Conceal an Equitable Interest . . . Lose Your Discharge
One of the central purposes of bankruptcy is to provide a “fresh start” to the “honest but unfortunate debtor.” Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007). Although there is a general policy in favor of providing debtors with a discharge of debts, this only applies to the honest debtor. In re Jennings, 533 F.3d 1333 (11th Cir. 2008) (citing In re St. Laurent, 991 F.2d 672 (11th Cir. 1993). In order to receive a discharge, a debtor is required to, among other things, disclose their assets. 11 U.S.C. §521. The assets required to be disclosed broadly include all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. §541(a)(1). One way for a debtor to lose their discharge is if with the intent to hinder, delay or defraud creditors, the debtor, within one year of the bankruptcy filing, conceals property. 11 U.S.C. § 727(a)(2)(A).
Recently, Bankruptcy Judge John K. Olson issued and opinion denying the discharge of a debtor who, with the intent to hinder, delay and defraud a creditor, concealed his equitable interest in an automobile business which he operated, but which was in the name of his live-in girlfriend. Rotella & Associates v. Bellassai (In re Bellassai), 2011 WL 1902694 (Bankr. S.D. Fla. 2011). In Bellassai, years before his bankruptcy filing, the debtor sold the assets of his going concern automotive service business to his girlfriend. Id. at 1. Before buying the business from the debtor, the girlfriend did not perform any due diligence and unlike the debtor who had vast experience running an automotive business, the girlfriend had little experience. Id. The Court found that through the years, the girlfriend had little to do with the operation and success of the business. Id. Nonetheless, the girlfriend was able to support herself and the debtor as a result of the successful business. Id. The Court stated “This arrangement enabled the debtor to shield his assets from creditors by diverting the fruits of his labors to the girlfriend’s new corporate shell, and having the uninterrupted going concern directly support his lifestyle.” Id. at 4. Accordingly, Judge Olson found that the debtor has an equitable interest in the automotive business.” Id.
After finding the debtor, in fact, had an equitable interest in the automotive business, Judge Olson next addressed the issue of whether the debtor continuously concealed his interest in the automotive business into the one year period before his bankruptcy. Id. at 5. “Concealment may be accomplished in two ways: the debtor may conceal the transfer by actively misleading an interested party into thinking it did not occur, or by a sham transfer where title to the property is transferred [but] the benefits of ownership are retained.” Id. citing In re Gonzalez, 302 B.R. 745 (Bankr. S.D. Fla. 2003). Under the doctrine of continuing concealment “discharge may be denied under § 727(a)(2)(A) where a debtor conceals the fact that he transferred an asset more than one year prior to filing bankruptcy and the concealment continues into the one year period.” Id. Based upon the facts of the case, Judge Olson concluded that the debtor continuously concealed his equitable interest in the automotive business into the one year period before the bankruptcy filing. Id.
The final step in Judge Olson’s analysis of whether the Plaintiff should prevail on its § 727 discharge action was to determine whether the continuous concealment of the equitable ownership of the automotive business was done with the requisite intent to hinder, delay or defraud creditors. In applying the standard badges of fraud to the facts of this case, Judge Olson concluded the debtor continuously concealed his equitable interest in the automotive business from 1995 through the one-year period preceding his bankruptcy filing with intent to hinder, delay and defraud his creditors and therefore denied the debtor’s discharge under § 727(a)(2)(A).
Judge Olson’s ruling in Bellassai was consistent with Eleventh Circuit precedent arising out of a 2008 case before Chief Bankruptcy Judge Paul G. Hyman. In Coady v. D.A.N. Joint Venture III, L.P. (In re Coady), 588 F.3d 1312. In In re Coady, the debtor, a formerly successful real estate developer, worked as an uncompensated independent contractor for all of his wife’s business entities for over ten years. Id. at 1314 Though he drew no salary, he moved into his wife’s house, leased a car under her name, wrote checks in her name on the businesses’ accounts to pay personal expenses, and executed a promissory note to fund a real estate development for one of the businesses. Id. Based upon these facts, Judge Hyman found that the debtor diverted assets and income to his wife and her businesses, thereby concealing them from creditors, with the intent to hinder creditors. The Eleventh Circuit Court affirmed Judge Hyman’s denial of the debtor’s discharge. Id. at 1317.
In both Bellassai and Coady the courts concluded that the debtors concealed their interests in property, but received the benefits of their efforts through an equitable interest. In both cases, the debtors acted as the sole assurances of their significant others’ business’ success, without receiving compensation for their efforts. The courts interpreted their status as “kept men” as a thin veil hiding their equitable interest in the companies for which they did the entirety of the work.
 (1) the lack or inadequacy of consideration for the property received; (2) the nature of the relationship between the transferor and the transferee; (3) whether the transferor retains possession, control, benefits, or use of the property in question; (4) whether the transfer resulted in insolvency; (5) the cumulative effect of the debtor’s transactions and course of conduct after the onset of financial difficulties or threat of suit by creditors; and (6) the general chronology and timing of the transfer in question.