Is helping a relative hide their assets in this manner illegal?

Factual Questions
21

I was using bankruptcy law parlance (a rose is a rose and all that). Under bankruptcy law, a trustee may use either bankruptcy law or state law to avoid and recover fraudulent transfers/conveyances. Regardless of whether the avoidance is done under state law (through the long arm provision of 11 U.S.C. sec. 544) or federal law (11 U.S.C. sec. 548), the trustee may recover the property OR if the court orders, the VALUE of the property (11 U.S.C. sec. 550). Cash is cash, and cash’s value is easily attained. If Jan get $10k in cash from Carl, a trustee in a subsequent bankruptcy could seek to recover $10K from Jan – any old $10K, not the specific bills Carl gave her. Likewise, if Jan gets a car worth $10k, sells it and spends the money, the trustee can go after Jan for $10K cash, even though the car is gone. The OP asked what could happen to Jan. I told him that she has opened herself up to liability, and that answer is 100% correct, especially if Carl finds himself in bankruptcy (remember bankruptcies don’t have to be voluntary, see 11 U.S.C. sec. 303).

No, if Carl goes into a bankruptcy and the money is nowhere to be found (in any account) Jan has exposure as the initial transferee of a fraudulent transfer. Moreover, the account is in Jan’s name, not Carl’s. The Bank might very well answer any garnishment with a denial since the account is not in Carl’s name. My answer is that Jan has most definitely opened herself up to liability.

11 U.S.C. sec. 727(a) provides in pertinent part:

*(a) The court shall grant the debtor a discharge, unless—

. . .

(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;

. . .

(7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider.* (Emphasis mine)

Jan is Carl’s mother and therefore a statutory insider, see 11 U.S.C. sec 101(31)(A)(i)

Dsiclaimer: this analysis concerns the hypothetical Jan and Carl, not any real people or situations. As with any legal matter, what seems like a trivial fact to the layman may be the most crucial fact of all. I.E. THIS IS NOT LEGAL ADVICE

22

If Jan has a lick of sense and is not co-mingling her funds with Carl, nor benefitting from this account by withdrawing from it, I would submit that Jan has no liability here.

23

And I would submit that you are wrong or at least could be – because you’re not applying the right test. If Jan could exert dominion and control over the funds should she so choose (and there is nothing to suggest she can’t), then she is an intial transferee not a mere conduit. The Second Circuit (in which NY sits) law supports me on this. See Christy v. Alexander & Alexander (In re Finley, et al.), 130 F.3d 52 (2d Cir. 1997). What’s your auhtority to the contrary?

24

All of the money is being used by Carl, as I understand the OP. They aren’t going to be able to chase Jan for money that Carl got back and gave to somebody else.

And again, since Jan doesn’t claim any legal interest in the money, the trustee would probably seek turnover under 11 U.S.C. § 543, which can be accomplished by a motion instead of filing an adversary proceeding.

Why garnish the bank when it’s Jan’s account? Garnish her. She’ll have to account for the money that’s in the account if she’s holding it for Carl. If she claims it was a gift, then the fraudulent conveyance act applies.

The money can easily be traced back to Carl. He’s got power of attorney and is taking the money out of the account. If it disappeared after Carl spent it, that’s not Jan’s problem.

A good point. Thanks.

True. But involutary bankruptcies are rare. http://www.weblocator.com/attorney/tx/law/c11.html#txc111700
Especially in cases where the debtor is an individual.

And filing an involuntary petition would subject any creditor to the risk of sanctions. Some courts are very hostile to creditors using involuntary bankruptcy as a collection techique.

If the case gets dismissed, the creditor might well have to pay Carl’s attorney’s fees. And possibly more:

Indeed.

25

They most certainly may. See my response to Mr. Slant.

A trustee will do whatever will get money into the estate most expeditiously. 543 is for turnover of property held by a custodian. The term “custodian” is defined in 101. Jan doesn’t fit the definition. 542 is the more general turnover provision, and you’re right, if the money is all there, then the trustee would probably just seek turnover. What if the money isn’t there and Carl doesn’t have it? The trustee sues Jan. To see what happens read my reply to Mr. Slant.

You can’t garnish Jan without a judgment against Jan. Am I missing something?

Oh, but it is or at least can be. See my reply to Mr Slant

I was fully answering the question and preemptively replying to any sort of rebuttal that, “well, Carl would never file bankruptcy.” You’re right, involuntaries, especially for individuals are rare.

26

Point conceded.
I thank you for the information infused in this post, and especially the final post.
While I had no plans to personally assist anyone in hiding funds from their creditors, this last bit of information you’ve relayed would give me definite pause.
Back to the idea of hiding funds in the form of self-payable money orders, cashier’s checks and/or prepaid cards.

27

You’re welcome. It’s certainly sad to see someone who thought they were helping a “friend” get caught holding the tab. It’s probably pretty common for judgment debtors to go underground, operate on cash, etc, but that generally requires some tax fraud which will land their happy asses in jail and make bankruptcy look like a sock hop. My advice to someone in this sort of situation would be to consult a bankruptcyy lawyer. Bankruptcy law is there to help the debtor (or at least it was until BAPCPA).

28

whole bean you’re quite clever. :smiley: You’ve added much to this discussion. A couple of quibbles and comments, though.

Not garnish Jan’s wages. Get a garnishee summons or a writ of execution and serve it on Jan (the new york statutes use slightly different language, but the concepts are the same). If the creditor knows about the account, it already knows about Jan. And Jan isn’t going to lie and say it’s her money (according to the assumptions we have made so far). Just as you don’t need a judgment against the bank to garnish a bank account, you wouldn’t need a judgment against Jan to seize Carl’s assets in her possession.

I don’t read Christy v. Alexander & Alexander as broadly as you do.

Nevertheless, let me modify my original analysis to include the following: Carl and/or Jan could have some legal problems if the case winds up in bankruptcy court.

I think pretty much everyone agrees that Carl should talk to a lawyer.

29

I knew I was missing something. I wasn’t thinking about garnishing Jan’s wages though, rather garnishing her bank account (i.e. a garnishment suit against X bank where the account with Jan’s name and Carl’s $ sits). You’re correct in that a complaint for garnishment could name Jan as a garnishee. Though it seems troublesome. Jan is hardly uninterested, as the bank would be.

I am reading it in the context of case law that says 550 is clear when it says a trustee can recover from an initial transferee, but because in some instances such a result would be harsh, the courts will allow this narrow exception for “mere conduits.” If were to pick sides in a Trustee for the Estate of Carl vs. Jan lawsuit, I’d bet on the Trustee.

Right, which is why I popped in with my two cents when **choosybeggar ** indicated a belief that Jan was in the clear. Admittedly, my knowledge of state collections law is not as strong as my knowledge of bankruptcy law, so I can’t say how creditors would fare against Jan in state court.

30

The case definitely supports the conclusion that 550 is not to be read as broadly as it could be:

The court held that the company in that case was not a transferee, but a mere conduit. It’s not clear to me from the language in the case and the descriptions of the other cases that Jan would be found to be an initial transferee and not a mere conduit. OTOH, I never argued that Jan could keep the money. I merely said that if Carl got it back, it would be a different story. The case is not authority for the proposition that the initial transferee is liable for all money the initial transferee ever touched. In fact, the court did not reverse the lower court’s ruling

The fact patterns are very different here (A&A was an insurance broker that transferred money from the debtor to an insurance company), and so what we can make of the District Court’s holding is unclear.

Nevertheless, your point is well-taken. And you’ve definitely read more of these cases than I have. I agree that there is at least a chance that a bankruptcy court would adopt the reasoning that you have described. And there is a chance that the case could wind up in bankruptcy court.

31

Oh crap. I’ll be right back.

When A. filed for bankruptcy two years ago, his first consultation was free. When he hired on the lawyer, they set up a payment plan he could live with ($100 a month, I think) until it was paid in full.

32

I think if you look at the reasoning it is pretty clear. The question in determing whether or not the entity was the intial transferee or a mere conduit is whether or not the entity in possession of the funds had the ability to exercicse dominion and control over those funds. If so, then that entity was an intial transferee regardless of the ultimate disposition of the funds. Jan, should she so choose, could withdraw the funds and spend all the money on beer and skittles; Jan is an intial transferee. Jan’s bank, where the funds were deposited, can only do with the funds as it is directed; Jan’s bank is a mere conduit.

We’ve really gotten into the nuance of this by now. We both agree that Jan needs to tell Carl to see a lawyer.

33

Hypothetical:
If Carl had taken a locked safe full of cashier’s checks, money orders, traveller’s checks and cash to Jan’s house and hidden it in a secret room next to her attic, would Jan have the same liability?
Assume Jan has no key and is asked by Carl to not open the safe under any circumstances.

34

I haven’t looked at the schedules since the changed the law, but as recently as last year, the schedules had a spot for “location” of property. If we are assuming that Carl fills out the forms without lying, and that Jan doesn’t claim the money is hers, the game is over. The Trustee is going to tell Carl to go and get it. If money is “missing,” (Carl says there’s $50K in there, but produces $30K) Jan and Carl are going to have to answer some questions. If, OTOH, Carl says, “I put the money in a safe, and then took it out and spent it on hookers and cocaine,” Jan’s liability is dicey at best. Here she didn’t have any access, and only had nominal control. If the safe disappears, Jan could be in trouble.

Consider these possibilities:

  1. Carl hides a safe at Jan’s house. Jan is unaware that safe is there, and doesn’t know how to access it.
  2. Carl buries the money in Jan’s back yard without telling her.
  3. Carl gives Jan the money to hold on to for him. On the way home, Jan is robbed.
  4. In number 1 above, Jan’s house is destroyed in a hurricane. The safe vanishes.
35

37 *Corpus Juris Secundum, Fraudulent Conveyances * § 190 (collecting cases).

This is probably the basis for the lower court’s holding in Christy v. Alexander & Alexander. Of course the Second Circuit mooted the issue by holding that A&A was not an initial transferee, and I did not see any bankruptcy cases addressing the issue, so as a matter of bankruptcy law, it remains a possibility that Jan could be found liable for every penny of Carl’s she ever touched.

:stuck_out_tongue:

36

There are ways of handling this very issue. When I moved once, my company paid for the move, and paid for the taxes for the move, and for the taxes on the taxes …

It was very complicated, but not infinite. They provided me a statement giving exactly what to put where on my tax return. So, I suspect good accounting packages have this handled. I guess it terminates when the tax on the income gets less than $1.00, if not before.

37

I take it that your moving expense reimbursement did not qualify for exclusion from income, then?

http://www.payroll-taxes.com/articles/art_moving_fringe.html (employer reimbursement for qualified moving expenses excludable from income)

http://www.irs.gov/publications/p521/ar02.html (IRS guide to deduction of moving expenses)

38

I go away for a bit and look what happens. I love this place! Thanks all.

I let Carl and Jan know about potential liabilities and advised Carl to seek counsel (you know how it is, though, lead a horse to water and all).

-CB

39

Several of us are going through something similar now – our employer is paying our foreign income taxes (we were out of the country a considerable amount of time last year) for us this year for liabilities last year which is taxable income in the US again this year, which the company will tack on in order to pay the taxes on the extra “income” given to use to pay the taxes for last year. Of course this “gross up” is taxable, too, so the gross up will be slightly larger to cover this. I need to dig out my old calculus textbooks, I think! Even more so, since it was a country where income tax evasion is a national pastime, it’d be a whole lot easier just to leave things how they are, but we have to be a respectable, non-tax-evading company.