The Claw: The Bankruptcy Provision That Can Take Back Money That Is Rightfully Yours

A claw arcade game plays a pivotal role in the classic Disney/Pixar film Toy Story. Toy aliens in the machine are in awe of the giant claw that chooses who will go and who will stay. If you have ever seen the movie, you can probably remember exactly how the aliens say “The clawwwwwwwww!” At Hanson & Payne, we have been involved in many Milwaukee area bankruptcy cases where our clients are also in awe of a claw — the clawback of funds following someone else’s bankruptcy filing. 

The Claw

If a debtor or someone you do business with declares bankruptcy, the court may order any assets the filer transferred to you within the last few months returned to the bankruptcy court so that they can be equitably distributed among all creditors. The court uses its power to claw back the money, even though it is rightfully yours. 

While this may seem unfair to you, clawback provisions were actually created with fairness in mind. They are meant to guard against the preferential treatment of certain creditors and ensure all of a bankruptcy filer’s creditors are treated fairly. 

Clawback Defenses 

If you are willing to put up a bit of a fight to keep the money or assets you have been paid from being clawed back, the Hanson & Payne team may be able to help you. There are exceptions to the clawback rule that you may be able to take advantage of. These are known as preference defenses. 

The three most common preference defenses are: (1) the contemporaneous exchange for new value, (2) the subsequent new value and (3) the ordinary course of business defenses. Hanson & Payne’s experienced bankruptcy attorneys can help you figure out if one of these exceptions, or another less common exception applies in your situation. 

1. Contemporaneous Exchange for New Value

The most common defense against a clawback is known as the contemporaneous exchange for new value defense. It applies when the payment sent to a creditor was intended by both the debtor and creditor to be a payment for some new good or service exchanged right when new assets were transferred to the creditor. 

2. Subsequent New Value

This defense is only slightly different from the previously discussed defense. In order to claim the subsequent new value defense, the creditor must have given something of value to the debtor after payment from the debtor was received.

3. Ordinary Course of Business

Most clawback actions are filed against businesses that were going about their business with no clue their customer was in financial distress. Fortunately, the ordinary course of business defense may protect businesses hit with a surprise clawback. 

The ordinary course of business defense applies when a payment subject to clawback was received in the ordinary course of business between the creditor and the debtor. To take advantage of this defense, the creditor must be able to show that its relationship with the debtor did not change in the time period leading up to the debtor’s bankruptcy filing.

Experienced Milwaukee Area Bankruptcy Attorneys You Can Trust

While the Toy Story aliens may worship the claw, the experienced bankruptcy attorneys at Hanson & Payne know the claw is something that can be controlled. We can work with you to defend against clawbacks by putting up a strong preference defense. 

Don’t hand money or other assets that are rightfully yours over to the courts without a fight. Contact Hanson & Payne to protect your interests and secure your assets.