David Drumm was the CEO of Anglo Irish Bank (popularly known as "AIB") from 2005 to 2008. Along with so many other banks worldwide, the 2007-2008 crash carried AIB down, and in 2009 the Irish authorities placed AIB into liquidation, renaming it Irish Bank Resolution Corporation Limited ("IRBC") in the process.
Drumm was gone by his time, having resigned in December of 2008. Unfortunately for all involved, Drumm when he left owed AIB/IRBC approximately $11 million from a personal loan made by the bank to him -- apparently his only significant creditor.
To wash out the loan, Drumm filed a Chapter 7 bankruptcy petition in the District of Massachusetts. That Court appointed a Trustee, and soon thereafter both she and IRBC filed adversary complaints objecting to Drumm's discharge. The Court consolidated the two adversary cases together, and held a trial over six days, the results of which were recording in the 75-page opinion of which I am about to relate.
The combined adversary actions resulted in no less than 52 different counts against Drumm, but they can mostly be distilled down to the common theme that Drumm intentionally hid his assets prior to filing for bankruptcy, and failed to disclose assets in his bankruptcy filings.
In a sense, this was a "Golden BB" strategy by the Trustee and IRBC, since if they could prove up only a single count, Drumm would lose his discharge. That's how the trial shook out, as Drumm won on some counts, but lost on others -- and lost his discharge.
The Court found that Drumm had knowingly and fraudulently omitted from his Statement of Assets in his bankruptcy filing that he had made nine transfers of cash from himself to his wife. Drumm responded that he relied upon his counsel to disclose these assets, and did not understand that he was required to list any transfers except those involving real estate. Drumm lost on these counts.
Drumm had also entered into a Separate Property Agreement ("SPA") shortly before he filed for bankruptcy, by which he transferred to his wife a 50% interest in a Trust. By the time Drumm filed his petition, however, the value of the property in the trust had decreased to nothing. Nonetheless, the Court held that the SPA effected a transfer, and Drumm lost on this count too. However, the Court found in favor of Drumm that he did not falsely value the Trust at $0.00 on the Petition date.
The Trustee and IRBC also complained that Drumm had taken out a mortgage to free up €250,000 which Drumm then transferred to his wife, and that his was omitted from Drumm's Statement of Assets. While admitting that he had made a false statement in his Petition about the mortgage, Drumm claimed that this was neither knowing nor fraudulent. The Court found against Drumm on this count as well, however, dismissing the Trustee's and IRBC's claim that Drumm had acted with a fraudulent intent.
Shortly before Drumm had resigned from AIB, he had transferred his 100% interest in a property to himself and his wife jointly, i.e., added his wife to title. This property later sold for $2.365 million, which Drumm did not disclose, and Drumm thus lost on this count.
Drumm sold two automobiles and transferred the proceeds to himself and his wife jointly, but did not disclose those proceeds either. Drumm lost on these counts, but the Court did not find that he acted with fraudulent intent.
Next, Drumm disclosed that he had made payments to his wife for about $50,000 to repay her on a loan, but no such loan ever existed. Drumm lost on this count.
Various furniture was listed on Drumm's schedules as having a value of $10,000 but the furniture was worth substantially more than that, so Drumm lost on this count too. However, the Trustee and IRBC lost on their claims that Drumm had failed to disclose the value of certain furniture held in storage, which the Court viewed as an innocent oversight.
Whenever a bankruptcy is filed, shortly thereafter a "Meeting of Creditors" is held in the presence of the Trustee, where the Debtor must answer questions about his assets and affairs. Drumm attended his meeting, and apparently made false statements, since the Court found against Drumm on these counts. Here, Drumm complained that the Trustee already knew some of his filings were false, but questioned him about them anyway, and thereby solicited false answers -- a game of "gotcha" played by the Trustee. How this was any legal defense is a mystery, and at any rate the Court rejected the defense.
The Court also rejected the contention that Drumm had concealed property prior to filing for bankruptcy based on the claim that certain assets were already the property of his Trust. However, the Court found that Drumm's Separate Property Agreement with his wife was a transfer prior to bankruptcy such that Drumm would lose.
As mentioned, if Drumm lost on any count (the "Golden BB") then he would lose his discharge, and has shown Drumm lost on quite a few counts -- and the Court therefore entered an order denying Drumm's discharge.
ANALYSIS
As I have repeatedly written, "In bankruptcy, all bets are off" when it comes to asset protection planning. While the "planning" here was at best sophomoric -- the almost predictable acts of a financially distressed debtor -- Drumm probably would have worked out a much better settlement had he not filed for bankruptcy and lost his discharge, but instead simply fought IRBC's attempt to collect on the assets transferred outside of bankruptcy (it is very difficult, though not impossible, for a creditor to hold a debtor in a single-creditor involuntary bankruptcy).
Here's what I can't figure out: Knowing that he had engaged in all these suspect transfers that had the intended effect of defeating IRBC's collection rights, why did Drumm voluntarily file for bankruptcy? The only thing that I can figure out is that the answer is stupidity; either Drumm made a stupid decision to file for bankruptcy, or he got stupid advice to file for bankruptcy.
There is a third possibility, which was that Drumm wasn't honest with his bankruptcy attorney, who presumably would have warned him that his discharge would likely be denied based on all these facts. But that implies a stupidity in not making a full disclosure to one's counsel.
The Bankruptcy Code exists to reward a debtor who doesn't hide assets and makes a full and fair disclosure of assets in the schedules to his Petition, and to punish a debtor who fails to do that. If a debtor is not prepared to make a full and fair disclosure of assets, then a debtor should not voluntarily file for bankruptcy.
The actions of distressed debtors are often quite predictable. When they first figure out they might be in financial trouble, they freak out (long before any creditor actually starts trying to collect on things) and start transferring assets to the spouse, or family and friends. No deep thought goes into this process, but rather the debtor is simply desperate to be divested of as many assets as possible.
By the time that a creditor does show up, the debtor has often developed a blase attitude about the whole process, having worked out over and over in his mind what stories he is going to tell his creditors to make them think that he is flat busted broke and has nothing to collect against.
The problem is that the average creditors' rights attorney has only heard these exact same stories hundreds of times before, and doesn't believe any of them. Almost always, the creditors' attorney has quietly investigated the debtor, and obtained a wealth of financial information to impeach the debtor with at his examination.
And that is exactly what happens -- the debtor goes to his debtor's examination, and gets caught telling a bunch of lies about where his assets went. This inspires the debtor's second freak out that usually causes him to file for bankruptcy. Under the circumstances, and as shown in the Drumm case, filing for bankruptcy is a really terrible idea, but that's exactly the sort of decisions that freaked out debtors make, being very bad and self-defeating ones.
Having made the decision to file for bankruptcy, too many debtors do what Drumm did here, which was to fudge about this assets and past transactions in his schedules. This flirts with disaster (and resulted in disaster in Drumm's case) since it risks negating the single and exclusive benefit of bankruptcy to a debtor which is the discharge.
Creditors are rarely concerned with a debtor's bankruptcy filing, since it gives creditors through the Trustee the full gamut of remedies to marshal the debtor's assets for the benefit of creditors. There is simply no worse place for a debtor who actually has non-exempt assets to be than in bankruptcy, since a primary purpose of bankruptcy and power of the bankruptcy court is to divest the debtor of those assets for the benefit of creditors.
I've had debtor's counsel try to scare me in cases: "Either take our settlement offer, or we'll file for bankruptcy." My response is usually something along the lines of "Please let me know when the debtor's Petition is ready for filing, and I'll pay for a limousine for your runner to take it down to the courthouse."
Especially after the 2005 changes to the Bankruptcy Code, creditors now often spend a goodly amount of time thinking about whether they can force particular debtors into an involuntary bankruptcy. Bankruptcy is no longer the hydrogen bomb that wipes out debtors and creditors alike -- now it mostly just wipes out the debtors, though creditors have to watch the Trustee and her attorneys get paid off the top (the real downside to bankruptcy for creditors).
This isn't to say that pre-bankruptcy planning has become impossible, but that it is terribly difficult and should only be done under the guidance of expert bankruptcy counsel. That planning is perhaps entirely limited to exemption planning, i.e., taking non-exempt assets and converting them into exempt assets -- to the extent it can be done at all -- prior to the bankruptcy filing, and requires full disclosure in the debtor's petition.
What is crystal clear is that the debtor cannot engage in anything like asset protection planning in the year before filing for bankruptcy, since the debtor will almost certainly be denied a discharge under Bankruptcy Code section 727(a), which basically flags as inappropriate all attempts of the debtor to hide or put asset out of the reach of creditors within that year.
Financially distressed clients will, as here, make terrible decisions and therefore are difficult to deal with. What they need to be advised is to "first do no harm" (to steal a line from the medicos), and calm down and really think through their future course of conduct, to where they can see an end game that gets them a soft landing.
But getting these clients to calm down and rationally think through things is much easier said than done.
CITE AS
In re Drumm, 2015 WL 77670 (Bk.D.Mass. Jan. 6, 2015).
This article at http://onforb.es/1BeozO9 and http://goo.gl/2Nm17t
