United States Bankruptcy law is known as a debtor-friendly law wherein debtors can utilize bankruptcy to reorganize and emerge out of debt. It also allows debtors to reject certain contracts that may be unfavorable. At the same time, bankruptcy is only allowed for the “honest debtor.” As such, certain transactions may be voidable under bankruptcy law. Those transactions are voidable as clawback transactions. When maritime business crosses with United States bankruptcy law, debtors should be careful about certain matters.
Clawbacks: Voidable Transfers
Upon a debtor filing for bankruptcy, such debtor benefits from the automatic stay, which stays all collection action against the debtor. At the same time, a bankruptcy estate is created for the benefit of the creditors. Included in that bankruptcy estate is clawback transactions, which is when a bankruptcy trustee voids preferential and fraudulent transfers to the debtor. Preferential transfers, or preferences are generally voidable when they occur within 90 days prior to the debtor filing for bankruptcy. To illustrate, suppose a debtor has $100 in his pocket. The debtor owes $100 to A, $100 to B, $100 to C, and $100 to D. The debtor goes and takes that $100 and repays A. When this occurs, the debtor preferred A over B, C, and D. Hence a preference. In that instance, the trustee can void such a payment and require A to disgorge the payment or claw the payment back (clawback) and place the $100 in the bankruptcy estate. In bankruptcy parlance, this is known as voiding a preference.
New Value Defense
When facing a trustee to avoid a preference, a defense is that the creditor added “new value” to the bankrupt debtor and therefore the preference should not be avoided. For instance, a creditor provides fuel for a fleet of cruise ships on a regular basis. In exchange for the fuel, the cruise ship company pays the creditor in cash. This relationship continues up until the debtor files for bankruptcy, including an exchange of fuel for cash 90 days prior to the cruise ship company filing for bankruptcy. As a result, the trustee seeks to avoid the preference, which, in this case, means that the trustee wants to compel the creditor to disgorge the cash from the creditor fuel supplier and place it into the bankruptcy estate.
In such an instance, the creditor fuel supplier can use the new value defense, also known as the subsequent extension of new value defense. To meet the new value defense, the debt must be unsecured and unpaid. It must be unsecured so that a creditor cannot have a stronger position during the bankruptcy process. Bankruptcy Courts have recognized that such payment, made in the ordinary course of business, can be considered extending new value to the debtor, thereby allowing the creditor to defend against the clawback action.
If you are involved in the maritime business, partner with a law firm that understands your business. Contact the Kolodny law firm, experienced and knowledgeable maritime lawyers.
(image courtesy of Erwan Hesry)