I can help clients who are parties to bankruptcy litigation. Bankruptcy litigation happens when there is a conflict or lawsuit inside of a bankruptcy case, known as an adversary proceeding,. These actions are primarily filed by a chapter 7 trustee and include, but are not exclusive to:
A preference action is an adversary proceeding where there is an allegation that the debtor was played favorites when making payments to creditors prior to filing the bankruptcy case. Once the debtor's financial records are turned over to the trustee, the trustee examines the debtor's payments to creditors within the year prior to filing bankruptcy. The trustee files adversary proceedings when he or she suspects, or has reason to believe, that there were pre-petition payments to particular creditors that jeopardize the equitable distribution scheme contemplated by the bankruptcy code. The bankruptcy code provisions are outlined to place all creditors on equal footing once the bankruptcy case is filed. A pre-petition pay off or stream of large payments to particular creditors while the majority of the creditors are receiving no payments goes against this notion of equal footing. Under the bankruptcy code, the trustee is able to claw back any money that was paid as a preference back into the bankruptcy, so that then the trustee can split the money equally among the creditors.
Preference actions are not for the purpose of establishing that the debt was not owed which is a common misconception by defendants. The important thing for preference defendants to know is that the trustee must show that the transaction fits the fact pattern of a preference and that the judge, not the trustee, is the decision maker in that determination. A common mistake is to contact the trustee for legal advice once the complaint is received. Why ask for help from the party that is suing you?
Preference defense is possible, but extremely time sensitive. When a complaint is received, seek out the advice of a bankruptcy specialist immediately to avoid a default judgment and having to pay funds into the bankruptcy estate that the defendant may have been able to keep with proper representation. If you receive a complaint from a trustee on behalf of the bankruptcy debtor, call me today.
Fraudulent Transfer Actions
The chapter 7 trustee will not only look at the assets owned by the debtor at the time of filing, but also property transferred by the debtor in the four years prior to the bankruptcy filing. The trustee will take interest in certain transfers where there was less than a reasonably equivalent value received by the debtor at the time of the transfer. An example of this kind of transfer would be gifting a paid off vehicle to a family member during a time when creditors are not being paid. If the trustee decides that the transfer was actual or constructive fraud, then the trustee will file an adversary proceeding to reverse the transfer or claw back money in the amount of the value that the debtor should have received to bring the money back into the estate to provide for distribution to creditors.
A prior defense for the defendant by an attorney that specializes in bankruptcy is important because the trustee should have to prove to the court that the transfer qualifies as a fraudulent transfer and the value at the time of the transfer, if the transfer does qualify as fraudulent, should not be left to the party with the most to gain from a high value.