Legal Question in Bankruptcy in New York

Secured Creditor in Banruptcy
A creditor entrusted $200,000 (bearing no interest) with individual engaged in check clearing business, and also loaned him $250,000 bearing interest, repayable on 30 days notice.
2 months later, following a theft in his business and consequent demands from other depositors to return their funds, the debtor had cash flow distress, and was unable to return the funds to the creditor.
He issued a mortgage on a property he owned to the creditor, who agreed in exchange to wait 7 more days for the entrusted funds and 30 days for the loan. The mortgage face value was negotiated between the parties to $350,000 bearing interest from that day on.
Around that time the debtor repaid other creditors amounts exceeding the mortgage amount.
7 months later another creditor filed bankruptcy petition against the debtor; he was declared bankrupt and a receiver was nominated as trustee.
The trustee seeks to cancel the mortgage using fraudulent conveyance law; creditor�s preference is not applicable when more than 3 months passed from the security transaction and the bankruptcy dates.
The trustee is not disputing the debt and the deposit authenticity.
Are fraudulent conveyance laws applicable in this scenario under US law?

Asked on 10/29/08, 5:23 pm

2 Answers from Attorneys

David Gibbs The Gibbs Law Firm, APC

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Re: Secured Creditor in Banruptcy

Where is the bankruptcy filed? You indicate NY law, but give a zip code in California. If the bankruptcy (and the debtor pressumably) are in New York, you need a New York attorney. If the loan was made to a debtor here in California, then you are in the right place. In any event, you are going to have to retain counsel to represent you in the pending Adversarial Proceeding by the Trustee to recover the money. I am defending a similar case right now, and the fraudulent conveyances laws the Trustee will sue under (if in California) may actually cover the situation described, and you may have potential exposure. There are both Federal and California laws governing these types of conveyances, so you are going to need counsel. The Trustee can sue in Bankruptcy Court on both the Federal and State laws. If its in New York, they probably have state Fraudulent Conveyances laws, and you need to consult with someone versed in the law of NY to determine any potential exposure.

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Answered on 10/30/08, 7:04 pm

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