New Jersey Lawyer Explains Bankruptcy Trustee’s Fraudulent Avoidance Power
A New Jersey bankruptcy trustee has seven powers that are called avoidance powers. Avoidance means to cancel or undue some type of transaction or obligation. In certain situations, a trustee may cancel a transaction for the benefit of creditors that were not involved with the transfer. In general, the avoidance laws were established to cancel a transaction based on wrongful intentions or to prevent the negative effect the transaction has on other creditors. The same transfer or obligation may be avoided by more than one specific bankruptcy avoidance law.
The first type of avoidance power relates to a fraudulent transfer. The trustee may avoid (cancel) the debtor’s transfer or obligation if the following criteria are met:
1. The transfer or obligation occurred within the 2 years, immediately preceding the bankruptcy filing; and
2. The transfer or obligation was made with an intent to hinder, delay, or defraud any past or future creditor; or
3. The debtor received less than fair market value for the sale of property; and
4. The debtor was insolvent or became insolvent at the time of the transfer; or
5. The debtor was engaged in business or about to engage in a business, or a transaction, with unreasonably small capital; or
6. The debtor intended to incur or believed he would incur debts beyond his ability to pay; or
7. The debtor made a transfer to an insider, which is typically a relative.
The best manner in which is to explain the above elements of the trustee’s bankruptcy avoidance powers, is as follows. In every situation, the transfer or obligation must have occurred within 2 years of the bankruptcy filing. The preference action is established, if the criteria of paragraphs numbers one and two, above, have been met. The preference action is established, if the criteria of paragraphs numbers one, three, in addition to any of paragraphs numbers four, five, six or seven.
In general, this power permits the New Jersey bankruptcy trustee to cancel transfers that are made to defraud creditors. An example of a transfer may be the debtor’s sale of real estate for an amount that is substantially less than the fair market value. A transfer may also include the debtor obtaining a substantial mortgage loan on a house, which was previously unencumbered. The trustee may enforce this power by filing an adversary complaint (lawsuit), within the bankruptcy case, against the entity that was involved in the debtor’s transaction. However, for the trustee to prevail, he must meet the necessary criteria listed above.
An example of a fraudulent transfer in a bankruptcy case is a debtor gifting property or money to his father, within 2 years prior to the bankruptcy filing. In this scenario, the trustee may wish to file an adversary complaint against the father to retrieve the funds. The trustee would be required to prove the elements as explained above.
Another example of a fraudulent transfer, is the sale of a house to a person, who is not a relative, within the 2 years prior to the bankruptcy filing, for an amount that is substantially less than the fair market value. In this scenario, the trustee would be required to prove the following criteria, in connection with a lawsuit against the purchaser of the house:
1 The intent of the sale was to hinder, delay or defraud creditors; or
2 The debtor received less than the fair market value of the house; and/or
3 The debtor was insolvent or became insolvent at the time of the transfer; and/or
4 The debtor intended to incur or believed he would incur debts beyond his ability to pay, and/or
5 The transfer involved the debtor’s business or a transaction, at the time when the debtor had unreasonably small capital.
Please note that the trustee may also use the New Jersey state fraudulent transfer laws which permit the trustee to avoid a transfer that occurred more than two years prior to the bankruptcy filing. Furthermore, the person who is sued by the trustee may possibly successfully defend an avoidance action lawsuit, even though all criteria was met, under certain situations, such as a person who purchased the property in good faith, without certain knowledge of the debtor’s circumstances.
Robert Manchel, New Jersey lawyer, may be contacted at (866) 503-5655 to discuss your options for receiving bankruptcy protection.