Clawback litigation, formally called Avoidance Actions, is a type of legal recourse available to people in bankruptcy who were defrauded a Ponzi scheme. Clawback actions allow bankruptcy trustees or receivers to recover (or “claw back”) funds that were taken from them under fraudulent pretenses by the orchestrator of the scheme.
There are two major types of clawback action: fraudulent transfer actions, and preference actions.
Fraudulent Transfer Actions allow defrauded people and trustees to void “fraudulent transfers”, which are transfers made between the defrauded person and the fraudster in the years prior to filing for bankruptcy. Specifically, “fraudulent transfers” in this context refer to any transfers made to or from the fraudster with the intent to hinder, delay, or defraud a creditor or a future creditor. In the absence of provable intent, a transfer can still qualify as “constructively fraudulent” if it:
- Was made in exchange for less than its equivalent value
- Was made while the debtor was insolvent
- Was made to an insider of the debtor
- Caused the debtor to become insolvent
With a fraudulent transfer action, a defrauded person or trustee may recover any property of the fraudster’s estate that was fraudulently conveyed to a third party. Trustees may use fraudulent transfer actions to try to void transfers of funds by fraudsters and their companies to their customers, in the hopes of redistributing those funds to the people who lost their principal investments in the scheme.
Preference Actions are used by trustees regarding transfers made by the fraudster in the 90 days prior to the fraudster declaring bankruptcy. Trustees view these transfers as “preferential” and therefore unfair, and seek to remedy that by recovering the money from the recipients of those transfers within the 90-day period. The logic here is that the transfers were made when the fraudster was already insolvent, so the people who received funds from the fraudster during that time should not be able to automatically keep them (as allowing them to keep the funds simply because they happened to be the last recipients in the scheme before it collapsed would be “preferential” or unfair distribution of assets to some of the fraudster’s victims over others). The Bankruptcy Code allows bankruptcy trustees to attempt to avoid some types of transfers made during that 90-day pre-bankruptcy period through preference litigation.
Clawback Actions—whether they are Fraudulent Transfer Actions or Preference Actions—can have unintended consequences for unwitting customers of fraudulent businesses or fraudster individuals, who may stand to lose significant amounts of money. Whether you are pursuing a clawback actions or looking to defend against one, you are going to need an outstanding bankruptcy attorney by your side to make your case. NYC Bankruptcy Attorney Wayne Greenwald is here to help. Call Attorney Greenwald for a free consultation today at (212) 739-7599.