Trustee Allowed to Sue for Fraudulent Transfer on an Unenforceable Contract
Even if a contract is unenforceable under state law, a bankruptcy trustee still has the ability to recover the value provided by the debtor as a constructive fraudulent transfer, according to Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y.
The corporate debtor had a contract with a municipality to build sidewalks and curbs for the city. To be enforceable under state and municipal law, the original contract had been subjected to competitive bidding and was approved by the town board.
About two weeks after the original contract expired, the debtor agreed to build more sidewalks and curbs for a price of about $450,000. Once the new job was completed and the time for payment arrived, the city refused to pay, citing state law and the lack of approval of the new agreement by the town board. According to the city, the local laws are designed to prevent corruption and favoritism.
Before bankruptcy, the debtor sued in state court, seeking a money judgment for the $450,000 called for in the new agreement. Before the suit was resolved, the debtor filed a chapter 11 petition and removed the action to bankruptcy court. The bankruptcy court granted the city’s motion for mandatory abstention, returning the suit to state court.
Back in state court, the judge granted the city’s motion to dismiss because the agreement was unenforceable under local and state law. The state judge said that the public interest in preventing collusion precluded the debtor from enforcing the contract.
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