Bass, Berry & Sims attorney Chris Lazarini discussed a case involving an arbitration award and bankruptcy filing. The court ruled that where a bankruptcy action has been closed, the bankruptcy trustee's exclusive authority to pursue a claim on behalf of the bankruptcy estate has expired and, absent the trustee affirmatively acting to re-open the case, an unsecured creditor may pursue a fraudulent transfer-voidance claim in state court where permitted by state law.
Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.
Forster vs. Theis, No. A17-0459 (Minn. App., 12/18/17)
Where a bankruptcy action has been closed, the bankruptcy trustee's exclusive authority to pursue a claim on behalf of the bankruptcy estate has expired and, absent the trustee affirmatively acting to re-open the case, an unsecured creditor may pursue a fraudulent transfer-voidance claim in state court where permitted by state law.
In March 2013, a FINRA panel awarded the Forsters $290,000 against their broker, David Theis (ID #12-01157 (Minneapolis, 3/15/13)). The Award was converted to a judgment, after which Theis sought protection from creditors in the bankruptcy court. The Forsters' judgment was excepted from discharge due to Theis' fraud, and the bankruptcy action was later closed. The Forsters then sought to pursue a fraudulent transfer voidance claim under the Minnesota Uniform Fraudulent Transfer Act (MUFTA) against Theis' wife and his former business partner and the company he had owned with Theis ("Appellants"). The state district court found that it had subject-matter jurisdiction to hear the MUFTA claims and Appellees had standing to bring them, rejecting Appellants' motion for summary judgment. This interlocutory appeal, challenging the court’s subject matter jurisdiction, followed.
The state Court of Appeals recognizes the general rule, under the federal Bankruptcy Code, that while a bankruptcy action is pending, the bankruptcy trustee has exclusive authority to void fraudulent transfers on behalf of the estate and its creditors, and that individual creditors are barred from pursuing a fraudulent transfer voidance action to the extent their claims are derivative. Here, however, the general rule is not applicable because the bankruptcy trustee took no action on the Forsters' claim and the bankruptcy action was closed. Ruling that the time limit for the bankruptcy trustee to seek avoidance lapsed when the bankruptcy action was closed, the Court declines to entertain Appellants' theoretical argument that the trustee could reopen the case and pursue the claim under the doctrine of equitable tolling.
Finally, the Court reiterates that, absent an existing bankruptcy action (which was closed), and given that the time for the trustee to act has expired, there is no exclusive jurisdiction in the Bankruptcy Court to hear the fraudulent-transfer voidance claim; therefore, the state district court has jurisdiction to do so to the extent such a claim is allowed under state law. Further, the Court affirms that Appellees, as unsecured creditors, have standing to bring such a claim.