A Short Series on the Disappearing Debtor – Conclusion: What Creditors Can Do

PART 4: Conclusion: What Creditors Can Do

Contributed by:
Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.

What happens when a business debtor closes up shop one day only to appear the next day under a slightly different name without going through bankruptcy? How does that happen and what do creditors do?  We hope you have enjoyed our short series on the Disappearing Debtor.

To answer that question, we need to review what ownership is, how debt is created and whether creditors have rights to attack property in a name other than the original customer. We attempt to do so in this four-part series. Should you have specific questions, please contact Bob Bernstein at bob@bernsteinlaw.com.

Sometimes, there is nothing creditors can do, practically. There are remedies, which we will discuss here, but the cost may not be reasonable for an individual creditor to undertake.

When your customer (debtor) closes down and reappears a few hours, days or weeks later in a slightly different form, move fast. While there may be a two-year (or longer) Statute of Limitations on fraudulent transfers in many states, there is a practical limitation. If your debtor is a “bad guy,” there is a good chance that this new business may disappear and reappear in yet another form. The longer it goes, the harder it gets. If there are actual assets of the customer in the hands of the new business, it is easier to trace. If time allows the business to sell the inventory and buy new or turn over the customer list or something like that, it becomes more difficult.

Assuming cost is not an issue, get immediately to your counsel to review the situation. There are options. The simplest thing may be to sue the customer and get a judgment. Once you obtain a judgment, you may be able to attach or levy upon assets in the new entity on the theory that they still belong to the old entity. Of course, if they are both sole proprietorships of contain the same partners, it is pretty much a “no-brainer.” If ownership is not identical, it may take some work, but you should be getting someone’s attention by the action.

Another option is to sue the new entity to recover the fraudulent transfer. This is an action directly against the current owner of the assets. In that action, one goal is to have the Court order the transferee to return the property to the customer. Another is to end up with a judgment against the new entity (which now presumably has assets). Once obtained, that judgment can be collected from the business.

A third way of approaching it would be to get together the necessary number of creditors to file an Involuntary Bankruptcy against the customer. Once an Order for Relief is entered and a Trustee appointed, the Trustee should be able to be convinced to use his powers to go after the property in the hands of the new business. While this may be more powerful and, thus, more effective, it is an action on behalf of all creditors, not just those bringing the Petition. The benefits, after expenses, are shared by all creditors.

Whatever the remedy you choose, it is far easier if you, the creditor, are diligent and watchful over your customers. Have a credit policy that is effective enough to learn of these sorts of transfers promptly. It does little good to learn about them six months or a year after they occur. At that point the horse is not only out of the barn, but has left the pasture!

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