Clawback Suits: Getting Sued In Bankruptcy When You’re Not In Bankruptcy
Neither you nor your business is filing for bankruptcy. You don’t offhand know anybody who is filing for bankruptcy. So how is it that you or your business has just been served with a lawsuit from a bankruptcy trustee? How did you get involved in a bankruptcy lawsuit without seemingly doing anything wrong?
Clawback Lawsuits: What are They?
The main reason why businesses end up in lawsuits in bankruptcy court when they’re not filing for bankruptcy is because of what are known as clawback lawsuits, sometimes also called preference lawsuits.
Often, when people or businesses file for bankruptcy, they make desperate, last ditch attempts to sell their possessions, often for much less than what that stuff is actually worth. They do this in an effort to keep all that stuff from going to their creditors.
On the other end of that is you, the person or business that unknowingly bought that person or business’ stuff for what you thought was a great deal.
The bankruptcy trustee, figuring out what has been done, now can sue anybody who purchased or received the debtor’s property, to get that property back from the purchasers.
Fair or Not?
Clawback lawsuits seem very unfair to people and businesses, because you purchased the property for what you thought was a great price, with no idea that the seller was doing anything wrong, and you never would have purchased the property had you known it was an attempt to evade bankruptcy.
Now, a bankruptcy trustee wants to take the stuff back that you in good faith purchased, and you have a full blown lawsuit in federal bankruptcy court on your hands, for seemingly doing nothing wrong.
Defenses to Clawback Suits
There are some defenses to clawback lawsuits, such as if the transaction was just an ordinary course of business transaction. You can show that the transfer of goods for money is a transfer that ordinarily happens, whether in your business or in your industry.
Sometimes if you paid fair value for the property and actually didn’t get that great of a deal, this can be a defense to a clawback lawsuit. This may involve having to prove the value of the items that you purchased.
There is also a defense for transfers that are so minor, that they are considered to be inconsequential. The limit is between $600-$6,425, with the higher number being business and the lower being consumer related debts or transactions.
Timing for Clawback Suits
As a general rule, the trustee can sue you for clawback if the transaction in question happened 90 days before filing for bankruptcy—however, that time is extended to one year for “insiders,” which include family or business associates. That means that if you have a business partner who is having financial troubles, and you suspect that he or she may be contemplating bankruptcy, be very careful about you or your business buying property that he or she is selling.
Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today if you have a question about a legal issue or related to any state or federal business laws.