For many years, anti-government and anti-tax protestors have used the UCC filing system to harass, intimidate, and defraud certain targets, primarily government officials. Increasingly, the same theories and tactics used by this anti-government movement serve as the basis for fraudulent debt elimination schemes. These schemes, however, can tie up the courts and increase the costs for all the parties involved. The recent case of In re: Hill, 2015 WL 5575499 (Bankr. E.D. Tenn. Sept. 18, 2015) illustrates this problem.
This case arose from a real estate transaction where two individuals (the “Debtors”) leased a home with an option to purchase from the owners (collectively the “Landlord”). Over several years, the lease had been in default, terminated, reinstated and into default again.
The Debtors eventually filed a Chapter 13 bankruptcy petition. The Chapter 13 plan required the Debtors to make regular payments to the Landlord for the arrearage in the lease payments.
After the court entered an order confirming the Chapter 13 plan, the Debtors tendered a “bill of exchange” to the Landlord and to the Chapter 13 trustee (the “Trustee”) as payment in full of the obligation. Each bill of exchange included instructions for how the recipient should tender the documents to the United States Treasury for payment. Neither the Landlord nor Trustee took any action because they believed that the bills of exchange were worthless.
When the Debtors received no response from the Landlord or Trustee, they claimed that their tender of payment had been rejected, which resulted in the discharge of their obligation. Accordingly, the Debtors filed a motion seeking an order for the Landlord and Trustee to show cause why their claims had not been discharged. The court denied the motion and the Debtors filed a motion to reconsider the ruling.
In considering the new motion, the court observed that the Debtors’ use of a bill of exchange to satisfy debts was based on Redemption theory, which has been widely rejected by courts across the country. The court explained that Redemption theory:
propounds that a person has a split personality: a real person and a fictional person called the “strawman.” The “strawman” purportedly came into being when the United States went off the gold standard in 1933, and, instead, pledged the strawman of its citizens as collateral for the country’s national debt. Redemptionists claim that government has power only over the strawman and not over the live person, who remains free. Individuals can free themselves by filing UCC financing statements, thereby acquiring an interest in their strawman.
(Citation omitted). Redemptionists also claim that the government created an exemption account at the U.S. Treasury for each strawman. Adherents to the theory believe that by filing a UCC financing statement on themselves, they become a creditor of their strawman’s exemption account. They can then access the value of that account by issuing a bill of exchange (or sometimes a similar instrument called a “sight draft”) to a payee who then must look to the U.S. Treasury Department for payment, or so the theory claims.
The court further noted that other courts have routinely rejected these arguments as frivolous. Various other courts have found similar bills of exchange amounted to nothing more than worthless pieces of paper. (Citations omitted). Moreover, the U.S. Treasury Department has issued warnings about bogus sight drafts and bills of exchange.
The court ruled that the legal theories upon which the Debtors’ arguments were based had no basis in law. Consequently, the court denied the Debtors’ motion to reconsider.
The takeaway from this case is that bills of exchange, sight drafts, and similar instruments that purport to draw on the U.S. Treasury, should raise red flags when offered as payment for a debt. Likewise, lenders should be very careful about dealing with a potential borrower if due diligence discloses a UCC record with the hallmarks of a Redemption filing, such as the same name for both debtor and secured party and phrases such as “HJR 192,” “accepted for value,” or “strawman” in the collateral. Such UCC records are often filed as part of fraudulent debt elimination payment schemes based on frivolous Redemption theories.
Paul Hodnefield is associate general counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.