Richards Layton & Finger
 

Bankruptcy Court Can Compel Defendants to Convey Trust Interest in Extraterritorial Realty

August 22, 2014

The United States Court of Appeals for the Ninth Circuit affirmed the order of the United States Bankruptcy Court for the Southern District of California that required the defendants-appellants to return their beneficial interest in Mexican realty to debtor’s estate. The salient facts are as follows: The debtor filed its bankruptcy case on December 15, 2003. In March 2002—prior to its bankruptcy filing—the debtor transferred its interest in a fideicomiso trust (a trust under Mexican law commonly used by non-Mexican nationals to exercise ownership over real property in Mexico) to a newly formed entity that the Bankruptcy Court later determined was an alter ego of the debtor (the alter ego). At that time (in March 2002), debtor also was engaged in litigation in state court regarding the trust interest, and the Bankruptcy Court later determined that the debtor transferred its interest to the alter ego in part to shelter the trust interest.

After the debtor’s bankruptcy filing, the alter ego sold its trust interest to the appellants. The sale was not disclosed in the debtor’s bankruptcy case until after the transaction was consummated and the majority of the consideration paid for the alter ego’s trust interest was not paid to alter ego but to other entities owned or controlled by the debtor. At the time of the sale, the appellants knew (or should have known) of the debtor’s bankruptcy case and numerous “red flags” associated with the closing including the direction provided to the appellants by the debtor for payment of the consideration from the sale to entities other than the alter ego.

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