“Of course it is happening inside your head, Harry, but why on earth should that mean that it is not real?” – Albus Dumbledore, Harry Potter and the Deathly Hallows

In a previous blog post, we discussed a situation in which actual fraud could be found where the transferor had the noblest of intentions and had demonstrated no intent to defraud creditors. This week, we address a situation at the other end of the spectrum – that of a transfer that the debtor affirmatively admits was made with “actual fraudulent intent.” At first blush, it seems the inquiry can end there.  But a recent decision from the United States Bankruptcy Court for the District of Hawaii reminds us that such admissions are not conclusive evidence of actual fraudulent intent, and that a full trial on the merits might still be necessary even where the debtor has [apparently] ‘fessed up to having intended to hinder, delay, or defraud creditors.

The story begins in 1992, when Winston Mirikitani (himself a former attorney) transferred his interest in certain family companies to his sisters [we’ll later find out that he supposedly did so to shield such assets from his creditors]. Thirteen years later, Mirikitani commenced a Chapter 7 bankruptcy case and received a discharge, and the case was closed. Eight years after that (in 2013), Mirikitani demanded that his sisters give back his interests in the family companies.  When they refused, Mirikitani filed suit in state court, seeking recovery of the transferred interests.  The state court dismissed the action, concluding that Mirikitani lacked standing because he had not disclosed those claims in his 2005 bankruptcy case, and that the claims were therefore property of his bankruptcy estate.

Mirikitani then sought to reopen his Chapter 7 case to recover those fraudulently transferred assets. In connection with that action, he submitted a declaration in which he again stated that he had transferred his interests in the companies to his sisters in an effort to shield those assets from creditors, with the understanding that his sisters would return those interests to him once his troubles blew over. The Chapter 7 trustee then commenced an adversary proceeding against the sisters to recover those interests for the benefit of Mirikitani’s estate. The parties subsequently filed several motions for partial summary judgment.

Hawaii state law (as in other states) allows the avoidance of certain transfers made with “actual intent to hinder, delay, or defraud any creditor.” As the bankruptcy court acknowledged, such “actual intent” is usually inferred from circumstantial evidence “because people rarely admit that they deliberately kept assets away from their creditors.” But the court went on to note that “this is the rare case in which the transferor . . . is adamant that he transferred assets to the Sisters in order to protect those assets from his creditors, his soon-to-be ex-wife, and potential malpractice claimants.”

The trustee, citing Johnson v. Neilson (In re Slatkin), 525 F.3d 805, 812 (9th Cir. 2008), argued that Mirikitani’s own admissions were conclusive (or virtually conclusive) proof of his fraudulent intent and warranted summary judgment. The bankruptcy court, however, distinguished Slatkin, noting that it only dealt with a situation where a transferor pleads guilty to a criminal offense involving the operation of a Ponzi scheme, in which case the guilty plea conclusively establishes the transferor’s fraudulent intent. Here, however, there was no guilty plea, there was other evidence to the contrary (i.e., the sister’s testimony that the transfer was made for value and not with an understanding that the property would be returned), and Mirikitani himself had a financial motive to make false statements regarding his intent in transferring property to his sisters, insofar as he could gain a share of the assets that would otherwise be outside his reach. Lastly, Mirikitani could also have offered a false “confession” solely out of spite for his sisters. The bankruptcy court acknowledged that Mirikitani’s testimony about his own mental state would be admissible and, perhaps, compelling.  But, for all of these reasons, Mirikitani’s testimony alone was not sufficient to warrant summary judgment for a finding of actual fraud.

At the same time, though, the bankruptcy court specifically rejected the sisters’ argument that the conclusory, self-serving statements by their brother should be disregarded in their entirety because they were self-serving. Because circumstantial evidence existed both in favor of and against a finding of actual fraudulent intent, the bankruptcy court concluded that the matter could not be resolved at the summary judgment stage, and must be addressed at trial.

The remainder of the bankruptcy court’s decision addresses other issues of interest, including equitable tolling and “reasonably equivalent value” for transfers made. Most importantly, the bankruptcy court’s decision points to the important details inherent in every case. It reminds us that even admissions by the debtor should be taken with a grain of salt, and that fraudulent transfer actions can be materially more complex than might appear at first glance.