Bankruptcy is a forum for the insolvent. However, financially sound businesses and individuals are being dragged into bankruptcy court against their will every day. The main culprit is the contradictory complaint filed by a trustee in bankruptcy.
An insolvent company that files for bankruptcy â commonly referred to as a âdebtorâ â may seek to reorganize under Chapter 11 or liquidate under Chapter 7 of the Bankruptcy Code. When a debtor liquidates, a trustee is appointed to handle the liquidation. The Bankruptcy Code empowers a trustee to recover and reduce the debtor’s property to money. 11 USC Â§704. The trustee has the power to take legal action to recover debts that the debtor may have against third parties. A lawsuit in the context of a bankruptcy is an adversarial procedure and is initiated by the filing of an adversarial complaint. Adversarial proceedings are similar to a lawsuit brought in state or federal court and include the practice of discovery and motion.
Contradictory proceedings commonly filed by trustees
A trustee has the power and authority to initiate adversarial suits against third parties to recover money or property. Common adversarial complaints filed by a trustee include:
- A complaint to avoid and recover preferential payments. A preference is a payment or transfer made by a debtor to a creditor for a legitimate debt within 90 days before a bankruptcy filing, or one year before a bankruptcy filing for insiders or those closely associated with a debtor.
- A complaint to avoid and recover fraudulent transfers. This lawsuit is usually brought when a debtor transfers an asset in the years before bankruptcy without consideration or with insufficient consideration. For example, if a debtor transfers real estate to ABC Co. two years before the bankruptcy filing for $250,000 and the trustee estimates the property was worth $500,000, a trustee can sue ABC Co. to recover and sell the property. property or collect $250,000.
- A complaint to recover money or property owed to the debtor by third parties.
- A claim to sell property jointly owned by the debtor and a third party.
- A claim to pursue a cause of action held by the debtor (eg, breach of contract, patent infringement, etc.).
Respond to an opponent’s complaint
A defendant in adversarial proceedings has 30 days to file a response to a complaint. Here are some useful strategies for responding to conflicting complaints filed by trustees:
- Communicate with the trustee: A trustee has a fiduciary duty to creditors. The goal of a trustee is to liquidate assets and distribute the money to creditors while minimizing legal fees and expenses. Most trustees would prefer to settle or resolve a lawsuit before litigation. A defendant should contact the trustee to learn more about the trustee’s claim and its settlement position. The smaller the amount of the trustee’s claim, the more a trustee may be willing to settle.
- Don’t assume the trustee is right: Many people unfamiliar with the bankruptcy process assume that a trustee has the powers of a judge or that a judge will always side with a trustee. It’s not true. Trustees are appointed after a bankruptcy filing. They don’t know a debtor’s history very well and often work with limited information. The parties should not be afraid to ask the trustee to share information so that they can better understand the claims in an adversarial complaint.
- Know your trustee: Although every trustee follows the same bankruptcy code, every trustee is different. Although every trustee has a fiduciary duty to creditors, trustees exercise their powers differently. Some trustees are aggressive and litigious. Other trustees are more interested in settling and minimizing expenses.
- Ask for more time: A defendant should seek an extension to the 30-day time limit for filing a response to a complaint, so that they have more time to assess whether to settle or pursue legal action. Trustees and the courts regularly accede to these requests.
- Mediation: To the extent that a defendant is unable to settle with the trustee, they should request the appointment of a mediator by the court to help facilitate a resolution.