Bankruptcy Claim Rejected After Debtor Fraudulently Undervalued Real Estate Interest

A debtor, who had a bachelor’s degree in finance and an MBA degree and had worked in the financial industry for almost a decade, filed for Chapter 7 bankruptcy in 2013. While working as a financial advisor, he personally invested in a real estate venture, in which he contributed $65,0000 for a 49% interest in the company. When the man filed his bankruptcy petition, he estimated his real estate investment interest was worth $2,500. He also claimed he did not have any non-exempt assets that were worth distributing.

CourtroomIn a recent opinion, a federal appeals court considered whether the debtor’s estimation that the value of his interest in the real estate investment company was 4% of his initial capital contribution warranted a denial of a discharge of his bankruptcy case. After the trustee learned that the man had an interest in the company, the trustee told the creditors there would likely be assets available for distribution. The creditors then filed an adversary complaint against the man, alleging that he intentionally misrepresented the value of his interest in the land by more than 95 percent. They requested a denial of discharge under the false oath provision of 11 U.S.C. § 727(a)(4).

The debtor explained that he arrived at this number by taking the largest annual distribution he received, which was $483, rounding it up to $500, and multiplying it by a capitalization rate of five. He acknowledged that the manager of the company would have been able to better evaluate the company’s worth, and he never asked him for his evaluation. The man’s most recent tax return showed an individual capital account in the venture of $67,555. The man claimed he did not make a false statement in valuing his interest, and his method of calculation was reasonable.

However, the court found the manner in which he calculated his interest was improper because the company only earned incidental income. The court added that he could have at least consulted with the manager or his partner in the venture. The court also found that he intended to make a false statement because “reckless indifference to the truth constitutes the functional equivalent of fraud.” The court noted that the debtor was a sophisticated financial professional with two finance degrees, yet he did not consult with his partner or the manager. As a result, the man’s bankruptcy discharge was denied.

False Statements in Bankruptcy Petitions

Chapter 7 bankruptcy allows debtors to be freed from most debts and start fresh. This occurs when the Bankruptcy Court enters a discharge at the end of the case, extinguishing most of the debtor’s debts.  There are, however, certain debts that are not extinguished by the discharge, such as student loans, alimony and child support and certain types of taxes. There are also scenarios in which a debtor is not granted a discharge at all.  Those  instances are listed in 11 U.S.C. § 727(a)(4). One of these scenarios is when a debtor “knowingly and fraudulently, in or in connection with the case . . . made a false oath or account.” In order to trigger this section, the debtor had to know the statement was false, the statement had to be related to a material matter, and the debtor had to make the statement with the intent to defraud. The idea behind the rule is that a debtor should be honest and file his case in good faith if he hopes to benefit from the bankruptcy process.

Contact a Bankruptcy Lawyer

If you feel like your life is being controlled by debt, you may have the option of filing for one of several forms of bankruptcy. At Kruger & Schwartz, helping individuals and families in Kentucky and Indiana face their financial challenges and find resolutions is what we do best. We have over 30 years of experience guiding clients through the complex and daunting Bankruptcy Code. We strive to identify possible solutions that will help you improve your life and get your finances back on the right track. To schedule your free initial consultation, call us toll-free at 866-366-3328 or send us an email online.

More Blog Posts:

Court Finds Couple’s Payments Toward Home Improvements May Have Been Fraudulently Converted into Home Equity, Kentucky Bankruptcy Lawyers Blog, published March 1, 2017.

Debtor Prevented from Pursuing Personal Injury Claim Because She Did Not Properly Exclude it from Bankruptcy Claim, Kentucky Bankruptcy Lawyers Blog, published March 15, 2017.

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