Tag Archives: adversary proceeding

GMX Resources, Fraudulent Transfers, Corporate Dividends and Bankruptcy

A bunch of people are getting sued in an Oklahoma bankruptcy court, because they received dividends paid to them as holders of priority stock in GMX Resources, Inc. which subsequently filed for Bankruptcy. I have to admit that when I heard this even I scratched my head a bit. This case is so strange that it took me a while even to figure out who the Plaintiff, one John P. Madden as Trustee of the GMX Resources Creditors Trust, was and what the heck he had to do with this. It took me a little while longer to figure out why I think that these cases should all be defensible by the stock holders. My defense strategy is complicated, but I am making sure that it is cost effective for even relatively small stock holders. So, if you have received a Summons and Complaint from John P. Madden – contact me or another attorney well versed in fraudulent transfer defense soon. As is generally the case when you get sued, time is not on your side.

The cause of action involved in these cases is a poorly named concept, “fraudulent transfer”. There are a number of varieties of a fraudulent transfer, some of which involve actual fraud; but the most common (and the one at issue here) doesn’t usually involve real fraud. To boil it down to its most basic elements, this variety of fraudulent transfer is:

  • A transfer of an asset (cash dividend);
  • Made for less than fair consideration (i.e., akin to a gift, no value received in exchange);
  • At a time when the transferor (GMX Resources) was insolvent; and
  • Made within two years (four years under the State law Uniform Fraudulent Transfers law) of the time the transferor (GMX Resources) filed for Bankruptcy.

Basically, the idea is that you don’t want people transferring assets without getting fair value back in return (kind of, giving stuff away) if they can’t afford to pay their creditors. In the context of a typical consumer fraudulent transfer case, why should a debtor give his old car worth $4,000 – $5,000 away to a friend when he can’t pay his creditors? Shouldn’t he have sold the car and paid his bills? So, the Bankruptcy Code allows for his Bankruptcy Trustee to get the car back, sell it and distribute the money out to the creditors. That fact scenario seems less offensive – unless, of course, you are the friend who was given the car!

What makes fraudulent transfers so much fun is that it is relatively easy for a Trustee to make what is called a prima facie case that the transfer should be avoided. Basically, that means a case that on its face is sufficient to support the cause of action. That is not the same thing as saying that the Trustee should automatically win. There are a number of defenses to fraudulent transfer actions, several of which I think are applicable to the case at bar.

One of the things that I think the Trustee is counting on in this case is that at first blush it looks like defending these cases is going to be outrageously expensive. I respectfully disagree.

Any lawyer who has been out of school for more than six months will tell you that any time you walk into a courtroom anything can happen. There are never any guaranties, and generally both sides are equally convinced that they are absolutely right. Still, there are some facts in this case that make the Trustee’s argument less than compelling; and if you have been sued or if you represent someone who has – give me a call. My contact information is in the right hand column.


What if My Bankruptcy is Denied?

I love questions like this.  My standard answer (if I am feeling obnoxious) is, “Well, I don’t know.  How would that happen?”  The standard response to that is, “Well, I don’t know.  You’re the lawyer.”

Yea, I’m the lawyer; and the fact is, it is possible to have a discharge denied — but that isn’t really the question.  The real question has nothing to do with the Bankruptcy Code and everything to do with the fear of feeling backed into a corner, surrounded and overwhelmed.  This is what I classify as a monster under the bed question, because no matter how old we get, we still have irrational fears that keep us up at night and vanish instantly when hit by the beam of a flashlight.  So, here’s my flashlight.

To be eligible to file for bankruptcy you must meet certain criteria.  The most well known of these is that to file a Chapter 7 Bankruptcy, you must pass the so-called Means Test.  You also must be insolvent; but there are three insolvency tests, and if you don’t meet at least one of them, you aren’t talking to a bankruptcy attorney.

Assuming that you are a human being (and not, say, a non-business trust) and you are not able to pay your bills as they come due, you are going to be eligible to file some chapter of Bankruptcy.  Which chapter may depend on other things, but you will talk to your attorney about those in detail — and this isn’t what people are afraid of.

For most people this really is a monster under the bed fear.  What if the Court just says “NO!  Not YOU!  Anybody else, ok; but not YOU!”  Doesn’t happen that way.  If you are eligible to file, you are eligible to file.

The snag with answering this question is that it is possible to file a bankruptcy successfully and have your discharge denied at the end.  Those are truly extraordinary cases (and not in a good way).  In my 22 years of practicing law, I have never had a client had his discharge denied.  It is a great big, bad thing that doesn’t happen easily.

So, what does that mean?  First of all, it is fairly common for certain debts to be excepted from the discharge.  This is not the same as a denial of discharge.  Most people know that recent taxes, child support and student loans aren’t going away just because they filed for bankruptcy — and they are generally right.  However, if you incur a debt with the expectation of discharging it in bankruptcy (that is called fraud), and the creditor complains about it to the Bankruptcy Court (by filing something called an Adversary Proceeding) and wins; then, that particular debt will be excepted from the discharge, and the Debtor will still have to pay it.

I can hear the chorus now, “But, I’m a good person.  I didn’t plan this.  This debt is all years old, and if I hadn’t lost my job/gotten divorced/ or gotten sick I wouldn’t be here.  Well, then you shouldn’t have to worry about this.  Again, the real fear is that the world won’t see you for who you really are; but only through this stigma of bankruptcy.

Still, this isn’t really what my clients are afraid of.  They aren’t afraid of having to pay their child support or that one credit card that they used right before they filed (knowing good and well they were filing and that they would still have to pay it).

No, my clients are afraid of filing the Bankruptcy and just being told NO.  Go away.  You aren’t good enough, and that doesn’t happen — well, not exactly.

What can happen is a Debtor can get caught hiding assets, not telling the truth, concealing income, not disclosing things he doesn’t want the Trustee to know about.  BOOM!  Thou shalt NOT lie, cheat or steal in connection with a bankruptcy.  Don’t even go there.  That means if you have a nonexempt asset you don’t want the Trustee to administer, well, talk to your lawyer about your legal options.  Just deciding not to disclose it (i.e., Oh, I don’t want to list that) is not a valid response to your lawyer.  Not only will that cost you far more than honesty up front, it can cost you your discharge.  It can also cost you a criminal prosecution and an all-expense paid vacation to a Federal minimum security “camp”.  Don’t go there, because I promise you, your lawyer has no intention of sharing your jail cell.

So, be the person you know yourself to be — honest, above board and cooperative.  A Debtor has a duty to disclose all assets, expenses, debts, liabilities and financial transactions.  Keep your records.  Produce anything requested of you.  If the Trustee wants to see something, hand it over WITH A SMILE.

The name of the Bankruptcy game is disclosure.  It is the ultimate flashlight, and the world is a lot less scary in the light.