What Disputes Could Push The Debtor And The Trustee Into Litigation?

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I suppose the most common dispute that might push a debtor and a trustee into litigation is when the trustee is seeking to liquidate an estate asset, and the debtor is trying to prevent the liquidation.

This sometimes happens with real estate where there’s excess equity that cannot be protected. The trustee will sell the real estate to recover the nonexempt equity for the benefit of the creditors. If the debtor refuses to cooperate with the trustee, then the trustee has to go hammer and tongs against the debtor in bankruptcy court.

Another way a trustee could end up in litigation against the debtor is when the debtor has hidden an asset — i.e., failed to list it in the bankruptcy schedules — or refuses to grant the trustee access to an asset. This is taken very seriously. There are people imprisoned in federal penitentiaries at this very moment because they hid assets that their bankruptcy trustee found out about. The silver lining: I have been assured by former clients who spent years in penitentiaries that the food is better in the federal ones than in the state ones.

I remember attending a hearing a few years back. I’m pleased to report that I was representing a different debtor from the one that was being examined. I watched the trustee ask the debtor, “Have you ever owned any real estate?” She said, “Oh no, never.” The trustee repeated the question, clarifying that the debtor was saying she had never been on title to any real estate ever in her life. She continued to insist that no, she had never been on the title to any real estate. The trustee then asked, “Would it surprise you to find out that your name is on title of the property at [such an address]?” It’s not so often that you see all the color drain out of someone’s face all at once, but I saw it happen that day. Although I didn’t keep up on that case, I suspect that the debtor was denied a discharge and got free room and board at taxpayers’ expense.

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