Too Good to be True? Avoiding Clawback Lawsuits

Imagine that someone out there, perhaps a supplies or products or goods or machinery, offers you a deal. A great deal. Almost too good to be true. You take it, thinking that you have a steal of a deal. And for a while it seems that way.

And then you get sued by a trustee in bankruptcy court.

How can that be? All you did was buy something innocently and seemingly legally. There’s nothing illegal about getting a good deal. And, you have nothing to do with bankruptcy or bankruptcy court or with any trustee.

Clawback Lawsuits

It’s called a clawback lawsuit, and it happens like this:

A business or person is thinking of filing for bankruptcy, but they don’t want to lose all their stuff in bankruptcy court. So, they decide to convert their property to money–essentially, they sell their goods, often at a ridiculously and unreasonably low price, because they need to unload the items as quickly as possible so as to avoid them being taken by the bankruptcy court when they do file.

You innocently buy those goods, thinking you’re just getting a good deal.

Later, when that person or business does file for bankruptcy, the trustee sees that your business received property at a steal of a price from the bankruptcy debtor just before the bankruptcy case was filed, and the trustee wants that property back. So, the trustee sues you in what is known as a clawback lawsuit.

So now, you face the prospect of having paid for property, and losing that property to the bankruptcy trustee. You are an innocent victim in the bankruptcy debtor’s scheme to defraud the bankruptcy court.

Defenses to Clawback Suits

There are some defenses to clawback lawsuits. One is if the transaction is one that is normal in the ordinary course of your business. In other words, it is not a unique, one-off, or one time transaction, but rather, you regularly purchase goods or items from the seller and have done so in the past.

Relatively minor transactions that involve a smaller amount, are also safe.

When are you safe from clawback lawsuits? A bankruptcy court will look back 90 days before the bankruptcy filing to see if there is any irregular activity that warrants a clawback lawsuit. That time limit is extended a year for “insiders,” that is, people who work with, are family with, or have some association with the debtor/seller.

Red Flags

Be careful when buying things from other businesses, where the deal looks to be too good to be true.

You don’t have to conduct an in-depth financial analysis for everybody you do business with to make sure they’re not contemplating bankruptcy, but if something seems off, or you know that a seller may be in tough financial straits, and they’re selling items off, that should raise a red flag.

Call our West Palm Beach business litigation attorneys at Pike & Lustig to help you.

Source:

lancasteronline.com/business/local_business/daryl-hellers-atm-investors-might-be-forced-to-return-money-appointment-of-a-bankruptcy-trustee/article_6d49ca95-5561-47c1-b423-cdfec0c9c67a.html