For most non-bankruptcy attorneys, their first experience in bankruptcy court could very likely begin with a call from an agitated and bewildered client asking for help to understand why they have been sued by a trustee in a bankruptcy case filed by one of its customers. Even worse, the client’s incredulity may only be exacerbated by the fact 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 bankruptcy trustees and Chapter 11 debtors-in-possession (and for 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 chief source of recovery for any bankruptcy estate—is the availability to the trustee of avoidance actions. These are legal actions to recover money or property that was transferred by the debtor before the bankruptcy case was filed. There are several types of avoidance actions that are covered by the Bankruptcy Code that can be pursued by a trustee. The most common of these are preferences and fraudulent transfers. In this article we will provide a top-level summary of the legal standards for recovering on avoidance actions, and the defenses and strategies available to companies or individuals that are the unfortunate targets of such litigation.
