Avoiding Avoidance Actions in Bankruptcy
For most non-bankruptcy attorneys, their first experience in bankruptcy court could most likely begin with a call from an agitated and bewildered client asking for help in figuring out why he was being sued by a trustee in a bankruptcy case. bankruptcy filed by one of his clients. Worse still, the customer’s disbelief can only be exacerbated by the fact that this same customer still owes your client money! This is when a basic working knowledge of avoidance actions in bankruptcy cases would be extremely helpful.
For trustees in bankruptcy and debtors in possession of Chapter 11 (and for the purposes of this article we will only refer to trustees as the terms in this context are interchangeable) an important aspect of any bankruptcy case – indeed a primary source recovery for any bankruptcy estate – is the availability for the trustee of actions for annulment. These are legal actions to recover money or property that was transferred by the debtor before filing for bankruptcy. There are several types of annulment actions which are covered by the Bankruptcy Code and which can be brought by a trustee. The most common are preferences and fraudulent transfers. In this article, we will provide a high-level summary of the legal standards for recovering rescission actions, as well as the defenses and strategies available to businesses or individuals who are the unfortunate targets of such litigation.