Although a debtor corporation would be bound by a release given before bankruptcy, the trustee is not barred from suing on a claim that could be raised by an actual creditor under Section 544(b), according to Bankruptcy Judge Joan N. Feeney of Boston.
Before bankruptcy, several companies and their owners were in disputes that culminated in a settlement where they granted mutual releases and divided up ownership. After one of the companies filed bankruptcy, the trustee filed suit to set aside fraudulent transfers under state law.
If brought on behalf of the debtor corporation, the fraudulent transfer claims would have been among those given up by the pre-bankruptcy mutual releases.
As an affirmative defense, the defendants argued that the fraudulent transfer claims were released. The trustee filed and won a motion asking Judge Feeney to rule that the defense was unavailable.
In her opinion on July 20, Judge Feeney said that the creditors of the debtor corporation were not bound by the settlement because they were not parties to it. Since the trustee was suing under state law based on a claim that could be raised by an actual creditor, the release did not bar the trustee’s suit, Judge Feeney said.