Bankruptcy Trustee Loses in Bid to Recover for Estate Transferred by Debtor

In any bankruptcy action, the trustee has the capacity to recover any funds which he or she believes was improperly transferred or paid from the debtor’s estate prior to the bankruptcy filing. The law gives the trustee this power to ensure either that individuals close to the debtor do not take advantage of the debtor or that the debtor does not collude with someone to move some of the assets out of the estate until after the bankruptcy. A bankruptcy decision rendered last year by a federal bankruptcy court in New Mexico rejected a trustee’s attempt to recover funds from a woman who had resided with the debtor and commingled funds in a single bank account with her for several months prior to the debtor filing for bankruptcy protection.

In the bankruptcy case of In re Strom (Case No. 7-10-14024-TA, Adv. No. 10-1186T, U.S. Bank. Ct, NM), the trustee sued Mariebeth Velasquez to recover funds which he contended were received fraudulently from the debtor, Ms. Strom.  He contended that the funds Strom made available to Velasquez should be paid back to Strom’s estate on the ground that the funds were fraudulently transferred in violation of N.M.S.A. § 56-10-1 et seq.  To show that funds are fraudulently transferred, the trustee must show that “the transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.”

The Court reviewed how the debtor and defendant commingled funds in to a joint account. It also looked at what Strom gave to Velasquez and visa versa. It calculated the contributions each made to the joint account. This enabled it to reach the significant conclusion that, since the debtor did receive a reasonably equivalent value of funds from the defendant, the transfer could not be a fraudulent one. Furthermore, the making of that transfer did not render Ms. Strom insolvent. Therefore, neither of the prongs of the fraudulent transfer statute were satisfied. Hence, the trustee failed to meet its burden of proof. 

The attorneys at Giddens & Gatton Law, PC prepare wills and trusts for individuals in New Mexico and handle probate matters for estates and beneficiaries as well as bankruptcy cases. Giddens & Gatton Law, PC is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico. Call the office at (505) 633-6298 to set up an appointment or visit the firm’s website at giddenslaw.com.