A Trustee’s Powers in Bankruptcy: How the Trustee can Make Money for Creditors

Everybody is asking about the efforts of Irving Picard–the Trustee in the Madoff Bankruptcy–to recover the money lost by investors. His stated goal has been to recover all of the lost investments. The question is: How? (Or, Really?)

The goal of every bankruptcy trustee is to find money or assets to sell. In most cases (probably 98% of them), there are no assets (the people are broke and they owe money against all of their property).  Of other 2%, the assets recovered fall into three categories:

  • Actual, real assets:  The debtor has money, cars, property, or anything else of value that is lien-free, meaning they own it out-right, not subject to any creditor’s claim.  This is rare; most debtors stay out of bankruptcy in order to keep their assets away from a trustee.
  • Assets resulting from avoided liens:  Upon the filing of a bankruptcy, the trustee is granted an interest in the debtor’s property, called the “hypothetical judgment lien.” If any creditor’s lien on property is defective, the trustee can attack and eliminate that lien, thus creating a “lien-free” asset. Note to Secured Creditors: This is the most common way trustees find assets. 
  • Bankruptcy Lawsuits:  This includes lawsuits to recover preferential transfers, fraudulent conveyances, and various other post-petition actions. These types of actions aren’t rare, but they generally occur in the larger bankruptcy cases.

These are the most common weapons in a trustee’s arsenal. The Madoff Trustee is claiming that the alleged Ponzi scheme constitutes fraudulent transfers to the paid investors.  If he can recover all or most of the lost investments, he will have earned his money on this one.

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