A real estate developer filed for bankruptcy, with approximately $200,000 in assets, $30 million in debt, and no income over several years. Yet, he lives in a house valued at more than $1 million in an affluent neighborhood. The home is titled to his wife even though she does not have a job outside the home. Trustee Neil Gordon employed a team of Arnall Golden Gregory attorneys to pursue assets that could be liquidated to repay creditors.
Representing the Trustee, the AGG team filed a complaint alleging a wide array of fraud perpetrated by the debtor, with the help of his wife and former counsel. The lawsuit alleged that assets were unlawfully hidden from creditors by shifting them to the wife, a family trust, and shell corporations made up of interrelated partnerships, all of which the debtor controlled. The complaint also alleged that the debtor’s bankruptcy lawyers were co-conspirators. For example, just before the debtor sought bankruptcy protection, a judgment creditor of approximately $6 million tried to garnish the law firm to collect any money it received on the debtor’s behalf. A six-figure sum was coming into the law firm but was diverted to another “friendly” law firm to shield it from garnishment. The funds were not disclosed in the debtor’s schedules and statements of financial affairs. The lawsuit alleged the debtor over time moved millions of dollars in funds and interest to defraud creditors, fabricated documents and filed incorrect tax returns. The complaint also sought to utilize a little-known provision in the Bankruptcy Code to reach back 10 years before the bankruptcy to avoid transfers into the debtor’s “self-settled trust.”
After two years, the battle over assets came to a head when AGG invoked the crime-fraud exception to the attorney-client privilege and moved to compel the production of otherwise privileged documents related to several particularly suspect transactions. Following a four-day evidentiary hearing, during which the judge announced her inclination to compel production of the documents, the defendants approached AGG to discuss settlement, and the parties were able to resolve the lawsuit favorably for the estate.