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What is a Clawback Lawsuit and What if You’re Served With One?


Let’s say that your business gets a really great deal, on inventory, or a product, or  piece of machinery, or a vehicle. It’s a really great deal—but you know that the seller is going through some financial troubles, so it makes sense that the seller may want to generate some quick cash. Or maybe you have no idea who the seller is, but you don’t care because it’s such a great deal.

Regardless, you do what any good business person would do: you buy the item(s) at a very favorable sale price.

And then it happens: you get served with a lawsuit from a bankruptcy court. How can this happen? You did nothing wrong, and you certainly have nothing to do with any bankruptcy court or case.

You’ve Been Served With a Clawback Lawsuit

This is often the scenario that happens with what are known as clawback suits.

Often what happens when people are filing for bankruptcy or just before they file for bankruptcy, they want to get some quick cash, and avoid property from being taken from them by a bankruptcy court. If a bankruptcy court takes their property, they get nothing. But if they get you to buy that property for pennies on the dollar, they at least get some cash out of the deal, which can be used and, presumably, never detected by the bankruptcy court.

This is, of course, illegal—but many people don’t know that, or they don’t care. And you, as the buyer of that property, may have no idea what the seller is doing. You just think you’re getting a great deal.

If and when the bankruptcy court does find out what happened, they can go to you, as the buyer and get back—or claw back—the property that you purchased from the seller. These lawsuits are also sometimes referred to as preference lawsuits.

What to Do?

From your standpoint, this whole thing seems unfair because you (may have) had no idea what the seller was doing. You never would have bought the property had you known.

In some cases, you can just give back the property you purchased to the bankruptcy trustee—although there may or may not be any money to repay you for what you paid to purchase it. And if you received hard money, and the trustee is trying to claw back that money, in most cases, you’ll just lose the money.

There are some defenses to clawback lawsuits. In some cases you can argue that the transaction was a normal, in-the-course-of-business transaction, where fair compensation was paid. And, there are also limits or exceptions if the transaction had less than a set value (usually under about $6,500 for businesses, but less with consumers).

Although in the bankruptcy court, clawback cases are business and commercial litigation. Let us help you. Call the West Palm Beach business litigation attorneys at Pike & Lustig today.



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