Frauds on Creditors in New York

When someone deceives another person by saying in words or actions that a fact is true when it is actually false, that is fraud. Fraudulent actions are very common, and can be civil in nature, or may result in criminal actions.

If you are charged with any form of criminal fraud, or even believe you are being investigated for criminal fraud by the authorities, seek legal advice immediately. Fraud covers so many varying types of transactions that you will need the assistance of a criminal lawyer who is familiar with the many types of criminal fraud to defend yourself against a charge of criminal fraud.

Fraud on Creditors in New York Defined

New York’s Penal Law defines many criminal fraud offenses. Types of fraud on creditors offenses include:

Fraud in insolvency (§185.00),
Fraud involving a security interest (§185.05),
Fraudulent disposition of mortgaged property (§185.10); and
Fraudulent disposition of property subject to a conditional sales contract (§185.15).

The basic premise is the same for each: fraud happens when a person deceives another person intending to get a gain or benefit from the deception.

The Elements of Criminal Fraud

There are two parts to the basic offense. To commit a criminal fraud:

The person must be found to have the intent to deceive another person through the false representation of a material fact

AND

The person must intend that the other person will be persuaded to act, such as releasing property or intangible assets such as financial assets, because of their false representation of a material fact.

Material Fact

For a fraudulent action to be a crime, the untrue fact must be a material fact, or essential to the making of a business deal, and the person expressing the material fact must know that what they are saying is not true.

Deliberate Deception to Make Illegitimate Gains

Fraud occurs when a person deliberately deceives another person to gain an unfair or unlawful advantage, gain or benefit in a transaction. There are many types of fraud: it happens in banking, insurance, credit, intangible property such as copyright and, most commonly, real estate. Criminal fraud may be aimed at a group, such as theft by false pretense. Frequently, criminal fraud is aimed at individuals, such as bank fraud, insurance fraud or mortgage fraud.

An Example of Criminal Fraud

Suppose Jack needs money quickly. He sells his new Porsche to Phil for $50,000. However, he does not tell Phil that he does not own the car. Phil is still making monthly payments of $1500 on the bank loan he took out on the Porsche at First National Bank, which originally cost $85,000. The Porsche is collateral for the loan.

Nor does Jack tell First National Bank that he has sold the car. Jack could be charged under Penal Code §185.05. A person cannot sell an item in which another person or institution, such as a bank, has a security interest without explaining that the item has been sold and accounting for the money he received when he sold the car.

This is an example of a criminal fraud involving a security interest. The Porsche itself secured Jack’s loan from First National Bank. By selling the Porsche without telling the bank, First National’s ability to repossess the car if Jack misses a payment has been compromised. Jack could be charged with fraud involving a security interest.

Prosecution’s Burden of Proof in Fraud on Creditors Cases

This can vary depending on the offense with which you are charged. Generally, the prosecution must prove these things before you can be convicted:

That you knowingly misrepresented a material fact to the other party or parties in a transaction; and
That you did so intending that they rely on your deception to take part in the transaction.

Frauds on creditors: what can you be charged with?

There are four different types of frauds on creditors in the New York Penal Law. These include:

Fraud in insolvency (§185.00): you intend to defraud your creditors by hiding, removing or disguising your property so it will not be included in your assets when you know that you are about to declare you are bankrupt or you know that you already are insolvent
Fraud involving a security interest (§185.05): you have a item of personal property that you have used as collateral for a loan from a bank, but sell it to another person without telling the bank
Fraudulent disposition of mortgaged property (§185.10): you take out a mortgage on property and then deal with the property in such a way as to defraud the mortgage holder
Fraudulent disposition of property subject to a conditional sales contract (§185.15): you agree to a sales contract that includes a condition you must meet before taking full ownership of the property, such as paying the amount you owe in full. You then sell the property to another person with intent to defraud, before you pay the money you owe to the seller.

Each of these crimes is discussed in more detail below.

Fraud in Insolvency (§185.00): Hiding Assets from Creditors

This fraud offense involves you mismanaging your property so it will not be included amongst your assets in bankruptcy on insolvency proceedings so as to defraud creditors.

You are considered to be insolvent when you cannot pay money you owe on a debt when it is due. You can try to borrow money or make loan arrangements with creditors to pay off your debt.

You seek to declare bankruptcy when your debts are so large and all other efforts to pay off your debts have failed that you ask the courts to order that you no longer have to pay off your debts. A bankruptcy administrator will control all of your assets once a court declares that you are bankrupt.

You can be charged with fraud in insolvency under Penal Law §185.00 if you know you are about to become bankrupt or are already insolvent and, with intent to defraud your creditors, you:

Remove, conceal, transfer to another, or destroy property that is part of your assets or estate; or
Falsify a record related to your assets or estate; or
Misrepresent
The existence of property that you own;
The location of property that you own; or
Any other information that is legally necessary to properly administer the bankruptcy or insolvency proceedings.

An Example of Fraud in Insolvency

Suppose Robert cannot pay his bills to several creditors. He owes over $650,000. Knowing that he will soon have to file for bankruptcy, Robert gives his car to a friend, and sells his valuable record collection to other collectors for less than it is worth. Robert can be charged with fraud in insolvency, as he knew he was about to file for bankruptcy but removed or sold some of his assets anyway.

Fraud in Insolvency – Class A Misdemeanor

Class A misdemeanors include sexual abuse, sexual misconduct, third degree assault, third degree stalking, and seventh degree of criminal possession of a controlled substance.

Penalties for Fraud in Insolvency

Conviction under this offense is punishable by up to a year in jail, up to three years’ probation, and/or a fine.

Fraud Involving a Security Interest (§185.05): Selling Property You are Using as Security for a Loan or Mortgage

This fraud offense involves you knowingly selling something you own, which you are using to secure a loan or other financial transaction with another person, to a third person without accounting for the money you have made from the third person.

You can be charged with fraud involving a security interest under Penal Law §185.05 if you have signed an agreement creating a security interest in your personal property that secures a financial obligation (money) that you owe to a secured party (another person), and you:

Have the right to sell or otherwise dispose of the property and the duty to account to the secured party the proceeds of the sale or disposition; and
Sell or dispose of the property and wrongfully fail to account for the proceed to the secured party; or
Do not have the right to sell or dispose of the secured property; and
Knowingly secretes, withholds or disposes of the property in violation of the security agreement.

An Example of Fraud Involving a Security Interest

(a) Security agreements

A typical security agreement is an automobile loan or house mortgage. Janice decides to buy a new Cruze. It costs $22,000. Janice pays $6000 to the automobile dealer and gets a loan from the bank for the remaining $16,000. Janice agrees to make monthly payments of the car; if she cannot make all the payments on the loan, the bank can repossess or seize the car and sell it for the amount Janice still owes on the car.

(b) Fraud involving a security agreement

Janice’s house is damaged in a fire, and the repairs will cost more than her insurance coverage will pay. She decides to sell her new Cruze to get the money to make repairs. Janice sells the car to James for $15,000. However, Janice does not tell James that her bank has a security interest in the Cruze, and doesn’t tell the bank that she has sold the car.

Janice continues to make her monthly payments to the bank. But Janice could be charged with fraud involving a security interest, as she has not told the bank she has sold the Cruze.

Fraud Involving a Security Agreement – Class A Misdemeanor

Class A misdemeanors include sexual abuse, sexual misconduct, third degree assault, third degree stalking, and seventh degree of criminal possession of a controlled substance.

Penalties for Fraud Involving a Security Agreement

Conviction under this offense is punishable by up to a year in jail, up to three years’ probation, and/or a fine.

Fraudulent Disposition of Mortgaged Property (§185.10): Selling a Property You Mortgaged to Defraud the Mortgagee or Buyer

Mortgagee or Buyer

This type of fraud is a major concern for those involved in real estate transactions. Banks and mortgage lenders must be able to trust that the loans they make will be repaid.

Similarly, those seeking loans to buy real estate must be able to arrange loans that they can afford to repay, which are more difficult to obtain if lenders fear being defrauded. Real estate transactions rely on the good faith between lenders and borrowers if they are to continue.

The New York State government is well aware of this, and has passed laws to protect lenders (and, indirectly, honest borrowers) from fraudulent mortgage transactions.

You can be charged with fraudulent disposition of mortgaged property under Penal Law §185.10 if you take out a mortgage on property, and:

Sell, assign, destroy or otherwise dispose of any part of the property that is encumbered with the mortgage
With the intent to defraud the mortgagee or purchaser of the property.

An Example of Fraudulent Disposition of Mortgaged Property

William buys a detached house for $550,000. He arranges a mortgage on the house for $500,000 with a mortgage lender, having made a down payment of $50,000.

William then sells the house for $575,000 to David. William does not pay off the amount he owes to the mortgage lender, and does not tell the mortgage lender that he has sold the house.

William can be charged with fraudulent disposition of mortgaged property under Penal Law§185.10.

Fraudulent Disposition of Mortgaged Property – Class A Misdemeanor

Class A misdemeanors include sexual abuse, sexual misconduct, third degree assault, third degree stalking, and seventh degree of criminal possession of a controlled substance.

Penalties for Fraudulent Disposition of Mortgaged Property

Conviction under this offense is punishable by up to a year in jail, up to three years’ probation, and/or a fine. Probation orders and financial repayment to lenders who suffered losses because of the fraud are common penalties for first offenders.

Fraudulent Disposition of Property Subject to a Conditional Sales Contract (§185.15): Selling Property You Possess but Do Not Yet Own

In a conditional sales contract, the buyer is able to take possession of the item the seller is selling, but the seller still owns the item until the buyer fulfills the condition. Often, the condition is that the buyer pays the full amount she owes to the seller.

You can be charged with fraudulent disposition of property subject to a conditional sales contract under Penal Law §185.15 if you are a buyer who signs a conditional contract to buy property, and, before you meet the conditions in the contract

Sell, assign, mortgage, exchange, secrete, injure, destroy or otherwise dispose of the goods subject to the conditional sales contract while claiming full ownership
With the intent to defraud another.

An example of fraudulent disposition of property subject to a conditional sales contract

Serena agrees to buy a painting by Picasso from Samantha for $1,800,000. Serena paid $1 million to Samantha, who agreed to let Serena display the painting in her home although Serena still owed her $800,000. Serena was arranging a loan from her bank and promised to pay the remaining money within seven days.

However, at a party Serena holds the next day to show off her new painting, Tabitha sees the painting and decides to buy it. Tabitha offers Serena $2,000,000 for the painting. Serena sold it right away without paying Samantha the $800,000 she still owes her.

Serena can be charged with fraudulent disposition of property subject to a conditional sales contract under Penal Law§185.15.

Fraudulent disposition of property subject to a conditional sales contract is a class A Misdemeanor

Class A misdemeanors include sexual abuse, sexual misconduct, third degree assault, third degree stalking, and seventh degree of criminal possession of a controlled substance.

Conviction under this offense is punishable by up to a year in jail, up to three years’ probation, and/or a fine.

Important Cases That Define Fraud

Orchid Constr. Corp v. Gottbetter

In Orchid Constr. Corpv Gottbetter, 89 AD3d 708 (2d Dept. 2011), the basic components of fraud were established. Prosecutors must prove

· The defendant made a misrepresentation or omitted a material fact that was false;

· The defendant knew the misrepresentation or omission was false; and

· The defendant made the misrepresentation or omission to induce the other person to rely in it;

· The other person could justifiably rely on the misrepresentation or omission; and

· The other person suffered injury as a result of relying on the misrepresentation or omission.

People v. Staton

In Peoplev Staton, 79 A.D. 634 (2 Dept. 1909), the court held that a person is not guilty of fraudulent disposition of mortgaged property if the person does not possess fraudulent intent. In the case, Staton, the mortgagor, shipped the goods he had mortgaged to his spouse. Mrs. Staton lived in another state.

The mortgage stated that the mortgaged goods could not be shipped to another state without the mortgagee’s consent. However, Staton did not try to hide the fact that he had shipped the mortgaged goods to his wife, and still made the required payments on his mortgage. The court held that Staton had no intent to defraud the mortgagee, and was not guilty of the offense of fraudulent disposition of mortgaged property.

Who investigates fraud on creditors in New York State?

The Bureau of Consumer Frauds & Protection, part of the Economic Justice Division of the New York Attorney General, investigates fraud on creditors. It prosecutes individuals and businesses that engage in fraudulent behavior.

What additional consequences do you face for a fraud on creditors conviction?

There are often other consequences beyond fines and/or imprisonment for those convicted of perpetrating a fraud on creditors.

Any fraud of a creditor is serious, even though it is punished as a Class A misdemeanor. A conviction shows that you are capable of lying and being deceitful, and could affect your future opportunities for employment, admission to colleges and universities, and access to housing. Others may be reluctant to make contracts or offer you a loan or mortgage, knowing that you have been convicted of fraud in the past.

Possible defenses to a charge of defrauding creditors

An effective defense is to raise doubts that you ever attempted to defraud your creditors or meet other components of the offense. These could include

· Showing that you were not aware of your insolvency or potential bankruptcy under a §185.00 charge;

· Showing that you were not aware that a statement you made about property that belongs to a debtor was false (§185.00);

· Showing that you did not intend to defraud a creditor (§185.00, §185.05) or a bank or mortgage lender (§185.10); see Peoplev Staton, 79 A.D. 634 (2 Dept. 1909);

· Showing that you did not sign a contract clearly including a condition that you had to pay the amount owing in full could mean that you did not owe the seller anything at all (§185.15).

Why you need a lawyer if you’re facing charges of fraud on creditors

If you are charged with defrauding creditors, or even learn you are being investigated for possibly defrauding creditors, obtain legal assistance immediately.

Fraud on creditors offenses is complex. It requires lawyers knowledgeable about

· The different fraud on creditors offenses;

· How these offenses are investigated; and

· How investigators may question you during an interrogation

Lawyers can assist you in making statements during the investigation.

You will need legal counsel that has defended others charged with an offense defrauding creditors to defend you. The prosecution will rely on documents and testimony to show that you made misrepresentations in your words or actions that were intended to defraud another. They will introduce these documents and present evidence through witnesses. Your legal counsel will be able to

· Analyze your specific situation to determine if you have been properly charged with the offense;

· Develop the best possible defense to the charges, based on their experience in other cases and their understanding of your situation;

· Examine the evidence and object to evidence that is improperly introduced in court;

· Cross-examine witnesses to challenge their evidence and their credibility; and

· Advocate forcefully on your behalf in all aspects of your defense.

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