Elements of Fraud of Creditor

November 20, 2012 12:34 PM

What are the elements of a "fraud of creditor" defense in Chpt 13 bankruptcy case?

I am contractor / small business owner. I have a small claims court judgement against a former customer, for $4,044.44.

The former customer is now filing Chpt 13 bankruptcy in Federal Court. This former customer is dishonest person (and that is generous assessment of his character).

We did a job for him at his business - and we realized afterwards that he did this construction work with the intent of burning everyone. Plumbers, carpenters, HVAC, electricians - everyone involved got burned.

I was crafty enough to sue him personally - but everyone else got burned when he collapsed his corporation. I have evidence that he never intended to pay anyone. I also have evidence that the corporation just changed names, but never really went out of business. (Some of the same owners, same business, same location, same name on the sign out front - just under a new corporate name).

I also have evidence that he has started and collapsed (due to insolvency) 7 corporations in the last 5 years. He has a series of court cases against him for failure to pay on a contracts. He has a criminal fraud judgement against him. He filed chpt 8 bankruptcy 2 years ago.

The current chpt 13 bankruptcy case is in Central Florida. He is doing this to save his personal home from fore-closure. In Central Florida right now, these cases are like going through a mill. Things are being rubber stamped and passed along. I attended a pre-trial hearing about this case, and saw the mill first hand.

I don't think that I will ever get my money - but I hate the idea of the Federal Bankruptcy Trustee helping him to cover his debts even more. I got the court papers showing his debts - the fee for his bankruptcy lawyer is more than he owes me.

I am sure that he was not expecting me to fight this. But I am a bit more savvy than the average contractor. I have already filed my judgement with the court as proof of a claim against him.

I am not going to throw good money after bad money - so, I will not be hiring a lawyer. However, I will be going to the creditors meeting, and arguing that my debt should not be discharged.

Can anyone tell me the elements of proving a "fraud of debtor" defense in Chpt 13? I think they might be:
1. misrepresentation by debtor
2. debtor's knowledge of misrepresentation
3. intent to decieve
4. justifiable reliance by creditor
5. damage to creditor

I think I can show all these elements. Are they correct? Am I good if I can show these 5 things? Am I missing anything?

I know you are not my lawyer, and I know that I am probably in over my head trying to argue my own case in Federal Court - but I determined to try. If nothing else, it will make me feel better knowing that I tried.

Any help or thoughts will be greatly appreciated.

posted by Flood to Law & Government (24 answers total)

I am not going to throw good money after bad money - so, I will not be hiring a lawyer.

If the debt is owed to an entity you control, you may not be able to represent yourself in court, as you will be attempting to represent a company or LLC, which is generally not allowed if you do not have a license to practice law.

I'd see a lawyer. They will have the answers.
posted by Ironmouth at 12:45 PM on November 20, 2012 [1 favorite]

Response by poster: Please do not advise me to see a lawyer. That is not what I am asking.

Seeing a lawyer is a waste of money. His debts are in excess of $200,000 - and his assets are less and $50,000. There are several big debtors ahead of me, including the IRS and various secured debts (like his upside down mortgage). There is no money there for me to collect. I don't need a lawyer to realize I will not be collecting money.

However, I am willing to spend my time. I am willing to fight the good fight.
If I am allowed to fight. If I am barred from representing my own corporation in court, then so be it - he wins.
posted by Flood at 1:05 PM on November 20, 2012

Here's the thing. There's a real limit to what a lawyer can tell you about your case without creating what could easily be construed, after the fact, as an attorney-client relationship. That has professional implications for the lawyer down the road. For starters, it means potential conflicts with other current or future clients, and it means the risk of malpractice exposure. So I hope you understand that Ironmouth is not being stingy.

The other thing is that law and legal advice is highly fact-dependent: it is highly unlikely that you have written all of the relevant facts for your particular situation. The facts often develop over the course of many back-and-forth conversations that you will have with your lawyer as they iterate and develop their theories of your case. The one-off "answer my legal question" sort of situation here actually just increases the risk that you will be given bad advice that doesn't help you, and therefore the risk of malpractice for the lawyer.

Non-lawyers, for obvious reasons, cannot provide the kind of advice you are looking for.

If you do not want to hire a lawyer, that is your right. The next-best option for you would probably be to go to a nearby law library (there will be one at your nearest law school, and your state government may maintain one or more) and spend some time with the reference librarian.

Good luck.
posted by gauche at 1:29 PM on November 20, 2012

Best answer: You said you've filed your proof of claim, but have you called the trustee's office and said you think this is a fraudulent filing? They refer plausible claims for investigation; the burden would not be on you to investigate or prove anything. The Trustee is just as interested--probably more--than you in making sure the BK court is not being used as an end run around the laws.

The U.S. Trustee’s telephone number for Tampa cases is 813-228-2000, and for Orlando and Jacksonville cases is [phone].
posted by crush-onastick at 1:33 PM on November 20, 2012 [5 favorites]

Just a random musing, but we assume that the bankrupt person has representation, is there a Federal Attorney who represents the interests of the government? If so, perhaps going to that person with your concerns might be worth it.

I have no idea, it's just a thought.
posted by Ruthless Bunny at 1:33 PM on November 20, 2012

See if there's a legal clinic in your jurisdiction that can help you out. At the very least, they could set you on the right path.
posted by Sticherbeast at 1:33 PM on November 20, 2012

I practice Bankruptcy law in a different jurisdiction. I am not your lawyer. What you are asking for is legal advice, which only a lawyer licensed in your jurisdiction can give you. If you are claiming fraud, there is a specific type of pleading that must be done. Contact your local federal courthouse and ask for the bankruptcy help desk, if you are absolutely refusing to hire a lawyer.
posted by betty botter at 1:38 PM on November 20, 2012

Response by poster: Some interesting thoughts here. I appreciate all of your input.
There is a trustee for the case. Maybe I should try to contact them.

if you are absolutely refusing to hire a lawyer.
Would you really advise me to get a lawyer? Honestly.
There is no money there. How will getting a lawyer help me?
I will spend more money, and still not be able to get blood from the stone.

Nevertheless, I do have evidence of fraud.
Don't you think I should find a way to present this evidence to the court?

I have time - not money - that I can invest in this.
Should I just let it go, and let him beat the system?
posted by Flood at 1:51 PM on November 20, 2012

>How will getting a lawyer help me?

It will answer your questions in a professional and responsible manner. And it will not cost that much. Answers are inexpensive. It's the legwork if you choose to proceed that builds up the bill.
posted by megatherium at 1:54 PM on November 20, 2012 [1 favorite]

Best answer: Of the options presented here I think contacting the Bankruptcy Trustee is probably likely to be the most helpful. I've never interacted with the Trustee as a creditor, but as a law student and as a lawyer I've found them to be very cordial and helpful when they can be. Also, at least where I practiced, the Chapter 13 Trustee was a Federal employee. (Don't know if that's the case in every state.)

Again, good luck.
posted by gauche at 1:56 PM on November 20, 2012 [1 favorite]

It sounds like you are fairly confident you are not getting any money from this process. What is your desired outcome? Do you want to preserve the rights you have on the off chance that someday you will be able to get some cash despite the creditors in line before you? Are you looking to have this guy face criminal charges again? Are you just looking to add to his general hassle and legal expenses?

He filed chpt 8 bankruptcy 2 years ago.

What is "chpt 8 bankruptcy?"
posted by grouse at 2:08 PM on November 20, 2012

I nth taking the trustee-contact route.
posted by SMPA at 2:09 PM on November 20, 2012

What is "chpt 8 bankruptcy?"

The OP probably means Chapter 7 bankruptcy.
posted by gauche at 2:10 PM on November 20, 2012

Oh, also, the DoJ has a bankruptcy fraud contact page.
posted by SMPA at 2:10 PM on November 20, 2012

Have you heard "He who represents himself has a fool for an attorney"? If you knew law, you would not be asking for advice on the internet. What makes you think that you can outsmart the other side's lawyers? Sorry to be blunt.
posted by Cranberry at 2:42 PM on November 20, 2012

IAAL, IANYL. This is not legal advice. I am a creditor's rights lawyer in your area. I have practiced a fair amount in bankruptcy court, although I do not hold myself out as a bankruptcy lawyer.

Please do not advise me to see a lawyer. That is not what I am asking.

Then there is no helping you. If the debt is owed to your business (a corporation/LLC/some other business organization), you will not get to represent it in court. A business entity, unlike a natural person, cannot represent itself pro se. A business entity must have a lawyer.

Your question tells us a bunch of reasons why I should think your debtor is a bad guy. That may be true. It is also entirely irrelevant to whether he gets a bankruptcy discharge. He gets to play the corporate shell game. The 341 creditors meeting is not the place for you to make an argument regarding dischargeability. All that happens is the trustee asks the debtor some questions about the petition and other factual issues. It is not the place for you to say what a bad guy the debtor is. Bad guys get bankruptcy discharges, too.

If you want to contest the dischargeability of the $4k owed to your business, you need to hire a lawyer to file an adversary action within the appropriate deadline. But, since you won't be hiring a lawyer, it's a moot point.

You said you filed your proof of claim, so now just wait for the bankruptcy to run its course and see if you get a few pennies on the dollar.
posted by Tanizaki at 2:49 PM on November 20, 2012 [3 favorites]

Response by poster: I appreciate all of your input, though the responses are disheartening

Yes, I meant Chpt 7 - not Chpt 8.

I am not sure what my finally goal is. I would just prefer to NOT see him carry his fraud forward. Maybe by speaking up, I can save someone else down the line.

If it is correct that a business entity cannot represent itself in court, then I guess he wins.

What makes you think that you can outsmart the other side's lawyers?
Silly me for thinking that a federal court would want justice to prevail. I have hard evidence of intent to commit fraud - and the off-the-cuff answers from the lawyers is, if you can not pay to have it presented in court, then it is meaningless. Welcome to America - all the justice you can buy.
posted by Flood at 3:10 PM on November 20, 2012

Best answer: If it is correct that a business entity cannot represent itself in court, then I guess he wins.

Not necessarily -- you just may have a hard time prevailing on your own during the adversary action process unless the Trustee agrees with you and takes up for you. Your inability to represent yourself in the adversary action may not be a big deal if your goal is not to recover your money, but rather to stop the fraud and keep him from getting away with it.

If you are concerned with halting the fraud, report your concerns to the Trustee, the FBI (the agency charged with investigating most bankruptcy fraud), the U.S. Attorney's Office (the agency charged with prosecuting bankruptcy fraud), and follow up and be willing to cooperate in the investigation. You don't necessarily need an attorney to get satisfaction.
posted by *s at 3:42 PM on November 20, 2012 [3 favorites]

Best answer: Welcome to America - all the justice you can buy.

Nope. The Trustee, the FBI, the US Attorney's office, and an appropriate legal clinic are all relevant entities you can work with, all without actually paying for a lawyer.
posted by Sticherbeast at 4:02 PM on November 20, 2012 [5 favorites]

is there a Federal Attorney who represents the interests of the government?

Unless there is a debt owed to the government, i.e. taxes, no. Bankruptcy is an arrangement between private parties, more like a civil lawsuit. A judge presides over the decisions, and a trustee appointed by the government handles the interests of the creditors and determines much of the actual implementation of the bankruptcy decision. As such, the trustee will in fact be very interested in an allegation of fraud, because that is a federal crime.

Silly me for thinking that a federal court would want justice to prevail. I have hard evidence of intent to commit fraud - and the off-the-cuff answers from the lawyers is, if you can not pay to have it presented in court, then it is meaningless. Welcome to America - all the justice you can buy.

Lucky for you! You clearly have no understanding of the bankruptcy process. It is, however, not really a matter of you against the federal court. It is you AND the petitioner BOTH in court together against each other. As such, an attorney is best suited to represent your interests. In theory the trustee will act generally to protect the interests of creditors such as yourself, but the trustee only puts things before the court and does not actually rule on them.

Please drop your bitter, cynical attitude and adopt a realist one. This is a very by-the-numbers process and while not immune from legal maneuvering is highly resistant to it. I simply cannot recommend that you proceed in this matter pro se no matter your preferences. Your inability to formulate a goal is a big problem and won't be improved by your freelancing this yourself. Your resistance to good advice is not making me want to give you more of it. Obviously you're angry, but anger is a poor way to make decisions.
posted by dhartung at 10:37 PM on November 20, 2012 [1 favorite]

Response by poster: Dhartung - you obviously did not read what I wrote above. I am more annoyed at the persistant responses of: " get a lawyer" - when that is not what I am asking.

Please read the post before answering in a condescending tone.

I have long since accepted that I will not get any money out of this. That is not my point. As I said above, both the IRS and several secured creditors are ahead of me. He owes nearly his entire assets in back tax. There is no money there for me. I know that.

Do you seriously suggest that I hire a lawyer, when I know without question that there is no money to be had? I don't need a lawyer to tell me that you can't get blood from a stone.

However, he is in federal court pleading bankruptcy, on the claim that he hit hard times and his business went under - when in fact, the business is still operating. It is a bar, a cash business. He might not be an owner on paper - but he still runs the place. Nothing changed at his business (same workers, same sign, same DBA name, same customers, same menu), except some paperwork in file cabinet in Tallahassee, which claims that the business went under and was sold to another corporation.

I was sent paperwork in this case that clearly contradicts documents that I have. He is lying to the court. How do I get that information to the court? That was my question.

Yes, I do not know that law - and researching it on my own, I discovered "fraud of creditors." I thought that was the way to go. I can document all the elements of that "defense." But there is no money there for me, so I am not throwing more money at this. However, I would like the court to know what I know.

Sending the info to the trustee seems the best way - he can do with it whatever he thinks best.
posted by Flood at 3:56 AM on November 21, 2012

I don't know why everyone keeps saying this is a fraudulent bankruptcy petition or that Flood's debt was incurred by fraud. Flood hasn't said any facts that indicate fraud to me.

If Flood sued him for fraud in small claims court and got a judgment, that is great because res judicata applies and he gets a quick summary judgment. I do not know what "burning" someone means, but if it means simply stiffing someone on their bill, that is not fraud. There is no such thing as fraudulent breach of contract or fraudulent performance of contract in Florida. The only possible exception to this is if Flood can prove that the debtor entered the contract and from the outset had no intention of paying. This sort of mental state is very hard to prove. How does Flood prove what the debtor was thinking at the time they entered the contract? Getting an entire bankruptcy petition kicked out for fraud in an order of magnitude harder.

If Flood just wants someone to see some documents, I agree that he can just send them to the trustee. There's not enough here to state much of a good opinion, but in my experience, the layman's definition of "fraud" is a lot broader than the legal definition, and I have had my share of clients disappointed to learn that what they thought was "fraud" was not.
posted by Tanizaki at 7:27 AM on November 21, 2012

Flood, if you want legal advice, then you need a lawyer. That you don't want to pay for one is completely irrelevant. Only a qualified lawyer in your jurisdiction can answer your question.

That's why so many of the helpful responses here are a bit orthoganal to your question - not "here is the argument you need," but "go see this person or office." We can't give you the legal advice you want, but we can refer you to entities that can help you with what you want to happen.

Best of luck with this.
posted by Sticherbeast at 8:01 AM on November 21, 2012

Flood, I don't want to be personal, but you simply aren't listening. As noted you want legal advice but don't want to hire a lawyer, so I'm baffled why you're here at all.

He might not be an owner on paper - but he still runs the place. Nothing changed at his business (same workers, same sign, same DBA name, same customers, same menu), except some paperwork in file cabinet in Tallahassee, which claims that the business went under and was sold to another corporation.

You're confusing the legal entity with the physical one. It may be a shell game or it may be legitimate but you probably can't tell from the outside. Note that a Chapter 7 bankruptcy -- if you're correct about that -- pertains to the petitioner's personal assets and interests. It is not required that the business cease operations, because the business is a separate legal entity. If he tried to conceal an interest in the business in some fashion that could indeed be bankruptcy fraud, but only a lawyer looking at the filing could really tell you that, and perhaps then only after some investigation outside the filing itself.

As Tanizaki notes there are widespread misconceptions about the law, and indeed about bankruptcy. I have a feeling you are more in the "misconception" area due to your understandable lack of experience with the topic and that only an attorney can give you concrete answers here. We can't, for example, examine his business papers and tell you our analysis, we can only go by what you tell us and we don't trust that you have the domain expertise to know for certain. This can only go in circles.

I hope, then, that we have answered your question about how you can get this information to the court by, well, telling you to go to the court. But we can't really give you any more options than you already have.
posted by dhartung at 11:14 AM on November 21, 2012