Preference Actions and Fraudulent Transfer Actions

Los Angeles attorney defends debtors against claims of improper transfers 

Preference actions and fraudulent transfer actions are procedures to get back assets paid to creditors or allegedly wrongfully moved from debtor estates prior to bankruptcy filing. At the Law Offices of Michael Jay Berger in Beverly Hills, California, we defend debtors against allegations of such transfers. Our law firm has successfully represented individuals and businesses in bankruptcy cases for nearly 45 years. 

What is a preference action under federal bankruptcy law?

A preference is a transfer of property, before filing a bankruptcy petition, that is alleged to unfairly favor one creditor over others. A preference action is an adversary proceeding by the trustee to recover (“claw back”) such a payment. The trustee must show that the preferential transfer was to or for the benefit of a creditor for an already existing obligation and that it allowed the creditor to receive more than they would have in a Chapter 7 liquidation. The time frame, or look-back period, for preference actions is generally 90 days prior to the bankruptcy filing, but it can be extended to one year for payments made to insiders, such as relatives, business partners or corporate directors and officers.

Fraudulent transfer claims in California bankruptcy court

A fraudulent transfer is an allegedly improper pre-bankruptcy movement of property beyond the reach of creditors. The bankruptcy code allows the trustee to challenge any transfer of the debtor’s property made on or within two years before the date of the filing of the petition. Upon sufficient proof, the trustee can unwind those transfers and bring the assets back into the bankruptcy estate.

There are two categories of fraudulent transfers that can be unwound:

• Intentional misconduct — This means the debtor knowingly transfers assets to a third party in order to intentionally hinder, delay or defraud creditors.
• Constructive fraud — This occurs when a debtor transfers assets for less than their reasonably equivalent value, if the debtor is insolvent or would become insolvent due to the transfer. Such transfers unfairly deplete the bankruptcy estate even without malicious intent.

As an experienced California Chapter 11 bankruptcy attorney, I will investigate the facts of your matter and counsel you about possible defenses to claims of fraudulent transfers. 

How claw-back litigation works in preference and fraudulent transaction cases

Claw-back litigation is the general term for a bankruptcy trustee using adversary proceedings to recover payments made or monies transferred before bankruptcy filings. A trustee typically does the following:

• Identifies transfers made within the relevant look-back periods.
• Sends demand letters seeking voluntary return of funds.
• Files an adversary proceeding if the recipient refuses.
• Opposes defenses such as good faith, ordinary course or new value.
• Recovers the property or its value for the estate.

We effectively represent our debtors in such proceedings, raising all appropriate defenses. 

Common defenses to preference actions

Defenses to a preference action typically focus on showing that even though the transfer met the technical elements of a preference, it did not distort creditor equality. These defenses are the most common:

• Contemporaneous exchange for new value — The creditor gave goods, services or credit at the same time as the alleged preferential transfer.
• Ordinary course of business — The debt was incurred and the payment was made in the ordinary course of dealings between the parties, or according to ordinary business terms in the relevant industry.
• Subsequent new value — The creditor, after receiving the payment, provided additional goods or services that replenished the bankruptcy estate.

Courts evaluate each defense on its own merits, often using detailed payment histories, industry norms and evidence of the parties’ intent. 

Common defenses to fraudulent transfer actions

A person accused of being the recipient of a fraudulent transfer can raise one of the following defenses:

• Good-faith transfer for value — This requires showing that money, goods, services or satisfaction of a debt was given in exchange for the transfer and that the transferee had no reason to know that the debtor was insolvent or was acting to hinder creditors.
• Lack of intent — For actual fraud claims, a transferee may argue that the debtor did not intend to hinder, delay or defraud creditors; that the transaction had a legitimate business purpose; and that there were no “badges of fraud,” such as insider transfers or inadequate consideration.
• Reasonably equivalent value — For constructive fraudulent transfer claims, the transferee can defend by showing the debtor received reasonably equivalent value for what was transferred and the transaction was economically fair at the time it occurred.

The courts evaluate each defense based on the transaction’s context, financial data, and the parties’ knowledge.

Contact an experienced California bankruptcy firm for help

The Law Offices of Michael Jay Berger in Beverly Hills defends individuals and businesses who have filed for bankruptcy in California against claims of wrongful transfer of assets. Our firm will develop a strategic and tailored defense that takes into account the specific factors in your case. For a consultation, call our firm at 310-271-6223 or contact us online.