Meaning
Clawback provision identifies transactions where the debtor was insolvent or became insolvent as a result of the exchange. A section 548 fraudulent transfer governs the recovery of assets to the bankruptcy estate and stops applying after the two-year look-back window closes. The intent of the rule is to prevent the hiding of assets from legitimate creditors.
Value Exchange
Determination of reasonably equivalent value is the central audit performed during the litigation. If a section 548 fraudulent transfer is suspected, the court compares the market price of the asset to the actual consideration received.
Insolvency Test
Proof of financial distress at the time of the transfer is required for the claim to succeed. A section 548 fraudulent transfer can be constructive, meaning no actual intent to defraud is needed if the numbers show a lack of capital. The cost of defending these claims can exceed the value of the original transaction.
Recovery Mechanism
Returning the property to the estate increases the total pool available for distribution to all claimants. A section 548 fraudulent transfer action often targets insiders who received bonuses or dividends while the company was failing. Demonstrated rates of recovery from these actions vary based on the liquidity of the transferred assets.
If the assets have been sold to a good faith purchaser, the trustee may seek the monetary equivalent instead.
