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Trustee seeks to reopen bankruptcy case to sell hidden assets

Many Kentuckians who are contemplating bankruptcy under either Chapter 11 or Chapter 13 may believe that when the court enters an order approving the plan of reorganization, the proceeding is over. This belief, however comforting it may be, is not correct. A recent motion by the trustee in a bankruptcy case in Kansas shows how a bankruptcy case can be reopened if fraud is suspected.

The husband and wife debtors sought reorganization of their debts under Chapter 11, and they obtained an order approving their plan of reorganization. The trustee then learned that the couple had concealed their ownership of more than $1 million worth of firearms. The trove of guns included 103 pistols that had been purchased during the pendency of the bankruptcy proceeding.

The trustee has filed a motion asking the court to convert the Chapter 11 proceeding to a Chapter 7 proceeding. The significance of the conversion is this: under Chapter 11, the debtor remains in possession of the bankruptcy estate, i.e., his (or her) assets. In a Chapter 7 proceeding, the trustee takes possession of the estate and sells the assets to pay the claims of creditors. In his motion, the trustee said that the husband owned 2,166 firearms with a total value of $1.4 million and that he failed to disclose his ownership of the guns in his bankruptcy documents. The legal basis for the motion is alleged gross mismanagement of the bankruptcy estate by the debtor-in-possession. If the court grants the motion, the debtor will presumably lose ownership of the guns. The debtor has already been indicted for several acts of bankruptcy fraud, including money laundering and receipt of firearms and ammunition.

This case demonstrates the perils of attempting to hide assets during a bankruptcy proceeding. Even though this case is venued in Kansas, the legal basis of the motion and any order by the court may apply to bankruptcy cases in Kentucky. A person who owns significant assets and who is wondering about the wisdom of filing a bankruptcy petition may wish to consult a lawyer who is experienced in handling such bankruptcy cases for advice on the disclosure of assets and the possible outcomes.

Source: Topeka Capital-Journal, "Bankruptcy trustee seeks sale of 2,000-plus Lindemuth firearms to pay creditors," Steve Fry, April 4, 2017

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