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Avoidance Actions

Lakelaw can both prosecute and defend avoidance actions in bankruptcy. Frequently, these actions are called “claw back” actions. Why? A bankruptcy trustee or a creditors’ committee sometimes has the right to get back money which was paid to you. It could be that you received a preference. In other words, you received money or property within 90 days of the filing of the debtor’s bankruptcy case and as a result you received more than other creditors. Or if you are an insider, like a friend, family or relative, you received money or property within a year before the debtor filed his or her bankruptcy case, the debtor was insolvent, and you received more than you would have otherwise. The idea behind avoidance actions or claw-backs is that in bankruptcy, creditors are supposed to be treated equally. This principle is called the principle of “equality of distribution.”

Another type of avoidance action is a complaint to avoid a fraudulent transfer. Here, the trustee or debtor in possession or creditor’s committee might allege that you received something of greater value than you were entitled to; that you didn’t give anything or enough back for it; that the debtor was insolvent or that the debtor made the transfer to hinder delay or defraud creditors. Maybe you received a gift from your grandfather before he filed his bankruptcy case. Maybe you received a payout as a dividend from a corporation before it went into chapter 11.

It seems unfair that you have to give back money to a trustee which to which you were legitimately entitled. If you get sued in such a case, you’re going to have to defend it. Lakelaw can help you and protect you against avoidance actions.

Frequently asked questions about Avoidance Actions

What is the basis of an avoidance action?

The Bankruptcy Code gives a trustee, a debtor in possession, a creditor’s committee or a liquidating agent for a debtor the right to recover avoidable transfers under the Bankruptcy Code.

What’s an avoidable transfer?

In layman’s terms, this includes a preferential transfer, a fraudulent transfer or an improper post-petition transfer by the debtor.

Is there a statute of limitations?

The statute of limitations for an avoidance action is two years from the date that debtor files bankruptcy or one year after the first trustee is appointed or elected if this happens before the end two years from the date the case is filed. Fraudulent transfers must be filed within this period even though the “look-back” period can be longer. Under Illinois law, the look-back period is 4 years. Under Wisconsin law, the look-back period is 6 years.

Are there defenses?

The plaintiff has to prove his case. This is not always easy. There are many valid and useful defenses to a complaint to avoid a preferential transaction. The burden of proof on fraud can be very high. Just because someone sues you doesn’t mean that you are going to lose.

Isn’t litigation expensive?

Yes, litigation is expensive. But paying out a judgment is even more expensive. Defending bankruptcy litigation could be very important to you. Select your bankruptcy litigation counsel wisely and establish a budget for the work. Do a litigation risk analysis so you can make informed decisions about how to defend bankruptcy litigation you may face.

Case Study

Lakelaw regularly represents LW, a meat wholesaler. Companies which buy meat from LW have from time to time filed bankruptcy cases in chapter 11. They have demanded millions of dollars in preference recoveries from LW. In the eight years we have been representing LW, it has not yet paid one cent in damages. We establish, using sophisticated statistical tools that payments LW gets from its vendors are in the ordinary course of business or in exchange for new value. These are perfect defenses and so far, not one creditor has ever sought to pursue a claim against LW to trial.