Caplin & Drysdale
Trevor W. Swett III and Jeffrey A. Liesemer
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In a bankruptcy fraudulent transfer suit, a representative of the bankruptcy estate, usually a bankruptcy trustee or a debtor-in-possession, sues individuals and business entities to unwind (or “avoid”) the fraudulent transfer, and to recover the money or property that was transferred before the debtor filed for bankruptcy. If the estate representative prevails in the suit, the net proceeds of the recovery will be distributed to the debtor’s creditors according to the payment priority scheme set forth in the Bankruptcy Code.
Former shareholders of a company that has gone into bankruptcy may find themselves on the receiving end of a fraudulent transfer suit, which may come as a rude awakening to those who participated in open transactions in public markets with no expectation that the company from which they received a payment or distribution was destined for bankruptcy. Nevertheless, former shareholders may be found legally obligated to return the sums of money paid to them. This article examines the implications and risks presented to shareholders for fraudulently transferred property, focusing in particular on one type of transaction that, under certain circumstances, may be avoided as a fraudulent transfer – the leveraged buyout.