Giving Back What You Got?  Federal bankruptcy and state insolvency laws permit a bankrupt or insolvent company to “claw back” or recover payments made to investors and third parties. Most understand bankruptcy laws – but beware that all states have some kind of “insolvency laws” which is similar to bankruptcy laws but only applicable to a particular state’s proceedings. Both procedures claw back money and assets in these cases for a variety of reasons. Most important is that, if you receive money from a company or person distributing assets within a defined period of a case, you may have to “give it back.” Most started understanding clawbacks during the infamous Bernard Madoff bankruptcy cases, where close to $8 billion was recovered or brought back into the bankruptcy estate from investors and others who thought that these distributions made to them were “safely” distributed.

Why is there “clawback”? The  public policy of clawbacks is to bring money and other assets back into the bankruptcy and insolvent estates to prevent “preferences” and “fraudulent transfers” that deplete the bankruptcy or insolvent estate. These laws are geared to prevent fraud, prevent preferring one creditor or distribute to another, and to make the “end game” of resolution of these cases more equitable.  Sections 544, 547, and 548 of the Bankruptcy Code specify procedures within certain periods of time and in certain cases to bring money back to the bankrupt or insolvent case before the cases were filed with an intent to “hinder, delay or defraud creditors” or where distributions were made for less than full value of what was given (giveaways or fire sales without grounds for reasonableness). The bankruptcy code permits clawbacks as far as 90 days to one year for some, but bringing in state laws could claw back distributions of years. State insolvency laws permit clawbacks for 4 to 7 years.

Defenses to Clawback. Just because there is a demand to return a distribution or asset does not mean that it must be returned. There are defenses and, except in certain cases, the claimant must prove grounds for the clawback. These defenses can be based upon the defense of “contemporaneously received value” in the bankruptcy code (BR Code) or state laws. For example, BR Code Section 547(c)(1) allows a defense where there was good value given in exchange for the payment or “new value defense”; BR Code Section 547(c) for cases where new value remains unpaid  “ordinary course of business defense” or on account of ordinary course of business dealings between the debtor and creditor. There are also defenses based upon “good faith” and the applicable statute of limitations.

Fight It – Don’t Cave In! Contesting Elements of a Clawback Claim. Just because there is a demand for “clawback,” one should not give in to the demand. The claims can be defended and are typically settled at a percentage of the dollar claim.  Whether the demand is made from a federal or state case, creditors should retain competent and aggressive counsel to defend, negotiate, and settle these claims. Call Weiss LLP for more information.