The Oklahoma Bar Journal December 2023

So what’s a litigator to do? Give up on settling cases? Hold one’s breath for 90 days in hopes the set tlement will stick? Maybe. There are, however, some additional measures that can be incorporated into your settlement structure to reduce your 90 sleepless nights. 1) Require payment as quickly as possible so that the clock is running to get past the 90-day avoidance risk period. 2) Include a “springing release” that is not triggered until the 91st day following settle ment. This release provision should provide that the claims will not be released until 91 days 6 after receipt of payment without a bank ruptcy filing. The release provision should expressly contemplate that the original claims remain in effect and are not released. Such a pro vision provides some protec tion in a worst-case scenario where a creditor is subject to avoidance by the trustee and required to return the settle ment payment. If included, this provision would per mit the creditor to pursue a nondischargeable action (if the claims meet the neces sary bad behavior criteria discussed below). 3) Require a guaranty or direct payment from a third party. All legal and equitable inter est of a debtor in property (less certain limited enu merated exceptions) become property of the bankruptcy estate upon commence ment of a bankruptcy case. 7 Accordingly, only the debt or’s property may be recov ered in an avoidance action.

Settlement payment made by a non-debtor third party, i.e. , the individual owner of a bankrupt entity, would not be subject to avoidance since such funds would not be considered property of the estate. Such payment structure could be included by making the third party a direct party to the settle ment or a guarantor of the payments due thereunder.

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made–

(A) on or within 90 days before the date of the filing of the petition; (B) between 90 days and one year before the date of the filing of the peti tion, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if– (A) the case were a case under Chapter 7 of this title;

SECURED VERSUS UNSECURED DEBTS

As discussed, bankruptcy only discharges personal liability ( in personam liability) and does not wipe out secured interests in the property ( in rem liability) of the debtor. 8 Taking a security interest in the property of the debtor is one of the best ways to protect your settlement, especially if the settle ment involves structured pay ments over time. Beware though: Similar to monetary payments received within the 90-day period immediately before a bankruptcy filing, transfers of property of the debtor within the 90-day lookback period are also subject to avoid ance under Section 547(b). 9 This combination of payment and secured interest in property could prove particularly helpful if the creditor is concerned that the debtor is not liquid enough to support the settlement payment but has unencumbered assets that could be pledged. While uncon ventional, the settlement terms could require the debtor to pro vide a security interest in a partic ular property immediately upon settlement, with the first payment not due until the 91st day (beyond the preference period). This would allow the secured interest in the

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title. 5

As a result, settlement payments made within 90 days before the filing of a bankruptcy petition face the risk that a bankruptcy trustee may seek to avoid that transfer and require the creditor that received such payment(s) to disgorge such funds and pay them over to the trustee.

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.

12 | DECEMBER 2023

THE OKLAHOMA BAR JOURNAL