August 11, 2023


When an investor in a litigation finance company was sued by the trustee appointed in the company’s former owners’ chapter 7 bankruptcy case to recover repayment of the investor’s loan to the company as a “preferential transfer,” she was referred to MPS bankruptcy and restructuring partner Tim Brink by another firm client.

Having represented numerous targets of preference, fraudulent transfer, and other “avoidance” claims in bankruptcy courts across the country, MPS bankruptcy and restructuring lawyers are very familiar with the many defenses available to defendants. After reviewing the loan documents and correspondence concerning the loan repayment, which included an excerpt from an allegedly confidential settlement agreement between the company and its former and new owners, the MPS team determined that traditional Bankruptcy Code-based defenses like “ordinary course of business,” “contemporaneous exchange for new value” and “subsequent new value” were unlikely to be available. After careful consideration, they concluded that a non-statutory defense – “earmarking” – might apply and opted to pursue it instead.

The team quickly worked to gather proof that the company’s former owners had no right to the loan repayment, but rather that it was intended by the company and its former and new owners to be paid to the investor. To do this, subpoenas were served on the company and the former and new owners to obtain the settlement agreement. When they responded that the settlement agreement was confidential and filed under seal in the parties’ state court lawsuit, MPS lawyers independently accessed the case records, determined that the settlement agreement was not filed under seal, and obtained a complete copy of the settlement agreement, which clearly indicated that the loan repayment was “earmarked” to pay the company’s loan from the investor.

Armed with the complete settlement agreement, the MPS team was able to persuade the trustee to dismiss her lawsuit with prejudice based on the investor’s earmarking defense. As a result, the client avoided not only paying any settlement amount but also incurring any additional attorneys’ fees and expenses to prepare for trial on the trustee’s complaint.

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