Ouch! That Really Hurts! Bankruptcy “Clawbacks” – Preferences and Fraudulent Transfers

1. Ouch! That Really Hurts! Bankruptcy “Clawbacks” – Preferences and Fraudulent Transfers By Michael R. Stewart, Stephen M. Mertz and Colin F. Dougherty First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

2. Clawbacks • What is a “clawback”? • Why are we hearing about clawbacks so much lately? • Could I be liable? • How can I protect my transaction? Can I make it “bullet proof”? First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

3. Elements of a Preference Claim • What is a “preference?” • 11 U.S.C. § 547(b) provides: • “Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property – (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made – (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if – (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

4. Elements of a Preference Claim • Was there a transfer? • Transfer is defined by 11 U.S.C. § 101(54) as “(i) the creation of a lien, (ii) the retention of title as a security interest, (iii) the foreclosure of a debtor’s equity of redemption, and (iv) every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property.” • Property is not defined by the bankruptcy code. Courts consider, among other things, whether, but for the transfer, the property would have been part of the bankruptcy estate. See 11 U.S.C. § 541. First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

5. Elements of a Preference Claim • Was the transfer to or for the benefit of the creditor? • Creditor is defined by 11 U.S.C. § 101(10) as, among other things, “an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” • Was the transfer on account of an antecedent debt? • A debt is antecedent if it was incurred prior to a transfer. • Did the transfer occur within the prescribed time period? • On or within 90 days before the petition date for non-insiders. • Look back period for insiders is one year. “Insider” is defined at 11 U.S.C. § 101(31). First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

6. Elements of a Preference Claim • Did the creditor receive more than it would have in a Chapter 7? • Often depends on whether a creditor is secured or unsecured. • Was the debtor insolvent? • A debtor is insolvent when its debts exceed the value of its property, excluding exempt property and property transferred with intent to hinder, delay or defraud creditors. See 11 U.S.C. § 101(32). • There is a rebuttable presumption that the debtor is insolvent in the 90 days prior to bankruptcy. See 11 U.S.C. § 547(f). First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

7. Preference Defenses • Contemporaneous Exchange of New Value • 11 U.S.C. § 547(c)(1) • Ordinary Course • 11 U.S.C. § 547(c)(2) • Creation of a Security Interest Securing New Value • 11 U.S.C. § 547(c)(3) • Subsequent New Value • 11 U.S.C. § 547(c)(4) • Not a Party from which the Transfer can be Recovered • 11 U.S.C. § 550 First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

8. Special Cases • Earmarking • Mere Conduit • Disallowance of claim – See 11 U.S.C. § 502(d) • Foreclosure Sale First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

9. Fraudulent Transfers • 11 U.S.C. § 548 • Uniform Fraudulent Transfer Act • Other Statutes First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

10. Bankruptcy Code Section 548(a)(1) 11 U.S.C. 548 (a) (1) provides: The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily— (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or (B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; (II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or (IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

11. The Uniform Fraudulent Transfer Act • Adopted in various forms by 43 states and the District of Columbia. • Similar to 11 U.S.C § 548, but includes (among others) the following differences: • 4-6 year look back period depending on applicable state law. • Transfers to insiders can be avoided without a showing of actual or constructive fraud, but also contains certain protections for insiders not found in the bankruptcy code. • Differentiates between present and future creditors for purposes of standing. First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

12. Fraudulent Transfer Defenses • Statutes of Limitation • 11 U.S.C. § 546(a) and 11 U.S.C. §§ 548(a) and (e) • Varies by state under UFTA (usually 4-6 years from transfer) • Value and Good Faith • 11 U.S.C. § 548(c) • Recipients of Charitable Transfers • 11 U.S.C. § 548(a)(2) • Limitation on Liability • 11 U.S.C. § 550 • UFTA • Section 8 First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

13. Potential Areas of Risk • Ponzi Schemes • Leveraged Buyouts • Upstream (and Downstream) Guaranties • Foreclosure Sales • Distressed Sellers First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

14. Due Diligence, Structuring Considerations and Documentation Techniques • Documentation Techniques • Savings Clauses • Representations and Warranties • Structuring Considerations • Earmarking • Corporate Structure Changes • Solvency, Viability and Valuation Analysis (Appraisals? Opinions?) • Due Diligence • Determining Reasonably Equivalent Value • Recognizing and Accepting Risk First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.

15. Questions & Answers If you would like a copy of the PowerPoint Presentation or any reference materials, please visit the Lecture Series section of the NCS website at www.firstam.com/ncs An audio/video replay of the presentation will also be posted to our website at www.firstam.com/ncs CLE Credits are not available in all 50 states – to find out if credits for this webinar are available in your state, please contact your local NCS account representative First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.