Dealing with Accusations of Business Fraud Through Bankruptcy
January 4, 2010 by Oliveros & O'Brien, P.C.
When a business goes bad, accusations often fly among the partners or owners about whose fault it was. Sometimes those accusations turn into criminal fraud charges being filed. Sometimes instead or in addition, they turn into a civil lawsuit for breach of contract, fraud, embezzlement, or breach of fiduciary duty. If you have been accused in any of these ways, filing bankruptcy may be the most effective way to resolve your situation.
***
A few weeks ago we wrote a blog posted here called “Can Any Kind of Bankruptcy Help with My Criminal Debts?” It showed how a bankruptcy filing can create advantages for you in dealing with civil litigation related to criminal allegations, there in the context of a disgruntled ex-spouse’s trumped-up accusations of assault, battery, and arson. This week we address the business context instead of the personal, with accusations of financial fraud instead of bodily harm.
In an even earlier blog, we made clear that a bankruptcy does not write off criminal fines or restitution, and does not stop criminal court proceedings. So here we’re addressing criminal-like allegations by your former business partner who is suing you for money damages, regardless whether the District Attorney is also pursuing criminal allegations against you.
The Scenario
Let’s say a few years ago you accepted the invitation of a friend to buy into his established business, a vehicle repair shop. You agree to invest $10,000 for a 50% share in the business. The deal was that you were to provide most of the labor to repair the customers’ vehicles while he would help out with some of his own labor and would also manage the business. The two of you agreed on a formula for splitting up the profits, with the expectation that you would be able to take home at least $3,000 per month. But from the very beginning there was less business than you thought your partner had assured you there would be, so most months you were not getting $3,000 and were falling behind on your house payments. Plus he was not helping you do the car repairs, and didn’t seem to be doing anything to bring in more customers. Feeling cheated and desperate, you started doing work for acquaintances and other new word-of-mouth customers during off-hours, pocketing what you were paid instead of putting it into the business account. After many months of this, during which you received $30,000 through this off-hours labor, your partner discovered what you were doing. He accused you of theft, fraud, breach of a fiduciary duty, and breach of contract. He filed a criminal complaint with the local District Attorney. You hired a criminal defense attorney who convinced the D.A. that you had at least an arguable right to the side income paid by people who were not customers of the business, and so the criminal charges were dropped. But your ex-partner is now suing you not only for the money you made but also for causing the failure of his long-running business. After a few month of unemployment you succeeded in getting a new car-repair job but your finances are now in shambles. Your ex-partner is mad as hell, thinks you’ve got money squirreled away somewhere (you don’t), and wants to pursue you “no matter what it costs.” You are thinking about filing bankruptcy anyway, because your new wages are being garnished by a collection agency.
How Would Bankruptcy Help With Your Ex-Partner’s Litigation Against You?
1. Automatic stay
The filing of your bankruptcy case would stop this litigation temporarily, and might possibly prevent it if you file before he filed his lawsuit. Your ex-partner would have to reassess whether it was still worth pursuing you. In most situations, his costs in pursuing you increased substantially when you filed your bankruptcy and his likelihood of prevailing against you decreased. So your bankruptcy may be enough to have your ex-partner reconsider whether to keeping throwing money into his vendetta against you.
2. Proof of your true finances
The documents you are required to file under oath in your bankruptcy case should show your ex-partner, and his attorney, rather convincingly that even if he won against you in the litigation, you have no pot of gold with which to pay the judgment.
3. More difficult elements for ex-business partner to prove
When you file your bankruptcy, you make it much harder for your ex-partner to win against you. He doesn’t just need to establish that under contract and partnership law you owe him money. AFTER THAT, he must also establish that this debt you owe fits within some limited categories of debts that are not “discharged” (written off) in bankruptcy.
Conclusion
Filing bankruptcy can create decisive advantages for you if you are being pursued in civil court for an alleged business fraud. This intersection of criminal defense and bankruptcy is very complicated. You need advice from attorneys who are intimately familiar with both areas. At Oliveros and O’Brien our attorneys have worked closely together in these areas of law for a number of years. Please call us at 503-786-3800 for a free initial consultation. Speak with Greg Oliveros if you want to talk primarily about a criminal defense issue, or click here to see our special website on that side of our law practice. Or speak with Mike O’Brien to talk about bankruptcy and creditor problems, or click on the “Contact Us” tab above. We are here to help get you a fresh start in life.