The recent bankruptcy case of Grochoncinski v. Schlossberg demonstrates how a owner’s efforts to save his home resulted in the Bankruptcy Court finding that the homeowner and his business associates had committed fraud.
Jeffrey Eckert (“Eckert”) entered into a contract for the construction of a new home (the “Property”). Prior to the Property’s completion, Eckert made payments pursuant to the sales contract totaling $120,000. Thereafter, Eckert began experiencing financial difficulties and could not obtain a mortgage to complete his purchase of the Property.
To protect the $120,000 in equity in the Property, Eckert approached two business associates, David Schlossberg and Gary Laliberte (collectively “Schlossberg and Laliberte”), who agreed to purchase the Property and resell it to Eckert under a contract for deed. Schlossberg and Laliberte were to receive an assignment of Eckert’s purchase contract for the Property and his $120,000 in equity and were to obtain a mortgage for the balance of the purchase price. Eckert’s contract for deed for the Property provided Eckert was to receive a credit for his $120,000 in equity assigned to Schlossberg and Laliberte and that he would make monthly payments to Schlossberg and Laliberte in the amount of their mortgage payment, plus pay a premium which was Schlossberg and Laliberte's profit on the transaction.
Pursuant to their agreement, Eckert assigned his contract to Schlossberg and Laliberte and the sale of the Property to Schlossberg and Laliberte closed. Eckert, Schlossberg and Laliberte also entered into the contract for deed for the Property as described above. Thereafter, Eckert began making his monthly payments to Schlossberg and Laliberte.
As Eckert’s financial problems continued, he defaulted on the payments to Schlossberg and Laliberte. At the time of his default, Eckert’s payments to Schlossberg and Laliberte had increased the equity in the Property to $200,000. Thereafter, Eckert found another purchaser for the Property, Marcelo Carlos (“Carlos”). Carlos purchased the Property from Schlossberg and Laliberte for $920,000. At the closing, the $200,000 in equity from Eckert’s payments was to be distributed to Schlossberg, Laliberte, Carlos and Eckert’s wife, Christine, as provided in the various side agreements between the parties.
Since the payments to Schlossberg, Laliberte, Carlos and Christine were made from the equity created by Eckert’s payments, Eckert was able to shield his equity in the Property from his creditors. When Eckert filed bankruptcy and the Bankruptcy Trustee discovered the sales of the Property, the Trustee filed suit to recover the payments to Schlossberg, Laliberte, Carlos and Christine, alleging the sales were fraudulent because they violated the Uniform Fraudulent Transfers Act (the “Act”).
To determine whether a transfer is made with actual intent to defraud under the Act, the Act sets forth several 11 factors known as the “badges of fraud,” which, if present in sufficient number, create an inference that fraudulent intent is present. The badges of fraud include the following:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit
(4) the transfer was of substantially all the debtor's assets;
(5) the debtor removed or concealed assets;
(6) the value of the consideration received by the debtor was not reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; and
(7) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
The Bankruptcy Court found that Schlossberg, Laliberte, Carlos, and Christine were insiders under the Act as a result of their relationship to Eckert. Moreover, the Property was transferred to Schlossberg, Laliberte and Carlos without consideration or Eckert’s receipt of reasonably equivalent value. Eckert also continued to reside in and control the Property after the sale. Additionally, at the time of the sale, Eckert was insolvent and subject to various collection suits by creditors. Finally, the sale of the Property was a transfer of substantially all of Eckert’s assets and was made to conceal Eckert’s assets from his creditors. Thus, the Bankruptcy Court entered judgments against Schlossberg, Laliberte, Carlos and Christine totaling the $200,000 of Eckert’s equity they received from the sale of the Property.
If you are having financial difficulties and are considering an asset transfer to protect your assets, please contact a member of the firm for advice regarding proper structuring of the transfer so you can avoid the badges of fraud.