Posted in Uncategorized
By Tony Liu, Founder and Principal Business Trial Attorney
In Summary:
When a business collapses in fraud, a court-appointed receiver, trustee, or creditor may try to “claw back” payments your company received—even if you delivered goods or services in good faith. In California, these claims are usually brought under the Uniform Voidable Transactions Act (UVTA) and related equitable theories. The good news: vendors and contractors have powerful defenses (e.g., value given, ordinary course, good faith) if they keep clean records and respond strategically.
Why Clawbacks Happen (and Why They Target Innocent Vendors)
When an enterprise is exposed as fraudulent or becomes insolvent, the law allows certain transfers to be unwound so victims can be repaid more fairly. That includes routine vendor invoices, referral payouts, or distributions made shortly before a collapse. It can feel unfair, especially if you’re a legitimate supplier, but the policy goal is to collect and redistribute funds to harmed investors or creditors.
Typical Players in a Clawback
- Receiver/Bankruptcy Trustee: Court-appointed party tasked with recovering assets.
- Creditors/Investors: Push for recovery to increase the estate.
- Vendors/Contractors: Often receive demand letters because they were paid.
UVTA 101: The Legal Hooks Behind Clawbacks in California
California’s UVTA lets a plaintiff challenge transfers that are:
- Actually fraudulent: Made with “intent to hinder, delay, or defraud” creditors.
- Constructively fraudulent: Debtor was insolvent (or became insolvent) and didn’t receive reasonably equivalent value in exchange.
Look-Back Periods & Timing
- 4 years is the standard UVTA look-back (with certain discovery extensions).
- Bankruptcy and federal receiverships can involve different timelines; always check the specific order or statute at issue.
What Counts as “Value”?
- Goods delivered, services performed, or other concrete benefits typically count as value.
- Payments that are purely profit, commissions tied to securities raises, or gratuitous transfers are more vulnerable.
Common Defenses That Actually Work
Vendors aren’t helpless. These defenses often carry the day when documented well:
1. Good Faith + For Value
If you acted in good faith and provided reasonably equivalent value, UVTA allows you to keep payments to that extent—even if the payer was running a fraud.
2. Ordinary Course of Business
Regular, arm’s-length invoices paid on typical terms (e.g., Net 30) are stronger than one-off, back-dated, or padded invoices. Show your normal pricing, lead times, and delivery documentation.
3. Subsequent New Value
If you received a payment but later provided additional goods/services after that payment, that “new value” can offset exposure.
4. Change of Position
If you materially relied on the payment (e.g., paid your own suppliers) and can’t be restored without hardship, some equitable doctrines may help—especially where records prove reliance.
High-Risk vs. Low-Risk Payments (From a Clawback Lens)
Higher Risk
- “Commission” or “profit-share” payouts untethered to a delivered product/service
- Large round-number payments with vague memos
- Payments routed through cash, apps, or personal accounts
- Back-dated or missing invoices; mismatched delivery dates
Lower Risk
- Standard invoices with SKU-level detail
- Proof of delivery, work logs, and consistent pricing
- Payments through normal business accounts on customary terms
- Clear contract language and change orders
Your 10-Step Response Plan to a Clawback Demand Letter
- Don’t ignore it. Calendar the deadline and respond professionally.
- Preserve records. Lock down contracts, invoices, POs, emails, chats, ACH confirmations, delivery receipts.
- Map the transfers. Build a spreadsheet tying each payment to specific goods/services and delivery dates.
- Show value. Highlight unit prices, time entries, deliverables, and acceptance/usage by the customer.
- Prove ordinary course. Compare the challenged transactions to your historic dealings with the same customer.
- Identify setoffs/new value. List later deliveries after each payment.
- Check insurance. Some policies (E&O, management liability) may cover defense costs.
- Align your narrative. No speculation. Stick to factual business records.
- Engage counsel early. A targeted response often avoids suit or narrows claims.
- Be settlement-smart. If you must settle, negotiate payment plans or credits rather than headline cash.
Paperwork That Saves You (Create This Now, Not Later)
Core Documents
- Master Service Agreement (MSA) or Terms & Conditions
- Statement(s) of Work or Purchase Orders
- Dated, itemized invoices; delivery receipts; time logs
- Email approvals/change orders; acceptance notes
Policy Add-Ons
- No cash policy for B2B invoices; require traceable rails
- Consistent Net 15/30/45 terms; avoid last-minute deviations
- Centralized contract repository and invoice numbering system
- Periodic customer credit/solvency checks for large orders
Special Situations
If You Were a “Referral” or “Finder”
Payments tied to raising investor money face heavy scrutiny and may be characterized as non-value or unlawful if tied to unregistered broker activity. Expect tougher clawback posture.
When a “Finder” Becomes an Unregistered Broker (and How to Stay Compliant)
If You Were a Subcontractor
Show the chain of value—what you delivered to the prime, and what the prime delivered to the end customer. The clearer the chain, the stronger your defense.
If You’re Still Owed Money
File a timely claim in any receivership/bankruptcy. Offsetting receivables can change the economics of a settlement discussion.
Frequently Asked Questions
1. Can a receiver really take back money I earned fairly?
They can try, but UVTA defenses (good faith, for value, ordinary course) often protect legitimate vendor payments. Strong documentation is key.
2. How far back can clawbacks reach?
UVTA commonly uses a four-year look-back (with some discovery extensions). Bankruptcy rules or court orders can alter timelines—have counsel confirm the applicable window.
3. Are commissions always at risk?
Not always, but success-based commissions—especially tied to investment fundraising—are higher risk. They’re harder to defend as “reasonably equivalent value.”
4. What if my company passed the funds along to suppliers?
That can support good faith and change-of-position arguments, but you’ll need proof—vendor invoices, bank statements, and payment confirmations.
5. Do I need a lawyer if I just have a demand letter (no lawsuit yet)?
Yes. Early counsel can often defuse claims with a focused document package and legal defenses—saving you from litigation.
6. If I delivered more after I got paid, does that help?
Often yes. Subsequent new value can reduce or eliminate exposure for the earlier payment.
Conclusion: Organize, Explain, and Negotiate from Strength
Clawback demands feel personal, but they’re mostly about paper and proof. When you demonstrate value, ordinary course, and good faith, cleanly and quickly, you shift the conversation from accusation to accounting.
If you’ve received a clawback demand or expect one, Focus Law can help you audit records, assert UVTA defenses, and negotiate practical resolutions that keep your business moving. Contact us for a confidential consultation—we’ll turn your paperwork into your best defense.
