By Ryan C. Wood
The answer is an emphatic yes. If you somehow own a star in the sky, or a rock on the moon and they are worth nothing, it is property of the bankruptcy estate when you file for bankruptcy protection and must be disclosed. At the same time, if the property is worth something, that does not necessarily mean you will lose the property. It all depends upon the value of your assets and the exemptions (exemptions protect your assets so that you can keep your assets) for the state you live in, or the federal exemptions. In California the exemptions are very generous. Other state exemptions are not so generous.
Property in a Foreign Country
When a person or business files for bankruptcy protection all of the assets owned at the time of filing become property of the bankruptcy estate. See 11 U.S.C. §541 of the Bankruptcy Code. Yes, this includes any property owned in a foreign country like Mexico or the Philippines. In addition, 28 U.S.C. §1334(e) gives the bankruptcy court the jurisdiction over all of the property, wherever located, that a debtor owns at the time the bankruptcy petition is filed. See In re Simon, 153 F. 3d 991, 996 (9th Cir. 1998). The bankruptcy court has authority over property in other countries depending upon the circumstances. In a recent case decided by the 9th Circuit Court of Appeals, In re Icenhower, the court provides the test for when the bankruptcy court has jurisdiction over property outside the United States. In Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), the Supreme Court established a two-part test for deciding extraterritoriality questions. Number One: unless Congress clearly expressed its intent for a statute to apply extraterritorially a court must first presume the statute is primarily concerned with domestic conditions. Number two: if the statute applies only domestically, the question becomes: which domestic acts are the objects of the statute’s solicitude or concern. In the Ichenhower case, the real property located in Mexico was owned by a shell corporation that the debtors sold the Mexico property to. The shell corporation then sold the property to a third party. The bankruptcy court ruled the corporation was the alter ego of the debtors and the transfer of the Mexico property the alter ego was fraudulent. Given these facts the bankruptcy court had exclusive jurisdiction over the Mexico property. The transfer of the Mexico property to the third party was therefore avoided (undone) and the property was transferred back to the shell corporation. There are a number of other issues surrounding the transfer and avoidance of the Mexico property. This article does not address those issues. Bankruptcy attorneys should take away from the Ichenhower case caution regarding clients with ties to other countries and the property they may have there. The property in a foreign country is property of the bankruptcy estate if the debtor has some sort of interest at the time the bankruptcy case is filed.
What If I Play Games and Try and Transfer Property I Own to a Third Party?
First, it is not a good idea to play any games with your assets before filing bankruptcy. If you have to play games with your assets then you should probably not be filing for bankruptcy protection. At the same time, if you have been fully informed of the consequences and risks, then by all means roll the dice with filing bankruptcy after transferring property to others under suspicious circumstances. Just ask Jerry and Donna Ichenhower about how transferring a property they owned in Mexico to a shell corporation went. Not well. If the shell corporation had not been found to be the alter ego of the Ichenhower’s the court may have ruled differently. What was held by the court is known. The Ichenhower’s may very well believed they were acting within the law when they sold the Mexico property to a corporation under Mexican law. The facts are the facts though. The bankruptcy court did not find any proof that any compensation was actually transferred by the Ichenhower’s when they sold the Mexico property to the corporation. Also, if the Ichenhower’s had fully capitalized the corporation and if the corporation actually had some sort of independent purpose the court may have found differently in the Ichenhower case.
