What is a preferential transfer? Investors who withdrew money from Bernard L. Madoff Investment Securities, Inc. before the discovery of the massive alleged fraud may find themselves on the hook as the bankruptcy trustee pursues claims for the return of profits. Federal bankruptcy law allows a debtor to recover certain payments or "preferential transfers" that were made to a creditor a short time before the filing of the debtor's bankruptcy.
For example, the trustee for Bernard L. Madoff Investment Securities, Inc. sued Jeffrey M. Picower, along with investment funds and philanthropies he controlled in a complaint seeking the return of $6.7 billion paid since 1995, with at least $5 billion representing "fictitious profits" made possible by using other people's money. The trustee's complaint alleges that Picower knew about the fraud by having the Madoff firm backdate transactions to create annual profits as high as 950 percent for some accounts.
Once a trustee obtains a judgment from a preference transfer against a creditor, how would the trustee collect? The judgment is only good within the boundaries of the state that it was issued so the attorney for the trustee will likely register the judgment in the state where the judgment debtor resides. In California, a judgment from another state would be registered under the Sister State Money-Judgment Act. Then the bankruptcy trustee can use state law to go after any assets the judgment debtor owns in the state.
To register a judgment in California, the trustee may need to complete judicial council forms EJ-105 Application for Entry of Judgment on Sister-State Judgment and form EJ-110 Notice of Entry of Judgment on Sister-State Judgment. The trustee may need to attach a certified copy of the sister-state judgment to the application for entry of judgment. A declaration showing how it calculated the post-judgment interest may be required. California counties may have additional local procedures.
Once the state court enters the judgment, the trustee must serve the Notice of Entry of Judgment on the judgment debtor. Enforcement of the judgment is automatically stayed until 30 days after service of the Notice of Entry of Judgment. The judgment debtor has 30 days to challenge the judgment. Sometimes the challenge is that the sister-state court lacked jurisdiction against the judgment debtor.
If the judgment debtor does not challenge the judgment, then the trustee can take whatever steps are necessary to collect on the judgment, such as a writ of execution from the US Marshal's. The trustee may do an asset investigation, or place liens on property.
