It happens, and it is most often an unintended consequence. Someone you know – a family member, a friend, someone you did business with – has filed for bankruptcy. Out of the blue, you receive a Summons and Complaint from the “Trustee of the Estate of that person or business.” You have no clue what the lawsuit is about, and you are pretty sure that you did nothing wrong. These cases, however, are not about breach of any contract, or any right versus wrong. When you get sued in a bankruptcy case, the trustee is trying to recover monies that may be part of the estate. You would be doing yourself a huge disservice by not speaking to an attorney and responding accordingly.
When a party files for bankruptcy, a theoretical estate is created. All of the ownership interests that the debtor has, and had, are part of that estate. A trustee is appointed to each bankruptcy case to oversee its administration, and to try and marshal any assets that may be available.
Transfers of assets by a debtor before the filing of a bankruptcy are subject to more scrutiny by the trustee. In particular, trustees have the power to avoid and recover transfers of property by a debtor if they meet certain qualifications. Two kinds of transfers that trustees regular seek to set aside are ‘preferential transfers’ and ‘fraudulent transfers.’
Preferential transfers are a kind of transfer where the debtor paid more to a certain creditor than other creditors prior to filing for bankruptcy. Normally, the payment is more than the creditor is likely to receive in the bankruptcy case. Common scenarios are when a debtor pays family or friends prior to a bankruptcy. A fraudulent transfer is when a debtor transfers property prior to a bankruptcy with the intent to defraud, delay or hinder the creditor. A common example is when, prior to filing a bankruptcy, a debtor transfers title to real property to a spouse or child for no value, increasingly common in uncontested divorce settlements.
Just like any case, it is the trustee’s burden to prove a preference or fraudulent transfer. Moreover, just because you are being sued does not mean that you do not have valid defenses to overcome the trustee’s case. Generally, if the transfer of asset(s) was for value and legitimate, the asset should not be recoverable.
If you find yourself as the defendant in a bankruptcy case (or any case, for that matter) do not delay in responding. Cases get only more complicated and difficult when a party waits too long to respond. To speak to a bankruptcy lawyer, or about other matters, contact the Law Office of Richard Kistnen, (718) 738-2324, www.kistnenlaw.com, with offices in Queens and Manhattan.