Lesson 54: Defenses to Avoidance Actions
Explaining bankruptcy law fundamentals, key provisions of the Bankruptcy Code, and practical insights for effective filings.
In the context of bankruptcy law, avoidance actions allow the trustee to recover certain transfers made before the bankruptcy filing. However, there are several defenses that can be raised against these actions.
1. Ordinary Course of Business Defense
Under 11 U.S.C. § 547(c)(2), a transfer may not be avoided if it was made in the ordinary course of business or financial affairs between the debtor and the transferee. This defense is commonly raised in preference actions.
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2. New Value Defense
Under 11 U.S.C. § 547(c)(4), a transfer may not be avoided if, after the transfer, the transferee gave new value to or for the benefit of the debtor.
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3. Subsequent Advance Defense
Similar to the new value defense, this defense applies when the transferee gave subsequent advances or credit to the debtor in exchange for the preferential transfer.
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4. Contemporaneous Exchange for New Value
Under 11 U.S.C. § 547(c)(1), a transfer is protected if it was intended by both the debtor and the creditor to be a contemporaneous exchange for new value and was in fact a substantially contemporaneous exchange.
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5. Enabling Loan Defense
Under 11 U.S.C. § 547(c)(3), a transfer is not avoidable if it was a security interest given in exchange for new value given to enable the debtor to acquire property.
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6. Fraudulent Transfer Defenses
Under 11 U.S.C. § 548, the trustee can avoid transfers made with actual intent to hinder, delay, or defraud creditors. However, the transferee may defend against avoidance by demonstrating that the transfer was for reasonably equivalent value and made in good faith.
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7. Additional Defenses
Other potential defenses include statutory limitations, equitable subordination, and claims of setoff.
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