7 Jun

Being Preferred Is Not Always a Good Thing

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, Creditor, Preferential Transfer. Tagged: , , , , .

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.

4 May

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

Posted by Douglas A. Goldstein, Esq. in Consumer Fraud Act. Tagged: .

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.

7 Feb

Getting Paid Promptly In the Construction Business

Posted by Douglas A. Goldstein, Esq. in Collections, Construction. Tagged: .

If you are a construction contractor, you probably worry about getting paid on time.  After all, you need cash-flow to cover ongoing labor and material costs.

Under New Jersey’s Prompt Payment Act (N.J.S.A. 2A:30A-1 & -2) (the “Act”), in addition to the amount owed under the contract, a prime contractor may be entitled to interest at a rate of prime plus 1%, and reasonable attorneys’ fees and costs, if:

•  the contractor performs (in New Jersey) according to its contract with the owner (such as a landlord, developer, or homeowner);

•  the contractor provides written notice to the owner of the work performed and requests payment pursuant to what the contract entitles the contractor;

•  within 30 days after the agreed upon billing date, and if the owner has “approved and certified” the billing for the work, the owner does not pay the amount due under the contract

(with the exception of certain public entities, the owner is deemed to have “approved and certified” the billing for the work if, after 20 days after the owner receives the contractor’s written notice, the owner does not respond with a written statement of the amount withheld from payment and why);

•  the contract permits a party to resort to alternative dispute resolution (such as arbitration) to resolve a payment dispute; and

•  the contractor successfully prosecutes a lawsuit in New Jersey to collect the amount owed under the Act.

The Act also may permit the contractor, after giving 7 days’ written notice, to suspend performance under the contract if the owner (1) has not made the payment required by the Act, (2) has not provided the required written response, and (3) is not engaged in a good faith effort to resolve the reason for the withholding.

But beware: the Act will not restrict the rights and remedies of a residential homeowner or purchaser with respect to the property being improved.  A homeowner facing a lawsuit under the Act might try to assert a counterclaim under the many consumer protection laws, including the Consumer Fraud Act (a topic I will cover in a future article).

10 Jan

When a Customer Files For Bankruptcy – Part 2

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, Creditor. Tagged: , , , , .

After reading my last article, you might wonder: what about the money owed for goods you sold more than 20 days before the bankruptcy filing? There still may be hope.

First, ask yourself:

• Did the customer receive the goods within 45 days before the bankruptcy? And,

• Did you sell the goods in the ordinary course of your business?

If you answer “yes” to these questions, you should make a written demand for “reclamation” (literally, you are demanding that the goods be returned). If you make this demand soon enough, and if another creditor does not already have a security interest in the goods, you may be entitled to payment for the goods before other, “unsecured” creditors receive anything.

Here is a possible scenario:
On each of June 1, June 21, July 1, and July 11, you sell, on credit, a box of parts to a manufacturer. Each box is worth $10,000. On July 21, you are owed $40,000, and the manufacturer files for bankruptcy.

Provided that you meet the necessary deadlines and substantiate the claim, you may seek payment of $20,000 (the value of the goods sold within 20 days before the bankruptcy filing) ahead of other, “unsecured” creditors.

You may make written demand for “reclamation” of the goods sold within 45 days before the bankruptcy filing, which consists of goods worth $30,000 (but if you recover $20,000 based on the above, this demand cannot recover more than the remaining $10,000).

And, what about the money owed for the goods you sold on June 1st? Unfortunately, you might have to wait with the rest of the “unsecured” creditors for this money. Actually, you could do better than that, but that is a topic for another article….

9 Jan

When a Customer Files For Bankruptcy – Part 1

Posted by Douglas A. Goldstein, Esq. in Bankruptcy, Creditor.

If a customer files for bankruptcy, will you recover only pennies on the dollar, or, can you collect the full amount owed?  This question weighs on the minds of vendors and services providers when they receive that fateful notice, typically from the bankruptcy court, that a customer has filed for bankruptcy.  Now, let’s try to answer it.  First, ask yourself:

•    did you sell “goods” (rather than only services)?  And,

•    did the customer buy the goods from you in the ordinary course of the customer’s business?  And,

•    did the customer receive the goods within 20 days before the bankruptcy filing?

If you answer “yes” to these questions, and if you have not missed the deadline to file a proof of claim, you may be entitled to recover the entire value of the goods you sold.  If there is not enough money to pay your claim, you at least may be paid before other, “general unsecured” creditors.

The next time you receive a bankruptcy notice for a customer, just remember: you may be able to recover some or all of your claim.

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