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A trustee in a Chapter 7 bankruptcy case filed adversary proceedings against numerous creditors. The defendants had either loaned money to the debtor or invested money with him. The debtor’s prosecution for investment and bankruptcy fraud, followed by his guilty plea in 2014, left some legal uncertainty as to whether these were loans or investments. A California bankruptcy court, ruling on motions to dismiss brought by defendants in 22 adversary proceedings, held that this question was not immediately relevant. It dismissed the trustee’s usury claims against the defendants, as well as parts of the claims for avoidance and recovery of allegedly fraudulent transfers. In re Singh, No. 10-bk-42050 et al., mem. dec. (Bankr. E.D. Cal., Apr. 22, 2015).

A federal grand jury indicted the debtor on 24 charges in October 2012, including wire fraud and bankruptcy fraud. He was accused of an investment fraud scheme that targeted nearly 200 members of the ethnic Indian Fijian community in the Sacramento, California area. The scheme, according to the indictment, brought in about $20 million, which the debtor allegedly said would be used for hard money loans. The debtor was accused of diverting much of the money for gambling, other business ventures, and personal use. Media coverage described it as a “Ponzi scheme.”

The debtor had filed for Chapter 7 bankruptcy in 2010, and the indictment alleged that he failed to disclose assets related to the investment scheme. In March 2014, the debtor pleaded guilty to wire fraud and false statements in bankruptcy, admitting that he did not disclose 19 bank accounts in his Chapter 7 case. A judge sentenced him to 15 years, eight months in prison in October 2014.

The Chapter 7 trustee filed multiple adversary proceedings against individuals who, although they are considered creditors in the bankruptcy case, were described as victims in the criminal case against the debtor. The adversary proceedings included claims that the amounts sought by the defendants were usurious, as well as claims for avoidance and recovery of both actual and constructive fraudulent transfers under 11 U.S.C. § 548(a)(1) and Cal. Civ. Code § 3439.04(a).

At least 22 defendants filed motions to dismiss. The bankruptcy court consolidated the motions for a single hearing and issued a ruling that applied to all of the cases in April 2015. The court first dismissed all of the trustee’s usury claims. Since the debtor pleaded guilty to investment fraud, and the trustee could only assert certain claims that the debtor could assert directly, the trustee was in pari delicto (in equal fault) with the defendants and was therefore barred from recovery. Singh, mem. dec. at 26.

The court granted partial summary judgment on the claims regarding actual fraudulent transfers, to the extent that no genuine issue of material fact existed about the fraudulent nature of the investment scheme. On the constructive fraudulent transfer claims, the court essentially found that the defendants had established claims for restitution from the debtor in the criminal case and that these claims overruled any constructive fraud claims under § 548(a)(1)(B).

Bankruptcy attorney Devin Sawdayi represents individuals and families in the Los Angeles area who have found themselves in financial distress. Through the Chapter 7 and Chapter 13 bankruptcy processes, we help our clients repair their finances and get a fresh start with dignity and respect. Contact us online, at (310) 475-9399, or at (800) 474-6050 today to schedule a confidential consultation with a dedicated advocate for financial recovery.

More Blog Posts:

Bankruptcy Trustee Files “Clawback” Suits Seeking Return of Allegedly Fraudulent Transfers, Los Angeles Bankruptcy Lawyer Blawg, April 22, 2015

Pre-Bankruptcy Sale of Real Property Below Market Price Found to be Fraudulent by Bankruptcy Judge, Los Angeles Bankruptcy Lawyer Blawg, November 7, 2014

Payment of a Debt Prior to Bankruptcy is Not a Fraudulent Transfer, According to Ninth Circuit, Los Angeles Bankruptcy Lawyer Blawg, June 30, 2013