Posts Tagged ‘preferential transfer’

19 Jun

How to Prevent, or Deal With, a Preference Lawsuit

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

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.

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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.