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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 37830
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Last year a firm that managed my two rental homes. In May,

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Last year a firm that managed my two rental homes. In May, the mngmt company stopped sending my monthly check for the rents they collected on my behalf. After many unsuccessful attempt to contact someone from their office, in early August I learned through the local press that during an audit they had discovered 1.5 million dollars had gone missing from the account that they used for collecting/distributing rent $ for their many clients. The couple that ran the company accused their rental manager of embezzlement and the FBI got involved. In early September, the state board of realtors here in AZ suspended the brokers license of the gentleman that operated the firm, and he and his wife were ordered to "cease and desist" their operation. They were told to stop collecting rents and do what they could to straighten out their financial situation. The couple began selling many of their own 800 properties to repay their clients the rent monies that had not been sent to them during the summer. On Sept 23rd, I received a cashiers check for approx. $7,000 from the management firm. Shortly after that, I learned that the couple had filed for chapter 7 . Since I had received some of the funds (not all) that I was owed by the firm, I decided not to get on the list of creditors that were seeking $ from the chapter 7 process. 2 months AFTER the deadline to get on that list, I receive a letter from the trustee of the court handling that case informing me it was to return the funds I had received. She further explained that it was "unfair" that I should have been sent the money and now I am being sued! Is this fair?

You ask whether or not it's "fair" that the trustee sue you to recover the rent money owed to you by the property management company/broker. I think the answer to that is self evident. However, the real question is two-fold: (1) is the trustee's suit legal; and (2) if yes, then can you prevail based upon the law?

The answer to #1 is that the trustee is entitled to sue anyone who he believes has received a "preference" transfer of funds within 90 days of the filing of the debtor's bankruptcy petition. A preference transfer is defined in Bankr. Code 547(b) -- and without getting into the greasy details, if the broker/debtor paid you the $7,000 from the debtor's personal accounts, rather than from the property management trust accounts, then there is an argument to be made that the transfer is avoidable by the trustee, and that you would be obligated to return the money.

However, if the money was paid from the debtor's property management account, then the trustee has no right to the money because, the transfer of property that the debtor held in trust for another is not a voidable preference. Trust assets are not “property of the estate,” and their transfer does not diminish the assets available to creditors. Begier v. United States I.R.S. (1990) 496 US 53, 59, 110 S.Ct. 2258, 2263. Whether property is truly held in trust for another is determined by reference to state law. In re North American Coin & Currency, Ltd. (9th Cir. 1985) 767 F2d 1573, 1575. And, under Arz. Rev. Stat. 32-2174, rental property proceeds are held in trust for the property owner.

There are other numerous and complex twists and turns to the legal issues here -- and that, frankly, is what the trustee is counting on -- because, the trustee knows that you will have to expend at least $7,000 just to hire a lawyer to defend the lawsuit, and since you cannot get your attorney's fees reimbursed, without filing a counterclaim against the debtor for breach of fiduciary under the original property management agreement, you will have to come out of pocket with your lawyer's legal expenses, and then wait to see if you ultimately prevail in the action against the trustee.

So, now you have a choice: you can contact the trustee and offer to settle the matter for less than the $7,000 (pick a number, start high, work down to 50/50). The trustee will also have to expend legal fees to collect from you -- so, you do have negotiating room. Moreover, if the trustee were to lose against you, then other creditors could use the same rationale to defend their transfers. In fact, you could look at the creditor list in the bankruptcy court, contact them all and see if you could pool your funds to hire a lawyer to defend all of the cases as one case, since all of your claims are substantially identical. That could cause the trustee to settle quickly, because suddenly, he has a lot to risk or gain on the basis of a single lawsuit. That's probably what I would suggest were I representing you.

BotXXXXX XXXXXne here, you have a pretty good case that the trustee cannot have the money -- but, to win, if you fight on your own, will cost you at least as much as the $7,000 you have been paid. So, you need to get together with other creditors who have also received payments from the debtor and see if you can "do a deal."

Or, you can just contact the trustee, make a settlement offer and see if the trustee will "bite."

For a competent creditor's bankruptcy lawyer referral, should you need one, see this link.

Hope this helps.
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