A New Obstacle to Debt Collection in New York State

On November 8, 2021, New York Governor Kathy Hochul signed into law the Consumer Credit Fairness Act (the “Act”).  How does the Act change consumer debt collection?

  • With some exceptions, the Act shortens a creditor’s time to file suit based on a consumer credit transaction, from 6 years to 3 years.
  • After that 3 year period expires, a payment or affirmation of the debt will not revive or extend the time to sue.
  • A collection lawsuit based on a consumer credit transaction must include:
    • a copy of the agreement for the debt, or a copy of the charge-off statement for a revolving credit account;
    • an “Additional Notice of Lawsuit” provided by the Act; and
    • a stamped, unsealed envelope addressed to the defendant at the same address where he is served.  The court will mail that notice.  If that notice is returned to the court as undeliverable and the defendant does not respond to the lawsuit, default judgment will not be entered.
  • As a result:
    • Creditors willing to settle still may need to file a lawsuit to preserve their claims.
    • A debtor who does not receive mail where he can be served, and who cannot be served where he receives mail, could become judgment-proof.

Who does the Act affect?  In addition to collection agencies and banks, the Act affects small businesses like home improvement contractors and others who sell on credit to consumers.

            In light of these and other legal developments, creditors need competent counsel to pursue their claims effectively.



Preparation Is Key For a Small Business Bankruptcy Reorganization

Remember George Zimmer’s famous line? “You’re gonna like the way you look. I guarantee it.”  On August 2, 2020, the parent company of Men’s Wearhouse filed for bankruptcy.  The men’s clothier very well may emerge successfully from bankruptcy.  The company gained the support of a majority of its lenders.  The company has obtained financing to get through the case.  The company recognizes that it must compete in a rapidly evolving retail environment.  No doubt, the company has taken other steps to prepare for its bankruptcy reorganization.

What are the prospects of a small business in bankruptcy?  Proper planning and preparation are key to a successful reorganization.  Here are a few considerations for pre-bankruptcy planning:

  • Should the company seek a global, out-of-court workout with its creditors so as to facilitate, or avoid altogether, a bankruptcy filing?
  • What are the consequences if the company does not file a bankruptcy case?
  • Can the business survive if its trade debt is eliminated?  If not, what other changes may be necessary?
  • How will the business stay afloat for the next 60-90 days?
  • Can the company find an investor or competitor that might buy, or buy into, the company if it were sold free and clear of all liens, claims and encumbrances?
  • Would the closure of weak performing store locations, and escaping those leases, help the business to survive and thrive?
  • Which vendors provide goods or services so critical that the company should seek permission from the bankruptcy court to pay them in full?

With careful planning and preparation, a small business can reorganize successfully, at less expense, and with less stress and uncertainty.

New Jersey’s Streamlined Business Reinstatement and Dissolution Program – Salvation at Last!

Every year in New Jersey, legally formed businesses must file a report and pay a fee to the State.  This allows businesses to maintain their legal status.  If a business does not file and pay for two consecutive years and is notified, the State may revoke its status.  As a result, the business can lose the legal powers conferred upon it, including:

  • the right to conduct its business;
  • the right to sue in court; and
  • the exclusive right to use its business name.

A revoked business may have difficulty obtaining financing.  The revocation, itself, could constitute a default under current financing agreements.  A revoked business may encounter difficulties in a sale, merger or acquisition, too.  Currently, there are approximately 370,000 inactive or revoked business entities in New Jersey.

Now, the good news: from March 1, 2020 through June 15, 2020, New Jersey will offer a streamlined process for revoked businesses to either reinstate their legal authority to operate or properly end their operations.  This process will require payment of a one-time $500 fee (plus a convenience or credit card processing fee), and completion of an online application.

The streamlined process promises to:

  • avoid the need (and cost) to apply for tax clearance;
  • avoid the cost of multiple past due annual reports and other fees that likely would exceed the one-time $500 fee;
  • offer expedited processing: one business day to reinstate or dissolve; and
  • provide dissolving entities with definitive closure of the business.

The State’s business registry program and the public at large will benefit as businesses update their filings and return to compliance.

Don’t Cry Over Spilled Milk! Borden Dairy Files For Bankruptcy Protection.

For years, Americans have been turning to alternative “milks”–such as soy milk, coconut milk and nut milks–and away from dairy milk.  Sales of dairy milk plummeted.  Thousands of dairy farms have gone out of business.  In a sour twist, while sales dropped, the cost of raw milk rose.  The Borden Dairy Company, a 163 year old milk producer, found itself in the cross-hairs of this phenomenon and saddled with too much debt.

In an effort to reorganize, on January 5, 2020, Borden filed for bankruptcy relief.  On the same day, Borden asked the bankruptcy court for permission to pay the pre-bankruptcy claims of its “critical vendors.”  Borden wanted the unfettered right to:

  • Designate which creditors provide goods or services that are necessary for Borden’s continued operation and that it cannot readily replace or buy from another vendor;
  • Pay up to the full amount owed to those creditors; and
  • Leave the remaining unsecured creditors to recover possibly pennies on the dollar at some later time, if ever.

Three days later, the bankruptcy court granted Borden’s “first day motion” on an interim basis, and with some limitations.  Now may begin a stampede of creditors to convince Borden that they should be designated as “critical vendors.”

The creditors that fail in this pursuit could try to challenge the entry of a final “critical vendor” order.  After all, the full payment to some, but not all, creditors goes against the Bankruptcy Code’s general scheme of treating like creditors equally.

Unsecured creditors also may evaluate their right to assert a claim under Section 503(b)(9) of the Bankruptcy Code.  That statute prioritizes certain claims for “the value of any goods received by the debtor within 20 days before [the bankruptcy was filed] … [if] sold to the debtor in the ordinary course of [the] debtor’s business.”  That priority designation can enhance a creditor’s distribution and would not require Borden’s approval.

Creditors should not ignore their rights, or ignore the case.  As the “first day” motion practice demonstrates, the bankruptcy court can decide significant matters quickly and without the input of all stakeholders.

Small Business Debtors Rejoice: The New, Streamlined Chapter 11 Bankruptcy Case – Part 1

For decades, members of Congress have claimed to be the saviors of small businesses.  At the same time, Congress created obstacles for those same businesses when seeking relief from their creditors.

Case in point: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).  BAPCPA added administrative hurdles for small businesses seeking to reorganize their finances.  In addition to the demands placed on big companies filing for bankruptcy, BAPCPA required small business debtors to file additional financial disclosures and to make an additional appearance.  Those extra demands placed considerable stress on small businesses already struggling with a diminished workforce and operational challenges.

Why did Congress make life so hard for small businesses?  Some in Congress believed that, because creditors would not invest the necessary resources to supervise the small business bankruptcy reorganization, Congress needed to implement “a variety of … enforcement mechanisms designed to weed out small business debtors who are not likely to reorganize.”  H.R. Rep. No. 109–31, at 19 (2005).  Inevitably, those enforcement tools destroyed small businesses that otherwise would have reorganized.  The collateral damage likely included lost jobs, vacant commercial space and frustrated customers, suppliers and landlords.

Fast forward to 2019.  Congress worked closely with bankruptcy experts and revamped the rules governing small business reorganizations.  The result was the Small Business Reorganization Act of 2019 (“SBRA”), codified in new subchapter V of chapter 11 of the Bankruptcy Code, which becomes effective in February 2020 and is available to business debtors with total debts up to $2,725,625.

The SBRA case borrows some features of a chapter 13 bankruptcy case.  As background, in a typical chapter 13 case, the debtor proposes a chapter 13 plan and makes monthly plan payments to the chapter 13 trustee.  If the chapter 13 plan commits all of the debtor’s disposable income for the plan’s 3 to 5 year term to pay unsecured creditors, the bankruptcy court can confirm the plan over the objections of creditors and the trustee.

In contrast, in a typical, non-SBRA chapter 11 bankruptcy case, the plan proponent (often, the debtor) must solicit votes from creditors to accept the chapter 11 plan.  The bankruptcy court cannot confirm a non-SBRA chapter 11 plan unless at least one class of impaired claims votes to accept the plan (an impaired claim is a claim that, under the plan, will not be satisfied in accordance with the contract terms).  Plan acceptance requires the affirmative vote of creditors holding at least two-thirds in dollar amount and more than one-half in number of allowed claims in that class.  Attorneys can spend many hours trying to gather votes from creditors, only to come up short when a creditor demands more, or does not return a telephone call, or is too large or too busy to keep track of balloting forms.

In my next post, I will share nine significant benefits that the SBRA offers to the small business debtor as an alternative to a traditional chapter 11 or chapter 13 case.

The New, Streamlined Chapter 11 Bankruptcy Case — Part 2: Nine Significant Benefits of the Small Business Reorganization Act of 2019

In my last post, I discussed the new Small Business Reorganization Act of 2019 (“SBRA”), which will allow a small business debtor to reorganize in a streamlined chapter 11 bankruptcy case.  The SBRA offers the following benefits to the debtor:


  • Like a chapter 13 debtor, the SBRA debtor does not need to solicit votes from creditors to support its plan, which will reduce fees and aggravation.


  • Unless the bankruptcy court orders otherwise, the SBRA case will not have a creditors’ committee.  Because the debtor-in-bankruptcy is typically responsible for the fees of the creditors’ committee’s attorneys and accountants, as well as the debtor’s own professional fees, no committee means less expense for the debtor.


  • The bankruptcy court can confirm the SBRA plan over the objections of creditors provided that the plan does not “discriminate unfairly,” and is “fair and equitable,” with respect to each class of impaired claims or interests that have not accepted the plan.


  • The SBRA eliminates the “absolute priority rule” and permits a shareholder to retain ownership of the debtor business without the need to pay unsecured creditors more through the plan than the business’s projected disposable income (and the plan must not discriminate unfairly, and must be fair and equitable).


  • Like a chapter 13 trustee, the SBRA trustee would collect periodic payments from the debtor and make cash distributions to creditors, but cannot sell the debtor’s assets (in contrast, a chapter 7 trustee may sell the debtor’s non-exempt assets to pay creditors).


  • Unlike a chapter 13 plan, the SBRA plan can modify the rights of a creditor whose claim is secured only by the debtor’s primary residence, provided that the underlying loan was used primarily in connection with the debtor’s small business and not primarily to acquire that property.  This provision may allow the debtor to strip down a partially secured mortgage on his primary residence and discharge the balance of the loan.


  • “Means testing” under Bankruptcy Code section 707(b)(2) does not apply to the SBRA debtor.


  • In a typical chapter 11 case, administrative priority claims (such as trade debts or professional fees arising during a bankruptcy case) must be paid, in full, on the plan’s effective date.  In the SBRA case, an administrative claim can be paid over time through the plan.  This can help the cash-flow-challenged debtor to avoid a default on the first day of its reorganization.  In addition, the payment of an administrative claim through the plan may reduce payments to other creditors.


  • Unless the bankruptcy court orders otherwise, the SBRA debtor can avoid filing a disclosure statement, which will save it considerable time and professional fees.


As debtors’ attorneys discover the benefits of the SBRA, small business chapter 11 bankruptcy filings likely will increase.  As a result, creditors should prepare for this wave of filings, understand the limits of the SBRA and take steps to protect their interests.

Will Merchants Charge Consumers for Using Visa and MasterCard Branded Cards?

For several years, Visa and MasterCard prohibited merchants from surcharging consumers for using their branded cards. After all, if Visa permitted merchants to surcharge consumers, but MasterCard did not, consumers would choose MasterCard over Visa. As a result, merchants absorbed the card fees, or, more likely, built the cost into the price paid by consumers. Meanwhile, consumers had no price incentive to choose between Visa or MasterCard. These rules insulated Visa and MasterCard from competitive pressure to lower their fees – at least, temporarily.

Several merchants brought a class action against Visa, MasterCard and their member banks (the “Defendants”). The merchants claimed that these rules prevented them from steering consumers to more cost-effective payment methods, illegally insulating the Defendants from competition.

A proposed settlement of the class action would provide a $6 billion fund for merchants and others. In addition, Visa and MasterCard would permit merchants to surcharge consumers who use Visa and MasterCard branded credit cards.

But wait – didn’t merchants already build the card surcharge into the cost of their products?

Not missing this detail, on February 4, 2013, New Jersey’s Senate Commerce Committee will consider a bill (S2533, same as A3758) that would prohibit “retail mercantile establishments from imposing surcharges on consumer credit card purchases.”

If state laws prevent merchants from exercising the rights promised them under the settlement proposal, will they reject it and demand a bigger settlement fund from the Defendants?  Stay tuned….

How to Prevent, or Deal With, a Preference Lawsuit

In my last article, I considered the possibility of a bankruptcy trustee suing to recover a “preferential transfer.” Preference lawsuits are very common in large bankruptcy cases, and reach many unsuspecting individuals and businesses. Here are a few strategies to help prevent (or deal with) a preference lawsuit:

1. Do not extend much credit to a customer before confirming its creditworthiness. Your due diligence may avoid a credit sale that otherwise could lead to a preference lawsuit (or the more obvious result: nonpayment).

2. Take and perfect a security interest in the goods that you sell. If you can be made whole by repossessing the goods, such that the payment will not improve your position, the payment may not be recoverable as a preference.

3. Determine if you have a defense, the most common of which being:

a. The “contemporaneous exchange” defense – e.g., a C.O.D. sale.

b. The “ordinary course of business” defense – did the debtor incur, in the ordinary course of its business, the debt for which the debtor made the payment, and either make the payment in the ordinary course of its and your business or financial affairs, or according to ordinary business terms? Said differently, was the debt, the payment and the surrounding events typical or unusual for all parties involved?

c. The “subsequent new value” defense – after the debtor made the payment to you, did you provide more goods or services?

(each defense may depend on other factors and require complex analyses not discussed here)

4. Seek a properly worded guaranty, and indemnification, from a third party capable of protecting your claim.

These strategies might not guarantee a favorable outcome, but they are a good starting point to protect yourself.

Being Preferred Is Not Always a Good Thing

What if, immediately after a customer pays you for a service you provided, the customer files for bankruptcy relief? You might consider yourself fortunate for not being one of the customer’s other creditors, who might have to wait years before they recover possibly pennies on the dollar.  But before you celebrate, take note: the bankruptcy estate could demand that you repay the money that the customer paid, even if there was no dispute concerning the quality of your services.

Why should you have to return any money?  Subject to certain exceptions, a bankruptcy trustee may seek to “avoid,” or recover, so-called “preferential transfers” if the debtor made payment to a creditor:

•   on account of a debt owed by the debtor before such transfer was made (such as a payment made on credit);

•   on or within 90 days before the filing of the bankruptcy;

•   while the debtor was insolvent (which is presumed during that 90-day period); and

•   enabling the creditor to receive more than the creditor would receive if the bankruptcy case were a liquidation, and if the payment had not otherwise been made.

The rationale behind a preference action is that a creditor should not be “preferred” over other creditors; by bringing into the bankruptcy estate the monies paid to preferred creditors, the funds can be redistributed to all creditors. This might sound fair, especially if a “preferred” creditor was paid ahead of other creditors only because it threatened the debtor’s business or harassed its employees with aggressive collection tactics. But not all creditors fit this mold. For example, a creditor may get paid quickly because it offers a discount for early payment, or is the only remaining supplier willing to sell to the debtor.

Either way, a preference lawsuit could spell disaster for a business if it must return a large preference payment.

Watch for my next article, in which I will discuss strategies to prevent, or favorably settle, a preference lawsuit.

New Jersey’s Consumer Fraud Act – What’s a Consumer?

Picture this: a company, Onyx Acceptance, makes a “guaranteed reservation” at Trump Taj Mahal Casino Resort in Atlantic City (“Trump”) for a banquet hall and 60 guest rooms, and prepaid $29,754.05. Unfortunately, Trump over-books and cannot honor the full reservation, and instead, after several hours of arguing, attempts to remedy the situation by booking rooms at area hotels and providing free transportation back and forth. As a result, Onyx deems the event a failure, and the matter heads to court.

New Jersey’s Consumer Fraud Act was intended to protect the public against unscrupulous contractors and others. A claim for relief under the Act requires a showing of:

• “unlawful conduct” by the defendant;

• “an ascertainable loss” by the plaintiff; and

• a causal connection between the defendant’s unlawful conduct and the plaintiff’s ascertainable loss.

At trial, the court concluded that Trump falsely represented the guaranteed nature of Onyx’s rooms, which constituted an “unconscionable business practice” violative of the Consumer Fraud Act. For purposes of the Consumer Fraud Act, it did not matter if Trump acted in good faith. “When Trump represented that the rooms were guaranteed, Trump did not really mean that the rooms would be guaranteed, at least not in the way any reasonable consumer would understand, because Trump defined the term guaranteed in a way that no reasonable consumer could predict.”

The end result? After an appeal, Onyx was awarded $212,159.74, consisting of $89,262.15 in treble damages (three times the underlying damage award of $29,754.05), plus $90,000 in counsel fees, and costs of $32,897.59.

The house does not always win, and the Consumer Fraud Act is not limited to individuals.