What To Do If Your Business Is Sued To Claw Back Property

Let’s say that one day your business gets a great deal. Maybe a steal on a great piece of equipment, or a vehicle, or some other item. You think you’ve hit the jackpot. Then, out of nowhere, you get sued by a bankruptcy trustee, who is saying something about a “clawback.” What is that, and what can your business do if you are sued by a bankruptcy trustee?

What is a Clawback Suit?

Without getting into the details of bankruptcy, as a general rule, people or businesses that file for bankruptcy can’t just sell off their stuff to avoid losing it in bankruptcy. But that’s exactly what many people do. Rather than lose that giant expensive piece of machinery for nothing, the debtor would rather sell it for pennies on the dollar, and get some money for it. But that’s bankruptcy fraud.

If you are the buyer of that piece of property you may have had no idea that’s what the seller is doing. The problem is that even though you were an innocent purchaser, the bankruptcy trustee is going to try to recover-or “clawback”- the property that the debtor sold. That makes you or your business the subject of a lawsuit by a bankruptcy trustee.

Do You Have to Give Back the Property?

Whether you have to give back the property to the trustee largely depends on whether you knew or should have known that the transfer was fraudulent.

If you knew a company was in financial trouble and was selling off all its property for pennies on the dollar, you may have a problem. Certainly, if you had any kind of “special relationship” with the debtor, this could make it harder to defend a lawsuit. A special relationship would be if the debtor who sold you the property was a friend, family, current or former employee, or a business associate.

You also will have to show that you provided some level of value for what you purchased. You must have paid a reasonably equivalent value for the property. Obviously that can differ, and appraisals may need to be made to see if you did in fact pay reasonable value.

If You’re Not the Direct Purchaser

Sometimes, you or your business doesn’t receive the property directly from the bankruptcy debtor. Sometimes, property is transferred a few times before it gets to you, the ultimate and current purchaser. The good news is that the farther you get from the bankruptcy debtor, the easier it becomes to defend a clawback lawsuit.

Usually, if you did not take or purchase the property directly from the bankruptcy debtor, all you will have to show is good faith—that is, that you had no idea where the property was from or that it was or could be the subject of a bankruptcy.

Call the West Palm Beach business litigation lawyers at Pike & Lustig for help today if your business is sued in any kind of lawsuit.