Supreme Court rules bankruptcy trustee avoidance claims do not bind third parties

The Supreme Court ruled on April 9 that an avoidance claim filed by a bankruptcy trustee under the Debtor Rehabilitation and Bankruptcy Act does not affect third parties, establishing that the legal effect of such claims is relative to the bankruptcy estate and the counterparty.

Limiting the effect of avoidance claims protects transaction safety while allowing the trustee to restore the debtor's general assets for the benefit of creditors, the court stated. It rejected the view that the scope of third parties should be restricted only to those who acquired new rights based on the legal effects of the avoided act.

When a counterparty returns assets or their value following an avoidance claim, any personal or material collateral held against a third party is also restored to its original state.

A creditor entitled to dividends who fails to receive their share due to another creditor receiving it erroneously may file an unjust enrichment claim, regardless of whether an objection to the distribution table was filed or if the table has been finalized.

In cases involving joint mortgages on multiple properties where some belong to the debtor and others to a third-party guarantor, auction proceeds from the debtor's property must be distributed to the joint mortgagee first, with any deficiency then covered by proceeds from the guarantor's property.