Bankruptcy Court Determines that Property Transfer by Corporation in Which Debtor Holds a 50% Interest Does Not Constitute a Transfer of Assets of the Bankruptcy Estate

[authors: Michael S. Gordon, Elizabeth D. Langdale]

The United States Bankruptcy Court for the District of New Jersey recently found that a debtor’s transfer of property owned by a corporation in which the debtor allegedly held a 50% interest did not automatically constitute a transfer of assets of the debtor’s bankruptcy estate. After the debtor filed a voluntary Chapter 7 bankruptcy petition, the Chapter 7 trustee filed an adversary complaint alleging that the debtor purposefully had executed a post-petition mortgage lien on certain real property owned by a corporation of which the debtor was a 50% owner. Based on the debtor’s alleged ownership interest, the trustee argued that the debtor’s transfer of assets owned by the corporation was tantamount to a transfer of assets belonging to the bankruptcy estate. The Bankruptcy Court disagreed and found that the debtor and the corporation in which the debtor allegedly held a 50% interest were separate legal entities. As such, the Court held that the assets of the corporation did not automatically become assets of the debtor’s bankruptcy estate. The Bankruptcy Court further found that the trustee had failed to meet its burden of demonstrating such unity of interest and ownership between the debtor and the corporation that would allow the trustee to pierce the corporate veil.