SW Legal Educational Publishing

Asset Transfer to Lawyers at Time of Bankruptcy Filing is Voidable Preference
Description Appeals court held that the transfer of assets from a bankrupt firm to its legal counsel, on the day bankruptcy was filed, was a voidable preference. The law firm had no right to receive full payment for work previously done or for work to be done for the bankrupt firm, so the assets would be returned and the firm could not represent the bankrupt firm in the proceedings.
Topic Bankruptcy
Key Words Asset Transfer; Voidable Preference
C A S E   S U M M A R Y
Facts First Jersey filed a petition for Chapter 11 bankruptcy after the SEC obtained a court order against the firm to repay $75 million in illegal proceeds. That made the SEC the largest unsecured creditor of the company. The same day the petition was filed, First Jersey transferred $600,000 in assets to its law firm, RSW, to pay for previous and future legal services. The trustee and SEC later challenged the transfer of the assets to debtor's counsel. The bankruptcy court and district court upheld the asset transfer; the trustee and SEC appealed.
Decision Reversed. The asset transfer was a voidable preference under the Bankruptcy Code. RSW was not a disinterested party since First Jersey owed it money for legal services previously rendered. RSW was a creditor given preferential treatment, which must be voided, and RSW is disqualified from serving as counsel because of its conflict of interest in treatment of creditors.
Citation In re: First Jersey Securities, Inc., 180 F.3d 504 (3rd Cir., 1999)

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