Losing money in a Ponzi Scheme is bad enough. Being forced to file for bankruptcy relief because of these losses is even worse. But how about getting your bankruptcy discharge, and then being sued by the bankruptcy trustee overseeing the failed Ponzi business?
That’s exactly what happened to one of our clients last month.
Agape World, Inc. Lands in Bankruptcy Because of Ponzi Fraud
In February 2009, several creditors forced Agape World into an involuntary Chapter 7 bankruptcy in the Central Islip Bankruptcy Court, here on Long Island in the Eastern District of New York.
I previously wrote that Ken Silverman was Appointed Chapter 7 Trustee in Agape World Case . Around that time, it was discovered that Agape president Nicholas Cosmo perpetrated a Ponzi scheme involving several hundred million dollars.
Many Long Island consumers lost their life savings after falling victim to his scheme. As a result, many of them filed bankruptcy cases themselves.
We recently represented one of them and filed his Chapter 7 bankruptcy petition last year. The unfortunate debtor lost hundreds of thousands of dollars. Our client’s bankruptcy case itself was unremarkable and was routinely processed and closed as a no-asset case. The client got his discharge last month.
Out of the blue, Ken Silverman , the Agape World trustee, brought an adversary proceeding  in the Agape World bankruptcy case against our client. He alleged that our client had received some distributions from Agape shortly before Agape was put into an involuntary bankruptcy, and that these payments now had to be returned to the Agape bankruptcy estate under several different legal theories.
We had not even scheduled Agape as a creditor in our client’s bankruptcy as we had no idea that there was any potential liability to them.
Trustee Recognizes Bankruptcy Discharge
In response to the adversary proceeding, we contacted an attorney in the trustee’s office and explained the circumstances of our client’s bankruptcy filing. It appeared that the trustee was totally unaware of our client’s prior bankruptcy as we had not included Agape or its trustee as a potential creditor.
We were concerned that the trustee would nevertheless seek to go forward with the adversary proceeding because the debtor had not listed Agape in the schedule of creditors.
However, we advised the trustee that failure to schedule a creditor in a no-asset Chapter 7 case does not, in and by itself, prevent the debtor from discharging that debt. I previously wrote about Inadvertently-Omitted Creditors in Chapter 7 Bankruptcy Cases .
Much to the trustee’s credit, he acknowledged that any possible liability of our client to Agape was discharged by virtue of the prior bankruptcy, and within 24 hours of advising his office of our client’s bankruptcy discharge, he withdrew the adversary proceeding.