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Is There Standing to Prosecute Fraudulent Transfer Claims if Unsecured Creditors Have Been Fully Paid?

By Paul A. Rubin and Leslie W. Chervokas

The answer to this question depends, in part, on where the debtor's case is pending. In the Second Circuit, courts allow defendants to escape exposure to fraudulent transfer actions if the debtor's estate cannot identify at least one general unsecured creditor who would benefit from a recovery in that litigation. In contrast, courts in the Fifth, Eighth and Ninth Circuits hold that a debtor's estate has standing to bring such claims, even after all allowed claims of general unsecured creditors have been paid in full, if the estate as a whole would benefit, for example through the payment of professional fees and other administrative expenses of the estate. It is unclear whether this split among the Circuit Courts of Appeal will affect the conduct of debtors and creditors in order to influence the outcome of avoidance actions brought by or against them.

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