By Michael L. Moskowitz
In our previous article, we shared the story of a personal injury attorney that was recently sued in an adversary proceeding filed in the United States bankruptcy court. Weltman & Moskowitz successfully established that the complaint was without merit and Plaintiff agreed to withdraw the complaint before answers were required to be filed or discovery ensued. In doing so, we saved our client the time and expense associated with protracted litigation. Today, we bring you the story of another client of ours, a large regional banking institution, in the same position with the same successful results.
Case Study #2
In the second case, our client, a large regional banking institution, was sued by the Chapter 11 plan administrator of a corporate debtor. The underlying basis for the complaint was that the bank was the purported recipient of fraudulent transfers and/or preferences (“Transfers”) paid to it by the debtor, for the debts of the corporate officer. The debtor’s principal had caused the debtor to pay his personal mortgage payments to his then lender, located in the south. At some point in time, the state declared the lender a failed Bank, and appointed the Federal Deposit Insurance Company (“FDIC”) as receiver.
Pursuant to a purchase and assumption agreement (“Purchase Agreement”) with the FDIC, our client purchased certain assets and assumed specific liabilities of the failed bank. Consideration was paid to FDIC for the acquired assets, but our client never succeeded to the interests of the failed bank.
On the eve of the two-year bankruptcy statute of limitations, pursuant to 11 U.S.C. §546, the chapter 11 plan administrator sued the original lender bank as recipient of the Transfers. The theory was lack of consideration for payments by the debtor for liabilities owed by the debtor’s individual officer. Following the expiration of the statute of limitations, the plan administrator amended the complaint and sued our client for more than $233,000.00, as a successor-in-interest, claiming it was merely amending the caption to name the correct party defendant.
Weltman & Moskowitz was asked to intercede. We immediately noted procedural and substantive flaws in Plaintiff’s theory. First, the amended action against our client was filed after the statute of limitations had expired. Since the amendment brought a new party into the action, in order for the amendment to relate back to the originally filed complaint, the amendment had to satisfy the criteria under Bankruptcy Rules 7015(a)(1)(A) or 7015(c)(1). The amendment failed under both scenarios, and we argued the action was time-barred.
Second, our client was not a successor-in-interest to the failed bank. Our client only purchased certain assets from the FDIC and assumed very specific liabilities. This is akin to a section 363 sale whereby the winning bidder takes free and clear of liens and encumbrances. Thus, any action for recovery of transfers would have to have been brought against FDIC, and not our client. Weltman & Moskowitz scrutinized the Purchase Agreement and sent the plaintiff a detailed letter explaining why, on both the facts and the law, the complaint should be withdrawn. As a result of the “position” letter, the plan administrator withdrew the complaint against our client. Had the complaint not been withdrawn, our client would have had to file an answer and engage in time-consuming and expensive litigation.
Takeaway
In both cases, the strategy was to identify whether there was any merit to the actions and persuade the respective plaintiffs to withdraw their complaints. The focus was on saving our clients from the expense of filing an answer and engaging in protracted discovery. This is the common-sense strategy we employ when engaged to defend adversary proceedings in bankruptcy court and litigation matters in general.
If you have any questions or concerns about bankruptcy court adversary proceeding litigation, contact the attorneys at Weltman & Moskowitz to review your options and map out a plan immediately upon learning you are the target of a possible lawsuit.
Michele Jaspan, a senior associate at Weltman & Moskowitz, LLP, contributed to this article.
About Weltman & Moskowitz, LLP, A New York and New Jersey Bankruptcy, Business and Creditors’ Rights Law Firm:
Richard E. Weltman and Michael L. Moskowitz founded Weltman & Moskowitz in 1987 to resolve business, bankruptcy and creditors’ rights challenges, but with a better value proposition. Weltman & Moskowitz serves clients in New York, Long Island and New Jersey.
The firm concentrates on lender’s rights, corporate insolvency, resolution of commercial disputes, loan workouts and modifications, shareholder and partnership contests, business divorce, dissolution, and business and bankruptcy litigation, arbitration, and mediation of all types. The firm also assists with corporation, partnership, and limited liability company counseling and operation, and preparing and negotiating many kinds of secured lending, leasing, equity, buy-sell, consulting, technology, and joint venture agreements. Michael and Richard may be reached at 212.684.7800, 201.794.7500, or via email at mlm@weltmosk.com or rew@weltmosk.com.
