How to Recover Attorney’s Fees in Preference Action

Defending against a preference action is challenging, especially more so when your client is an innocent bystander to such a draconian rule.   Unfortunately too, recovering attorney’s fees from a successful defense is not in your favor either.

Attorney’s fees are generally not recoverable for successfully defending against the trustee’s preference action because a preference action is based wholly in bankruptcy law, is unique to bankruptcy and not an action under contract law (which gives effect to attorney’s fees clause in contract).   Alvarado v. Walsh (In re LCO Enters., Inc.), 180 B.R. 567, 570-71 (9th Cir. BAP 1995), aff’d, 105 F.3d 665 (9th Cir. 1997).

Attorneys CAN recover fees in defending a preference action IF:  (cue suspense music)

(1) a statute provides for the prevailing litigant to recoup attorney fees;

(2) a contract provision allows for attorney fees in litigation on the contract, but only when the decision is based on state law [note: preference action is federal law];

(3) when a litigant purposely disobeys a court order;

(4) when a losing litigant has acted in bad faith; and

(5) when a litigant recovers a common fund that benefits others.

Alyeska Pipeline Service Co. v. Wilderness Society421 U.S. 240 (1975),

One Reply to How to Recover Attorney’s Fees in Preference Action

  1. Be careful about the “contract” provision for fees. The attys fees language in the contract must cover the litigation at hand. A preference action is not litigation “between the parties.” Having said that, a clause could say “including fighting off a preference action.” Even then, as I think of it, I don’t think two parties to a contract can decide that the trustee (i.e., the estate) has to pay if he loses a preference action.

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