The Oklahoma Bar Journal December 2023

C ONGRATULATIONS ON REACHING THAT STELLAR SETTLEMENT in your hard fought litigation. Your client is relieved to have it all behind them and is looking for ward to finally getting paid after all these years (and attorney fees). Then the call comes: “I got some sort of notice in the mail about a bankruptcy. What does this mean? What about our settlement? Am I going to get paid?” Oftentimes (depending on, among other factors, the nature of the underlying claims in the lawsuit, the structure of the settlement and the amount of time between settlement payment and bankruptcy filing) that stellar settlement will be discharged, and the obligated party is now untethered from all payment obligations despite your masterfully drafted settlement agreement.

settlement payment still faces the risk of being treated as a prefer ential transfer and being clawed back into the bankruptcy estate for pro rata distribution to all creditors (yes, your client would actually have to return the payments made to them). Settlement payments are subject to avoidance under 11 U.S.C. §547. Pursuant to Section 547: (b) … the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under Subsection (c), avoid any trans fer of an interest of the debtor in property–

both secure and unsecured debt. However, “liens flow through bankruptcy,” 2 meaning that if the debtor fails to pay on a debt secured by collateral, the creditor retains its rights to enforce the lien and proceed in rem to liquidate the collateral and apply the proceeds to satisfy the debt. 3 Entities (other than individ uals) do not receive a discharge in bankruptcy. 4 Rather, business entities can use the bankruptcy system to reorganize or liquidate assets to pay creditors. AVOIDANCE ACTIONS: PREFERENTIAL TRANSFERS The ideal settlement involves a single prompt lump sum pay ment before any bankruptcy filing is likely to occur. However, such

So what can we as litigators do to plan for the worst when nego tiating settlements? This article is intended to help navigate and reduce potential risks associated with a subsequent unexpected bankruptcy filing. Individual debtors are enti tled to a discharge of all personal liability for certain types of debts unless the debtor can be shown to have engaged in one of the various enumerated types of bad behavior (more to come on this) that war rant denial of their bankruptcy discharge. 1 If a debt is discharged, that means the individual debtor is relieved from all personal liability to repay such debt. This applies to THE BANKRUPTCY DISCHARGE

Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff.

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THE OKLAHOMA BAR JOURNAL