[COLUMN] Trustee and Debtor Mutually Dismiss Adversary’s Claims for $1 Million —

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The client’s company filed for Chapter 7 relief because it was bankrupt. There were two warehouses and the rent for one was $15,000 per month, the other $20,000 per month.

The original business started 12 years ago when the client had a partner. They were importing goods from Asia and distributing them here in the United States. For eight years, business was good. In year 9, the business began to deteriorate with sales down about 40%. The partner decided that he wanted to separate and no longer do the business. The client then bought out the partner and paid him a lump sum for the inventory. The client then set up an LLC to take over the business.

The first year of operation was balanced. The second year of operation was profitable. Foreign suppliers shipped goods with extended credit to the LLC. During the third year, it appeared that there was too much competition and losses were incurred every month. The LLC could not pay rent for two warehouses, so it stopped paying rent for the larger warehouse and consolidated inventory in the smaller warehouse. The owner of the largest warehouse sued the LLC for unpaid rent of $240,000.

In the third year, the LLC was unable to pay its suppliers on time despite having extended credit, so the customer, as CEO of the company, decided to return all unpaid goods to the suppliers. Let’s end it here because it gets a bit complicated what happens next.

I represent the LLC in its Chapter 7 petition. Since the merchandise was returned to the vendors, the LLC had no inventory left, or if it did, the inventory was negligible.

The client testified in multiple hearings with the Chapter 7 Trustee that the LLC did not have inventory, which was the truth. And what is the reason why he had no more inventory? Because the LLC couldn’t pay the vendors and so the LLC returned all inventory to the unpaid vendors. Indeed. It’s the truth anyway.

However, it doesn’t stop there. It’s a long story. First, the client attempted on his own, without me or another lawyer, to respond to the 2004 review conducted by the trustee. This is a deposition where the trustee’s attorney can ask the client anything he wants and needs to figure out what happened to the inventory. The problem is that the third year tax returns show that there is approximately $1 million in inventory while the client testified that there is no inventory. So what’s really going on? I am out of the game at this time because the client did not retain me for the 2004 review. Second, at the same time as the trustee’s client to appear for the 2004 review, the trustee also filed a contradictory case against the client, as an individual, to recover certain amounts which he believes to be preferential payments made by the LLC to the client. The amount is not huge. But it’s just a preferential payment action that involves a small amount, less than $50,000.

After the deposition, the trustee then fines the opponent against the client alleging that the client had concealed the inventory of $1M, and he wants the $1M to be refunded in cash to the client. Whoa, now that’s a pretty big claim! So now the client hires me again to represent him in the adversary. Trustee throws everything at client, including kitchen sink, in amended complaint, which now looks like a criminal case with all sorts of conspiracies perpetrated by client to hide $1 million inventory from trustee .

This is a simple Chapter 7 case that has exploded into a very complicated legal case! In short, the trustee actually charged the client with committing a crime by hiding $1 million in inventory.

In the client’s response to the amended complaint, we include a counterclaim against the trustee for $1 million. So now that the issues have joined, the trustee and the client are suing for $1 million, with the trustee accusing the client of committing multiple crimes.

This case was litigated for two years and finally ended with the parties, the trustee and the client denying their claims against each other. It is a mutual rejection of the adversary’s claims. The settlement was reached after a day-long settlement conference with the assistance of a highly experienced mediator who was a recently retired federal bankruptcy judge. She was very helpful in resolving the case and I would like to thank her for all her help and insight in resolving this matter out of court. We were ready to go to court in case the mediation failed. But the judge pointed out some weaknesses in the documentary evidence. At trial, I had no idea what the trial court’s decision was.

The client had plenty of documentary evidence to prove his case, but at the same time there were discrepancies in the tax returns.

I believe there was divine intervention through the judge because she really saw both sides of the argument unbiased.

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DISCLAIMER: NONE OF THE ABOVE IS CONSIDERED LEGAL ADVICE. EACH CASE IS DIFFERENT.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented over five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803 .

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