Unorthodox Chapter 7 Filings Against This One Construction Company
Avoiding transfers and clawback funds from trustee received through the successful defense of alter ego allegations.
The Firm represented a successful construction and building services company based here in San Diego. Through some creative accusations by the Chapter 7 Trustee, the client found itself the subject of an adversary proceeding filed for a preferential transfer action. The Trustee alleged that the assets of certain non-debtor corporations were alter egos for the individual debtor and, therefore, such assets were the property of the bankruptcy estate. Based on this allegation, the Trustee turned attention to the Firm’s client and was determined to avoid and claw back all funds that had been properly paid to the Firm’s client as part of its construction services.
With the client in the crosshairs, the Firm filed a Motion to Dismiss the lawsuit and was able to successfully prove that all possible legal theories that could allow the Trustee to recover the funds in question—reverse piercing, the single business enterprise doctrine, and the alter ego doctrine—were inapplicable. From a legal perspective, the Court found that an individual could not use the single business enterprise doctrine to create an alter ego.
The Court dismissed the case with leave to amend, however, the Trustee was warned that if the amendment was unsuccessful, the Trustee would be subject to Rule 11 sanctions. The Trustee did not amend and the case was dismissed allowing the Firm’s client to retain all of the funds at issue.