case?
by Jerald I. Ancel
Sommer Barnard PC; Indianapolis
John R. Humphrey
Sommer Barnard PC; Indianapolis
Suppose you suspect that a corporate chapter 11 bankruptcy debtor has knowingly and willfully failed to disclose pertinent information on the schedules or statement of financial affairs, stolen property from a bankruptcy estate or defrauded a trustee or judge in connection with a bankruptcy. Your best course of action will depend upon whether you are counsel for the debtor, a trustee or examiner, a creditor, or counsel for the creditors’ committee. Unfortunately, there are few cases that suggest a course of action when a person suspects or discovers fraud in connection with a chapter 11 bankruptcy case. However, there are some statutes and rules that provide some guidance.
Committing Fraud While Acting in a Fiduciary Capacity Could Result in the Loss of a Homestead Exemption
by Heather M. Forrest
Jackson Walker LLP; Dallas
Bankruptcy Judge Jeff Bohm of the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division, recently rendered an opinion that has the potential to significantly affect homestead rights. In re Presto, __ B.R. __, No. 06-33618, 2007 WL 2913316 (Bankr. S.D. Tex. Oct. 5, 2007). The opinion, which appears to be a matter of first impression, analyzes changes related to homestead rights under §522 of the Bankruptcy Code that were enacted under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Judge Bohm held that where the debtor owed a debt arising from fraud committed while acting in a fiduciary capacity at the time his bankruptcy petition was filed, his homestead exemption was capped at $125,000. Importantly, there was no finding that the fraud was related to the homestead. Accordingly, it appears that if any debt arising from fraud that is committed while acting in a fiduciary capacity remains unpaid at the time the bankruptcy petition is filed, a debtor runs the risk of losing an unlimited homestead exemption (such as allowed in the state of Texas). Also interestingly, Judge Bohm ordered that the debtor was entitled to a cash exemption in the capped amount of $125,000 and found that the remainder of the value belonged to the estate, setting the stage for a sale of the property.
Personal Bankruptcy Hell and Debtor Compliance Program in Canada
by Honorable Stanley J. Kershman
Ontario Superior Court of Justice; Ottawa, Ontario, Canada
The Bad News, and the Good in Canada
If your client is looking for an easy way out of personal bankruptcy in Canada, and cannot be described as an honest but unfortunate debtor deserving of the fresh start envisioned by the Bankruptcy and Insolvency Act (BIA), you should be prepared to deliver some bad news. The Office of the Superintendent of Bankruptcy (OSB) is actively opposing discharges from bankruptcy for debtors who are not complying with the bankruptcy process or who are showing little or no signs of rehabilitation.
This means that the court will consider giving many noncompliant debtors discharges that are potentially made conditional upon additional payments to their estate (and, therefore, their creditors), along with other measures, such as prohibitions from credit card use and activities such as gambling for specific time periods. Discharges may also be suspended and, in particularly egregious cases, may be refused outright.
ABI’s 19th Annual Winter Leadership Conference: Committee Educational Session
The Commercial Fraud Task Force and Bankruptcy Litigation Committee will join forces at ABI’s 2007 Winter Leadership Conference at the Westin Mission Hills Resort & Spa in Rancho Mirage, Calif. on Friday, Dec. 7, from 9:30 - 11:30 am, to present "Gotcha! Replacing Management for Fraud and Other Evil Deeds."
Under §1104, an evidentiary burden must be met to oust management on issues of fraud, dishonesty, incompetence or gross mismanagement. Most frauds go unnoticed in private companies, and public companies have not exactly been fast to eliminate members of the debtor’s rat pack. Attend this session and obtain the information you need to expose the “Seven Deadly Sins” and win the appointment of trustee or examiner. This will be followed by “20 Questions for Management of the Debtor at the 341 When Fraud and Other Evil Deeds Are Suspected.”
Panel: Diana G. Adams (United States Trustee, Region 2 - Districts of Connecticut, NY and VT), Deirdre A. Martini (CIT Group Inc.; New York), Cyrus Noshir Pardiwala (PricewaterhouseCoopers LLP; New York), Hon. Barry Russell (U.S. Bankruptcy Court; C.D. Calif.; Los Angeles) Jordon W. Siev (Anderson, Kill & Olick; New York), Brian C. Walsh (Bryan Cave LLP; St. Louis)