The bankruptcy court provides a forum for the prosecution of a variety of lawsuits. The most common complaints filed by or on behalf of a bankruptcy estate are for the avoidance and recovery of preferential transfers and fraudulent conveyances (under both the Bankruptcy Code and state law).
A preference is a transfer (usually a payment) that is made:
The idea behind a preference is that it is not fair for some parties to escape a bankruptcy unscathed (or less scathed) just because the company decided to "prefer" them over, or pay them instead of, other parties before the bankruptcy filing. Therefore, the parties who were preferred should return the payments for the benefit of all creditors, who would then receive a pro rata distribution that includes those additional payments that have come into the bankruptcy estate.
There are a variety of defenses to preference actions. For instance, a defendant’s liability may be significantly reduced or altogether eliminated if (1) the debt was incurred and payment made in the ordinary course of business or financial affairs of the company and the defendant (the "ordinary course" defense), or (2) after the payment was made, the defendant provided goods or services to the company (the "new value" defense). The strength of a defendant’s defenses depends upon the facts of its particular case.
A transfer of property by a debtor may be avoided as a fraudulent transfer. There are two types of fraud: (i) actual fraud, where the transfer was made with the intent to hinder, delay, or defraud a creditor; and (ii) constructive fraud, where a debtor received less than reasonably equivalent value in exchange for the transfer and either was insolvent at the time of the transfer or was rendered insolvent by the transfer. Under the Bankruptcy Code, the "look-back" period for such transfers is two years before the commencement of the case. A defendant can avail itself of several well-recognized defenses, including disputing the allegation of insolvency.
Other kinds of litigation in bankruptcy include breach of fiduciary duty, corporate governance disputes, lender liability, recharacterization of debt to equity, subordination, claims objections, and non-dischargeability.
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