Inside: An increasingly important defense to clawback actions

Section 546(e) of the Bankruptcy Code has evolved into an extraordinarily effective defense in avoidance action litigation

Perhaps the most potent power vested in a bankruptcy trustee is the authority to bring “avoidance” or “clawback” litigation, most commonly actions to recover “preferences” and “fraudulent conveyances” under Sections 544, 547 and 548 of the Bankruptcy Code.

Section 544 authorizes the trustee to avoid transfers that would have been avoidable by a creditor under applicable state fraudulent conveyance law, which typically will permit the trustee to pursue actual and constructive fraudulent transfers made four years or more prior to bankruptcy.

Case law under 546(e)

Mindful of the legislative history, numerous lower courts have declined to extend 546(e) protection to transactions and recipients where avoidance would not lead to systemic disorder and/or ripple effects in the financial markets. With but one exception, however: in recent years, at least six federal courts of appeal have shielded transfers from recovery without requiring any evidence that such transfers would implicate the risks identified in the legislative history.

Contributing Author

author image

Thomas C. Wolford

Thomas C. Wolford is a partner and bankruptcy attorney at Neal, Gerber & Eisenberg LLP (Chicago). He regularly appears before bankruptcy and appellate courts in...

Bio and more articles

Join the Conversation

Advertisement. Closing in 15 seconds.