In re Krause

The Internal Revenue Service (IRS) (creditor) secured a judgment against Gary Krause (debtor) for $3.5 million in past-due taxes. Krause filed for bankruptcy, claiming he had no meaningful assets and his debt to the IRS should be discharged. The IRS contested, arguing that Krause had fraudulently conveyed his assets to other entities and the assets should therefore remain subject to the debt. Specifically, the IRS claimed Krause had transferred assets to two companies, Drake Enterprises and PHR, LLC. On paper, Drake Enterprises marketed a diet cookie. PHR merely held title to the family residence. The IRS also claimed that Krause transferred assets to trusts nominally created to benefit his adult sons, Drake and Rick Krause (defendants). During pretrial discovery, Krause violated a court order by destroying the records of Drake Enterprises and PHR. As a sanction, the bankruptcy court deemed the companies to be Krause’s nominees or alter egos and their assets to be subject to the IRS debt. A trial ensued regarding the allegedly fraudulent conveyances to the children’s trusts. Evidence showed that after learning the IRS was auditing his taxes, Krause transferred money and insurance policies to the trusts without receiving anything in exchange. Additionally, Krause continued to control the trust assets, using them to pay his personal expenses, including country-club memberships and car loans. The bankruptcy court concluded that Krause had fraudulently conveyed the assets to the trusts and the assets therefore remained subject to the IRS debt. The district court affirmed. Drake and Rick, who had intervened in the bankruptcy proceeding, appealed to the Tenth Circuit.