Clawback Suits: Getting Sued In Bankruptcy When You're Not in Bankruptcy

Jan 2, 2022


Welcome to Baytowne Reporting, the leading source of comprehensive legal information. In this article, we will delve into the intriguing world of clawback suits and explore what happens when you find yourself being sued in bankruptcy, even if you're not currently in bankruptcy.

Understanding Clawback Suits

Clawback suits, also referred to as preference actions or fraudulent conveyance actions, arise when a bankruptcy trustee attempts to recover certain payments or transfers made by a debtor prior to filing for bankruptcy. The trustee seeks to reclaim these funds or assets for the benefit of the bankruptcy estate and its creditors.

These suits are based on specific provisions of the bankruptcy code that aim to prevent preferential treatment of some creditors over others, or the fraudulent transfer of assets to protect them from being included in the bankruptcy estate.

Preference Actions

In a preference action, the trustee seeks to reverse certain payments made by the debtor to a creditor shortly before filing for bankruptcy. The idea is to undo any transactions that may have given an unfair advantage to one creditor at the expense of others.

To establish a preference, the trustee must show that the payment was made to a creditor, on account of an antecedent debt, while the debtor was insolvent, and within a specific preference period. These preference periods differ based on whether the creditor is an "insider" or an "ordinary" creditor.

It is important to note that preference actions can become a complex legal battle, requiring detailed analysis of the transactions and circumstances surrounding the payments made before bankruptcy. Consulting with an experienced bankruptcy attorney is crucial.

Fraudulent Conveyance Actions

Fraudulent conveyance actions focus on the transfer of assets made by a debtor with the intent to hinder, delay, or defraud creditors. These transfers aim to remove assets from the reach of the bankruptcy estate.

There are two categories of fraudulent conveyance actions: actual fraud and constructive fraud. Actual fraud occurs when the debtor intentionally transfers assets with the purpose of defrauding creditors. Constructive fraud, on the other hand, refers to transfers made without the debtor receiving reasonably equivalent value while being insolvent, or that leave the debtor with unreasonably small capital.

Getting Sued in Bankruptcy Without Being Bankrupt

One might wonder why someone would be sued in bankruptcy if they are not actually bankrupt. There are several scenarios where this can occur:

  1. Transfers Made to Insiders: If you have made payments or transfers to insiders, such as family members or business associates, shortly before filing for bankruptcy, those individuals could be subject to a clawback suit. This is because transactions with insiders are subject to stricter scrutiny due to the closer relationship between the parties involved.
  2. Preferential Transfers: If you have received payments from a debtor who later filed for bankruptcy, you might find yourself being sued in a preference action. Even if you were not aware of the debtor's financial situation at the time of the payments, the trustee may attempt to recover those funds.
  3. Fraudulent Transfers: In cases where you acquired assets from a debtor who later filed for bankruptcy, and these assets were transferred with the intent to defraud creditors, you could be targeted in a fraudulent conveyance action. Your knowledge or lack thereof regarding the debtor's intentions may become a significant factor in these proceedings.

What to Do If You Are Being Sued in Bankruptcy

If you find yourself being sued in bankruptcy, it is crucial to take the following steps:

1. Consult with a Bankruptcy Attorney

To navigate the complexities of a clawback suit and protect your rights, seek immediate assistance from a knowledgeable bankruptcy attorney. They can provide expert guidance tailored to your specific circumstances.

2. Gather Relevant Documentation

Compile all relevant documentation, including contracts, invoices, payment receipts, and any communication with the debtor. These records will help your attorney build a strong defense and identify any possible defenses or exemptions that may apply.

3. Evaluate Potential Defenses

Your attorney will assess the specifics of your case and identify potential defenses. These may include the "ordinary course of business" defense for preference actions, lack of knowledge or involvement in fraudulent transfers, or any applicable statutory exemptions.

4. Assess Settlement Options

Before proceeding to trial, explore the possibility of settlement with the bankruptcy trustee. Negotiations can often lead to mutually agreeable resolutions that minimize legal costs and potential risks.

5. Prepare for Litigation

If a settlement cannot be reached, your attorney will prepare for litigation. This involves developing a strong legal strategy, gathering evidence, and presenting a compelling case in court.


Clawback suits present complex legal challenges for individuals who find themselves being sued in bankruptcy, even though they are not in bankruptcy themselves. Understanding the intricacies of preference actions and fraudulent conveyance actions is crucial to protect your interests and mount a successful defense.

Remember, when facing a clawback suit, consult with a qualified bankruptcy attorney to ensure you have the expertise and guidance necessary to navigate this intricate area of the law. At Baytowne Reporting, we are committed to providing detailed insights into legal issues, helping you stay informed and empowered.

Andrew Murray
This is a very interesting read! I never knew that you could be sued in bankruptcy even if you're not bankrupt. Informative article!
Nov 8, 2023