Supreme Court rules bankruptcy estate takes priority over fraudulent transfer claims

The Supreme Court ruled that assets restored to a debtor following a fraudulent transfer cancellation automatically become part of the bankruptcy estate if insolvency proceedings commence before individual enforcement actions conclude.

In a case decided May 20, a creditor successfully sued to cancel a land sale and restore ownership to the original debtor, subsequently initiating a forced auction. However, bankruptcy proceedings were declared for the debtor's inheritance before the auction finalized. The court-appointed trustee continued the sale, using the proceeds to prioritize tax debts over the creditor's claim.

The high court determined that while the restored property initially serves as collateral for the creditor who filed the cancellation suit, a bankruptcy declaration shifts its status to common security for all creditors within the bankruptcy estate. This ruling clarifies that even creditors who acquired their claims after the initial fraudulent transfer are entitled to exercise rights under the bankruptcy procedure regarding these assets once collective proceedings begin.

Consequently, the state was not liable to return funds to the individual creditor. The court found that national tax claims incurred before the bankruptcy declaration qualify as estate claims under Article 473 of the Debtor Rehabilitation and Bankruptcy Act. As such, they must be repaid from the liquidation proceeds ahead of general bankruptcy claims, regardless of the prior fraudulent transfer cancellation judgment.