{"id":32640,"date":"2008-03-26T16:35:41","date_gmt":"2008-03-26T21:35:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/pre-bankruptcy-planning-for-plaintiffs.html"},"modified":"2008-03-26T16:35:41","modified_gmt":"2008-03-26T21:35:41","slug":"pre-bankruptcy-planning-for-plaintiffs","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/finance\/pre-bankruptcy-planning-for-plaintiffs.html","title":{"rendered":"Pre-Bankruptcy Planning for Plaintiffs"},"content":{"rendered":"<section class=\"fl-gutenberg-byline\">\n    <div class=\"fl-gutenberg-byline-content\">\n                    <p><em>This article was edited and reviewed by <a href=\"https:\/\/www.findlaw.com\/company\/our-team.html\" rel=\"noopener\">FindLaw Attorney Writers<\/a><\/em><\/p>\n\n                | Last reviewed\n        <time>\n                            May 15, 2026\n                    <\/time>\n    <\/div>\n\n    \n    <details class=\"fl-gutenberg-byline-toggle fl-gutenberg-byline-legally-reviewed\">\n        <summary>\n            <i class=\"fl-gutenberg-byline-icon\" aria-hidden=\"true\"><\/i>\n            Legally Reviewed\n        <\/summary>\n\n        <div class=\"fl-gutenberg-byline-toggle-content\">\n            <p><em>This article has been written and reviewed for legal accuracy, clarity, and style by <a href=\"https:\/\/www.findlaw.com\/company\/our-team.html\" rel=\"noopener\">FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with <a href=\"https:\/\/www.findlaw.com\/company\/company-history\/editorial-policy.html\" rel=\"noopener\">our editorial standards<\/a>.<\/em><\/p>\n\n        <\/div>\n    <\/details>\n\n    <details class=\"fl-gutenberg-byline-toggle fl-gutenberg-byline-fast-checked\">\n        <summary>\n            <i class=\"fl-gutenberg-byline-icon\" aria-hidden=\"true\"><\/i>\n            Fact-Checked\n        <\/summary>\n\n        <div class=\"fl-gutenberg-byline-toggle-content\">\n            <p><em>The last updated date refers to the last time this article was reviewed by FindLaw or one of our <a href=\"https:\/\/www.findlaw.com\/company\/our-team\/contributing-authors.html\" rel=\"noopener\">contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please <a href=\"https:\/\/lawyers.findlaw.com\/?fli=bylinelink\" rel=\"noopener\">contact an attorney in your area<\/a>.<\/em><\/p>\n\n        <\/div>\n    <\/details>\n<\/section>\n\n\n\n<div class=\"rxbodyfield\" xmlns:o=\"urn:www.microsoft.com\/office\" xmlns:st1=\"urn:www.microsoft.com\/smarttags\" xmlns:w=\"urn:www.microsoft.com\/word\" xmlns:x=\"urn:www.microsoft.com\/excel\"><p>Often litigation successes turn to profitless nightmares with the filing of a bankruptcy. A multi-million dollar judgment or a composite 20-year settlement agreement may be worthless against a defendant under bankruptcy protection, even if the defendant is completely solvent. In fact, because a worthless judgment or settlement still require the expenditures of costs and attorney&#39;s fees, it might be less costly to abandon rather than pursue litigation, even if the defendant is undeniably liable.<\/p><p>The filing of a bankruptcy petition stays all litigation pending an &quot;orderly&quot; resolution of the claims against the debtor. It often readjusts the pay-out to creditors (including a plaintiff) by ordering payment of only a portion of their claims or even of none at all and discharges the remaining debt. It may even permit the defendant to &quot;reject&quot; an ongoing settlement agreement as an executory contract.<\/p><p>Many litigation attorneys admit they are ignorant of the effects their actions may have in a later bankruptcy. Therefore, a plaintiff should insist that competent bankruptcy counsel review settlement documents and documents filed with the court.<\/p><p>Is the defendant a candidate? It is imperative to determine whether a defendant will likely frustrate a hard won victory with a bankruptcy. There are certain telltale signs which indicate bankruptcy may be imminent. The following are behaviors and circumstances which should be questioned:<\/p><ul type=\"disc\"><li>Is the defendant also a defendant in other lawsuits?<\/li><li>Has the defendant stopped making payments, or made payments in abnormal amounts, to its ordinary trade creditors?<\/li><li>Is the defendant actively marketing itself as a going, concern?<\/li><li>Even if the debtor is a large, solid-looking company, is it subject to a substantial number of parasitic leases?<\/li><li>Is the defendant&#39;s counsel a rec-ognized bankruptcy attorney?<\/li><\/ul><p>Remember that some defendant entities will not even begin to explore the bankruptcy option until a looming judgment or unperformable settlement agreement forces them. The best tactic for the plaintiff is to anticipate bankruptcy before the defendant does.<\/p><p><b>The complaint.<\/b> If properly drafted, the pleading filed to initiate litigation may protect the ultimate judgment from the effects of bankruptcy. However, a poorly drafted complaint can be destructive. For instance, one judicial interpretation of a series of interrelated court decisions is that a judgment obtained by default before bankruptcy requires a bankruptcy court to accept as true all facts pleaded in the complaint. If the complaint filed in the original action did not contain facts sufficient to form the basis of a cause of action, the default judgment cannot be relied upon for anything except the amount of the claim.<\/p><p>For instance, while a default judgment based upon fraud may be excepted from a bankruptcy discharge, the fraud issue may be subject to relitigation if the elements of fraud are not expressly identified in the complaint in the original lawsuit.<\/p><p><b>Settlements.<\/b> The way a lawsuit is settled also dictates whether a com-promise will benefit the plaintiff after the defendant&#39;s bankruptcy. A settlement agreement can be thwarted by the avoidance powers of a trustee in bankruptcy (who, in a case under Chapter 11 of the Bankruptcy Code, is the defendant itself). If the defendant pays money under a settlement agreement, that payment may be avoidable &#8211; and the court may order the money returned to the trustee &#8211; if a bankruptcy is filed within 90 days after the payment. Moreover, if under the settlement agreement the defendant consented to the attachment and perfection of a security interest on its assets, this security interest can be avoided in the same way.<\/p><p>A safeguard against the avoidance trapdoor is to obtain a judicial determination (i.e., a consent to judgment) of the facts underlying the plaintiff&#39;s cause of action. In the alternative the plaintiff should secure a simple declaration from the defendant that monies were owed on a note or contract, or that certain tortious acts were committed. The benefits of this form of settlement are twofold. First, a judicial determination of the facts precludes the defendant &#8211; or a successor trustee in bankruptcy &#8211; from contesting the issues arising underlying the judgment. Second, the entry of judgment in many jurisdictions becomes a lien on real property interests owned by the defendant in the judicial district in which judgment was entered.<\/p><p>Another safe guard is patience. Many transactions are avoidable as preferential if they occur within 90 days before the defendant filed a bankruptcy petition. A structured settlement imposing a lien on the debtor&#39;s assets but not requiring payment until after the 90th day after perfection reduces the avoidance risk. However, it is critical that the location and status of the defendant&#39;s major encumbered assets be monitored closely. Although a lien will often take priority over the subsequent transferee of an asset, hens do not always survive transfers. And even a surviving lien on an asset is worthless if the asset cannot be located.<\/p><p>Competent bankruptcy counsel is aware of all these tactics and will seek to prevent them when able. Moreover, a defendant contemplating a Chapter 7 bankruptcy, in which all the defendant&#39;s assets would be transferred to and liquidated by a third-party trustee, might use this knowledge to gain leverage in cer-tain circumstances.<\/p><p>The bankruptcy process adds a series of obstacles and pitfalls which can frustrate the efforts of the unwary plaintiff. Without proper planning, even the ostensibly successful plaintiff may have obtained only a Pyrrhic victory, an unenforceable piece of paper called a judgment.<\/p><p>For more information on this issue, contact <u>Alan M. Grochal<\/u> at 410\/752-9715, <u>Robert A. Gordon<\/u> at 410\/752-9749 or <u>Adam Hiller<\/u> at 410\/752-9739.<\/p><\/div>","protected":false},"excerpt":{"rendered":"<p>Often litigation successes turn to profitless nightmares with the filing of a bankruptcy. A multi-million dollar judgment or a composite 20-year settlement agreement may be worthless against a defendant under bankruptcy protection, even if the &#8230;<\/p>\n","protected":false},"template":"","meta":{"_acf_changed":false,"_stopmodifiedupdate":true,"_modified_date":"","_cloudinary_featured_overwrite":false},"corporate_categories":[6480,6479],"class_list":["post-32640","corporate","type-corporate","status-publish","hentry","corporate_categories-finance__bankruptcy","corporate_categories-finance"],"acf":[],"_links":{"self":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate\/32640","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate"}],"about":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/types\/corporate"}],"wp:attachment":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/media?parent=32640"}],"wp:term":[{"taxonomy":"corporate_categories","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_categories?post=32640"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}