Finding fraud in bankruptcy cases

HFCC, a fertilizer and chemical applicator, went bankrupt. Investigations discovered the owner committed bank fraud, financial statement fraud and performed fraudulent conveyances or fraudulent transfers. However, a judge ruled that the author and the company's outside CPA didn't prove the company was insolvent during all the transfers, which limited the penalties. Here the author proposes a better way to establish the date of the insolvency of an entity and thus recover more fraud proceeds.

A fraud case I worked reminded me that establishing the date of insolvency in a business bankruptcy filing can be key to recovering fraudulent conveyances or preference payments.

HFCC was a custom fertilizer and chemical applicator in a sparsely populated county in southern Illinois. The owner of the company was purchasing chemicals from large brokers in Iowa. The manufacturers of the chemicals were offering year-end rebates to purchasers based on a sliding scale. In other words, the more chemicals purchased from a manufacturer the higher percentage rebate paid to the purchaser.

For example, if the owner of HFCC bought $100,000 worth of chemicals from a manufacturer he might get a 5 percent rebate or $5,000 at the end of the year. However if he purchased $2 million of chemicals from the manufacturer he might get 15 percent or $300,000 in rebates during the year.