- If you are based in New York, how do you represent defendants in Preference cases and Fraudulent Conveyance cases in other parts of the country?
While we are based in New York, we do represent preference and fraudulent conveyance defendants all over the country through our network of local counsel affiliates. The way we work is that most of the analysis, research, document drafting and negotiation is done from our New York based office. Appearance in Status Conferences and oral arguments on motions are either done by Roland Gary Jones or handled by our handpicked special bankruptcy counsel affiliates. Trial representation would normally be handled by Roland Gary Jones.
- What is the benefit of hiring Jones & Associates as opposed to using my regular corporate counsel?
While we are sure your regular corporate counsel could handle this matter, it is much more cost effective to hire specialty counsel for a special legal matter. Essentially, you will not be paying for our education. Also, since we focus on this narrow area, we are often better equipped to spot applicable defenses. We also rely on an extensive library of pleadings in past cases on preference and fraudulent conveyance issues.
- We are uncomfortable being solicited. How do we know we can trust you?
We focus on an extremely narrow area in bankruptcy law. We also try to form groups of defendants whenever possible. The only way we can focus so narrowly and be effective in forming groups is to send out solicitations for this type of work. Our reputation is our most important asset. Providing the highest possible quality service is our number one objective. We address this kind of uncertainty in two ways: First, we either require no retainer or a relatively small retainer, since we know that most of our clients have not done business with us before; Second, we list the emails of former clients as references. Very few, if any, firms maintain this level of transparency.
- What is the benefit of hiring a small firm as opposed to a larger multi-partner firm?
Hiring a boutique firm like ours has the following benefits: First, we are free of the conflicts of interest you may find present with larger firms. We do not accept referrals from larger firms who typically handle trustee work. Therefore, we do not need to be concerned about being as aggressive as possible in representing our clients; Second, our small size and narrow focus is a crucial advantage in representing defendants in preference and fraudulent conveyance cases. We are able to keep our focus instead of, like at larger firms, switching our allegiance between plaintiff and defendant work; Third, your client contact is with the owner of the firm, not a junior level associate. As a small firm, our reputation is on the line with every single case.
- Is there duplication of fees between Jones & Associates and the work done by a special bankruptcy counsel?
No. We guarantee that you will never be charged for the same work twice.
- How are you able to work efficiently with your special bankruptcy counsels and with international lawyers?
We work seamlessly with special bankruptcy counsels and international lawyers wherever in the world they are located. We have made a considerable investment in developing and maintaining an internet based work space which is shared by all our affiliates and staff. We also make extensive use of internet based calendaring and document editing. Access to all our digital materials are protected by the highest level of encryption.
- What is the benefit of joining a group? I don’t want the Plaintiff to prejudice my case because I’m part of a group and I don’t want my settlement to be adversely affected by being part of a group.
We form groups of defendants solely for the benefit of sharing common expenses and relevant information. The group is completely informal. We never negotiate or settle cases as a group. Each case is handled individually as each case would generally have a different fact pattern and may have entirely different defenses. In our experience, there may be substantial cost benefits to being part of a group of defendants that we are defending. The most common costs that we share are Omnibus Hearings and Plaintiff Discovery Production Analysis.
- We are concerned about legal costs. How can we get a grip on how much this is going to cost us? Maybe we should just settle now.
The legal cost of defending a preference or fraudulent conveyance case is a very legitimate concern. This is doubly true with a new attorney/client relationship. Over the years we have developed a process for controlling legal fees which we think works well. We divide up the case into discrete stages. These stages include the pre-discovery period, the discovery period, the mediation period, the pre-trial period and trial. At the conclusion of each of these stages, we re-evaluate our legal position, our settlement position, and the legal cost that lie ahead. At the end of each of these stages we make a decision with our client as to the most cost-effective way to proceed based on the facts of the case and settlement posture.
- What is your firm’s system for handling a preference case?
We are known as effective litigators as well as seasoned negotiators. We use the credibility of our litigation practice as leverage to maximize successful outcomes in negotiations. Should negotiations fail, we are able to aggressively protect our client’s rights through litigation. We know that the quality of our work depends upon the quality of our people. All staff members including paralegals, international lawyers and special bankruptcy counsel have a direct bearing on the effectiveness of our service. We invest substantial sums in continued training and improvement. We also define our quality standards for the services we provide. Everyone in our firm knows what is expected of each other. We recognize the needs and maintain high ethical standards with respect to our clients
While our firm is small, we have a national reach through our own, internally developed network of special bankruptcy counsel. We also employ international lawyers and paralegals to provide cost effective and 24/7 turnaround execution in varied time zones. When other lawyers are home asleep, we are operating 24 hours a day. This is yet another way we pursue an advantage for our clients. In short, we are a closely knit team of lawyers and paralegals focused on one purpose – unequaled legal representation at the best possible speed and cost. Our success is based on our specialized skills, hard work, and our technological creativity.
- How is your firm different from other law firms for handling preference cases?
Few other firms, if any, have our unique focus on defending preference and fraudulent conveyance cases. Our philosophy is to know everything we can about avoidance litigation so we can give the most effective and incisive service available. Since we focus and specialize so relentlessly, we have unparalleled expertise in our field. We only have a few lawyers, but we have very focused and experienced lawyers. The fact is that in the areas of preference defense and fraudulent conveyance defense, our experience is second to none. Whether representing a Fortune 500 company or a local closely held firm, we have the responsiveness and the experience to ensure the best possible result. We are not distracted by switching from debtor to creditor work. Instead, we benefit from obtaining deeper and more penetrating knowledge of what we do best.
- What is benefit of hiring a lawyer specializing in bankruptcy cases?
A lawyer specialized in bankruptcy cases can relentlessly focus on your case. Since the specialized lawyer deals with such cases on daily basis and knows the applicable laws inside out, he will have the responsiveness and the experience to ensure the best possible result. You don’t have to pay for any training time and they directly get to work for you, immediately.
- What other areas of law does your firm practice?
Our practice is devoted primarily to representing defendants of preference and fraudulent conveyance actions. We also routinely represent creditors in defending turnover actions, asserting claims against bankruptcy estates and in motions to lift the automatic stay. As experts, we are committed to knowing preference and fraudulent conveyance defense litigation inside out. This means reviewing and analyzing the hundreds of preference and fraudulent conveyance judicial opinions issued each and every year. But we do more. We maintain a database of these opinions and related briefs as part of our precedent file so that we can provide our clients with stronger defenses against preference or fraudulent conveyance cases.
- How do you stay cost-effective?
By working seamlessly with our nationwide network of special bankruptcy counsel and our international lawyers and paralegals, we are able to provide uniquely fast turnaround times and cost effective service.
- Do I need to pay a retainer to hire you in my case?
Not necessarily. We may represent clients on contingency, flat rate or per hour basis. We generally do not require a retainer. Our hourly rate is $250 per hour. For a no cost analysis of your case and your defenses, as well as an estimate of the costs involved, please call or email to request our Defense Worksheet Form or to arrange a telephonic consultation.
- What is lawyer’s role in representing me?
There are a multitude of factors that can affect the outcome of negotiations / discussions / case proceedings between the trustee and the creditor in a preference action that are not obvious from the facts. These include timing of the negotiations, assessing opposing counsel’s desire to resolve claims outside of an adversary proceeding, the potential defenses available in a case etc. For the proper assessment of the settlement of a bankruptcy preference claim, a specialized lawyer is necessary. Since an expert lawyer knows the law ins and outs and deals with related cases on a daily basis, he possesses a better understanding of situation, laws and regulations and can identify the defenses available in the case accordingly. No website can replace a consultation with competent bankruptcy preference counsel.
- What kind of information will I need to supply you to defend this case?
You need to supply us the full payment history for at least a year before the bankruptcy. This includes:
- Copies of all invoices sent to the Debtor prior to the commencement of the Debtor's Preference Period.
- Copies of all invoices sent to the Debtor during the Preference Period.
- Details of the check including the check number and the check Issue date.
- Any documents showing the date payment was received for each invoice.
- Copies of checks, if any.
- Documents, if available, showing when the payment for each invoice was cleared by your bank.
- Any proofs of claim filed in the case.
- Any correspondence with the Plaintiff regarding payment terms.
- If any product or service was rendered during the preference period, please forward the documents showing the exact date such service or product was delivered. For example, proofs of shipment or consulting time records.
- Any contract/ email/correspondence with the Debtor.
Once the attorney has this information, he will raise a number of questions. For instance, are some of the payments alleged as preferential outside the 90 day period? Or, are the payments made within the ordinary course of your industry? How do you determine your industry compared to a similar industry? Do you need an expert witness? Etc.
- While our firm is small, we have a national reach through our own, internally developed network of special bankruptcy counsel. We also employ international lawyers and paralegals to provide cost effective and 24/7 turnaround execution How many lawyers work at your firm?
in varied time zones. When other lawyers are home asleep, we are operating 24 hours a day. This is yet another way we pursue an advantage for our clients. In short, we are a closely knit team of lawyers and paralegals focused on one purpose – unequaled legal representation at the best possible speed and cost. Our success is based on our specialized skills, hard work, and our technological creativity.
When can I expect updates on my case?
Regular status updates are sent to all clients every month.
Can I send you hard copies of my files?
Yes. You can send us the information via email as attachments. Alternatively, you can also mail it to us at the address given below.
Jones & Associates
1230 6th Avenue 7th Floor
New York, New York 10020
Tel. (646) 964-6461 begin_of_the_skype_highlighting (646) 964-6461 end_of_the_skype_highlighting
Fax (212) 202-4416
- What kind of information will I need to supply you to defend this case?
Can I send you files by email?
Yes. You can send us the information via email as attachments. Alternatively, you can also mail it to us at the address given below.
Jones & Associates
1230 6th Avenue 7th Floor
New York, New York 10020
Tel. (646) 964-6461 begin_of_the_skype_highlighting (646) 964-6461 end_of_the_skype_highlighting
Fax (212) 202-4416
I was served the complaint by regular mail. Is this legally sufficient service?
How do I contest insolvency?
The onus of proving insolvency lies with the trustee. The Bankruptcy Act defines “insolvent” as not being able to pay all your debts as and when they become due and payable. The bankrupt must have been insolvent at the time of the transfer or payment. The reasoning is that a solvent person has the capability of paying all of their debts (whether they actually did or not) and therefore no creditor could be at an advantage over the others by receiving a payment.
The Debtor paid by wire during the preference period. Can this still be a payment in the ordinary course?
This depends upon the payment practices followed in the pre-preference period and how consistent they are with the practices followed in the preference period. The facts of the case need to be identified in order to provide a definitive answer.
I am owed money for the work performed, or product we delivered, during the preference period. Is this a defense to a preference action?
This may qualify for the new value defense; however the exact facts of the case need to be identified. You should immediately consult a bankruptcy attorney.
What happened to any money I returned to the plaintiff?
Preference avoidance powers under Section 547 allow a trustee to take back or recover the preference transfers from the creditors. That money is then equitably distributed among similarly situated creditors.
Do you handle preference case on contingency?
Yes. We may represent clients on contingency, flat rate or per hour basis. We generally do not require a retainer. Our hourly rate is $250 per hour.
Do you handle preference cases for a flat fee?
Yes. We may represent clients on contingency, flat rate or per hour basis. We generally do not require a retainer. Our hourly rate is $250 per hour.
- What is a Debtor?
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. In other words, the term “debtor” is generally used to describe a company that has filed for bankruptcy, or an entity which is in debt or under any financial obligation to another.
- What is a Creditor?
The term “creditor” is used to describe a company that has sold its goods or services to another company on credit terms. In other words, a creditor is an entity/entities or individual(s) that are owed money by a company that files bankruptcy.
- What is a Scheduling Order?
Scheduling Order is an order issued by the Court providing information on the case deadlines; limiting the time to join other parties, amending the pleadings, completing discovery, and filing motions. The scheduling order is generally issued under Rules 26(a) and 26(e)(1)
- What is the difference between terms of Due on Receipt, and terms of Net 1 [day]?
Nothing. Both are a form of open account terms.
- What is meant by Reclamation Demand against Customer that later files Bankruptcy?
Reclamation is the right of a seller to recover possession of goods delivered to an insolvent buyer. The remedy of reclamation is needed when an unsecured vendor is unable to retrieve goods or stop them in transit. A reclaiming vendor need not prove fraud, although the premise of reclamation is that the vendor was defrauded.
- What is a Motion for Summary Judgment?
Summary judgment is a determination made by a court without a full trial. Such a judgment may be issued as to the merits of an entire case, or of specific issues in that case. A Motion for Summary Judgment is a request made by a defendant in a civil case to promptly and expeditiously dispose of a case without a trial. It is used when there is no dispute as to the material facts of the case and a party is entitled to a Judgment as a Matter of Law.
- What is an adversary proceeding?
Adversary proceedings are lawsuits brought by interested parties in the bankruptcy process, and are initiated by filing a formal complaint with the bankruptcy court. These proceedings are governed by the Federal Rules of Bankruptcy Procedure. The adversary complaint is served on the individual who is the subject of the proceeding. After an individual who is served with the adversary complaint files an answer, a bankruptcy court schedules a hearing before a judge, who then settles the matter in dispute. Often an adversary proceeding is used to resolve competing claims between a debtor’s various creditors. A complaint in a bankruptcy case can be filed by either the debtor, the creditors of the debtor, or a bankruptcy trustee.
- What is a Motion to Dismiss?
A Motion to Dismiss is a written submission to a court at a preliminary stage of any case, generally before a defendant answers, seeking dismissal of the case on one of several grounds, including lack of jurisdiction over the person or subject matter, failure of the plaintiff to allege necessary elements of the cause of action asserted in the complaint, etc.
- What are Interrogatories?
Interrogatories (also known as requests for further information) are a formal set of written questions propounded by one litigant and are required to be answered by an opposing party to clarify matters of fact. This also helps to determine in advance the facts which could be presented during a trial. Requests for interrogatories are a part of discovery process in a civil case. In the U.S. federal court system, they are governed by Rule 36 of the Federal Rules of Civil Procedure.
- What is lien avoidance?
Lien avoidance is the process through which a debtor who is filing for bankruptcy can avoid certain liens that may be attached to the exempt property of the debtor prior to filing a bankruptcy petition. This action is often used to clear title to land from a judgment lien arising out of pre-petition activity in a state court. The debtor accomplishes this by way of a Motion to Avoid Lien. This process essentially turns a secured lien on a property into an unsecured lien, thereby avoiding any security interest. In order to do this, the lien must be a non-purchase money loan, in which the debtor pledges property he or she already owns as collateral for the loan. Examples of this include home equity loans or credit union loans on a car. The collateral attached to the loan must also be able to be classified as exempt, and be part of the debtor's exempted estate.
- Why there are 3 “Counts” and what is a “Count” anyway?
A “count” is just a way to organize allegations in a lawsuit. In a well organized complaint, each count is based on a distinct legal theory that allows a plaintiff to make a claim against a defendant.
- What is the Last Count that refers to 11 U.S.C. Sec. 502(d)?
Section 502(d) requires a bankruptcy court to disallow any claim under Section 501 (claims for which one has filed or are deemed to have filed a proof of claim) unless any preference payments are first repaid. At times, the debtors and trustee use Section 502(d) to delay, defeat or reduce creditor rights to administrative expenses under Section 503.
- What is a Request for Admissions?
Request for admissions (sometimes also called a request to admit) are a set of statements sent from one litigant to an opposing party, for the purpose of having another admit or deny the statements or allegations. Requests for admissions are part of discovery process in a civil case. In the U.S. Federal Court system, they are governed by Rule 33 of the Federal Rules of Civil Procedure.
- What is a 502 (H) Claim?
502(h) claim is a provision entitling an unsecured claim to a creditor for an amount that such creditor paid to a trustee/debtor in the settlement of an avoidance action. Accordingly, it is important that a creditor have its bankruptcy counsel carefully review any proposed settlement agreement in order to ensure that a claimant does not inadvertently waive its pre-petition claim or its Sec.502 (h) claim in connection with the settlement of an avoidance action.
- What is a secured creditor?
A secured creditor is a creditor who has security interest over some or all of the assets of a debtor. A secured creditor is one who has sold its goods and/or services, or loaned money on the basis of collateral pledged to secure the debt or who has filed a lien on property of the debtor. Banks and other lending institutions are generally secured creditors. In the event of the bankruptcy of a debtor, the secured creditor can enforce their security against the assets of the debtor, and avoid competing for a distribution on liquidation together with the unsecured creditors.
- What is a critical vendor?
The critical vendor doctrine applies to the vendors that are so vital to the continued business operations of a debtor that their refusal to sell to the debtor could mean the demise of the debtor and its reorganization. In such cases, the debtor may request a court to authorize the debtor to make immediate payment of the vendor’s pre-petition claim, in exchange for a commitment by the vendor to sell to the debtor on a post-petition basis under the same or better terms. This arrangement elevates critical vendors’ otherwise low-priority pre-petition unsecured claim to a higher priority administrative claim, ensuring payment in full if the debtor successfully reorganizes.
- What is a plan of reorganization?
A plan or reorganization is a document setting forth how a bankrupt company plans to satisfy its creditors. The plan of reorganization is the cornerstone of a successful Chapter 11 bankruptcy. The bankrupt company generally has 120 days following the filing of petition to present a plan of reorganization to the court. Bankruptcy judges however, may extend the time in which a plan can be submitted and approved.
- What is a “Debtor in Possession”?
A Debtor in Possession, commonly referred to as a DIP, is a person or corporation who has filed a bankruptcy petition, but remains in possession of property upon which a creditor has a lien or similar security interest. The debtor remains in control of the operations of a bankrupt company. Generally, a debtor in possession is the debtor in Chapter 11 proceedings. Trustees however, may in some cases operate a bankrupt company instead of the original management that drove it into bankruptcy.
- What is a "creditors" committee?
A group representing firms that have claims on a company facing bankruptcy or extreme financial difficulty is referred to as "creditors" committee. In other words, a creditors’ committee is a committee of representatives of creditors appointed by the U.S. Trustee. The committee acts on behalf of all creditors of the bankrupt company in negotiating a plan of reorganization and other major actions.
- What is a voluntary bankruptcy?
A voluntary bankruptcy is one in which a debtor files the petition on its own volition.
- What is an involuntary bankruptcy?
An involuntary bankruptcy is one that is initiated by at least 3 creditors holding unsecured claims aggregating at least $5,000 or more against a debtor.
- When does a bankruptcy take effect?
A bankruptcy becomes effective as of the date a petition is filed and recorded with a bankruptcy clerk.
- What is a Proof of Claim?
A proof of claim is a form filed with a bankruptcy court by a creditor setting out its claim against bankruptcy debtor. In other words, it is a document a creditor files with a court to prove that the debtor owes them a debt.
- What is an Expert Witness?
An expert witness is a witness, who by virtue of education, training, skill or experience, is believed to have expertise and specialized knowledge in a particular subject beyond that of the average person, sufficient that others may officially and legally rely upon the witness's specialized (scientific, technical or other) opinion about an evidence or fact issue within the scope of his expertise, referred to as the expert opinion, as an assistance to the fact-finder. An expert witness is retained to assist attorneys in the defense of preference claims filed against creditors.
- What is a Mechanic's Lien?
A mechanic's lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. The lien exists for both real property and personal property.
- What is a correlation between "antecedent debt" and a "preferential payment?"
Antecedent debt means pre-existing debt. If a payment on antecedent debt is made by a debtor to a creditor during the preference period (i.e. within 90 days of the bankruptcy filing), the transfer may be avoided by the court and returned to the debtor's estate. Theoretically, the preferential transfer is returned to the debtor's estate to enable an equal distribution for unsecured creditors.
- Who is a Bankruptcy trustee?
A Trustee is an agent of the U. S. Department of Justice appointed to assist in the administration of bankruptcy cases.
A Chapter 7 trustee liquidates non-exempt property and distributes it according to the scheme of priorities in the Code; the trustee also considers whether there are preferences or fraudulent transfers that can be recovered from which creditors can be paid. The trustee may bring a motion to dismiss the case as an abuse of the bankruptcy system or to deny the debtor a discharge if the trustee finds evidence of fraud, perjury, or ineligibility.
A Chapter 13 trustee reviews the debtor's plan and collects and distributes payments made by the Chapter 13 debtor.
A debtor in possession is the debtor in a Chapter 11 proceedings; the "DIP" has the powers of the trustee under the Code and the responsibility to act as a fiduciary for creditors.
- How do I find out who is the trustee?
In a Chapter 7, a trustee is named on the notice of the first meeting of creditors which is sent to every listed creditor. This information is also available in the case file at the bankruptcy court, and over the phone in some districts. In most Chapter 11 cases, there is no trustee; the debtor assumes the duties of a trustee. The United States Trustee (UST) is different from the case trustee: UST's are employees of the Department of Justice and have oversight, but not day to day operating responsibilities, in bankruptcy cases.
- What is a Position Statement?
A Position Statement is a document which litigating parties often exchange to resolve the matter before trial. As evident from name, a Position Statement is drafted to represent the position of a case. It asserts the facts, alleged defenses, contentions, applicable statutes and precedents upon which a party relies and intends to base its case and argue/negotiate/settle accordingly.
- What is Bankruptcy?
Bankruptcy is a legal proceeding where a person or company who is having difficulty meeting financial obligations can obtain a fresh start. The right to file for bankruptcy is provided by a federal law, and all bankruptcy proceedings are handled in a federal bankruptcy court. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by a debtor (a "voluntary bankruptcy" that is filed by the insolvent individual or organization). Filing bankruptcy generally stops most creditors from seeking to collect debts. The goal of most debtors is to obtain a discharge order from the bankruptcy judge. The discharge order has the effect of releasing the debtor from many forms of debt that were incurred prior to the bankruptcy filing.
- Is there more than one type of bankruptcy?
Yes. The most common types of bankruptcy allowed under the Bankruptcy Act are Chapter 7, Chapter 11 and Chapter 13.
- What is a Chapter 7 bankruptcy?
A Chapter 7 bankruptcy is a liquidation proceeding. In a Chapter 7 bankruptcy, a court appoints a trustee to liquidate a company’s assets and to pay creditors with the proceeds of the liquidation.
- What is a Chapter 11 bankruptcy?
A Chapter 11 bankruptcy allows a company to reorganize while continuing to conduct business. When a company files Chapter 11 bankruptcy, all creditors are stayed from collecting debts outstanding at the time of filing.
- When is someone insolvent?
The Bankruptcy Act defines “insolvent” as not being able to pay all your debts as and when they become due and payable. The bankrupt must have been insolvent at the time of the transfer or payment. The reasoning is that a solvent person has the capability of paying all of their debts, whether they actually did or not and therefore no creditor could have been advantaged over the others by receiving a payment.
- Who has to prove insolvency?
The burden of proving insolvency lies with the trustee.
- Do I have a right to jury trial?
Preference defendants who do not file proofs of claim in the main bankruptcy case have the option to demand a trial by jury in the preference lawsuit. This is a right protected by the Seventh Amendment to the Constitution. The parties in a lawsuit can consent to have a bankruptcy court conduct jury trial but this doesn't happen very often. A preference defendant makes a jury demand for three common reasons:
- 1. The defendant believes a jury would be more inclined to find in its favor than a bankruptcy judge;
- 2. The defendant wants the case moved to federal district court from the bankruptcy court, which some defendants perceive as more debtor-friendly; and
- 3. Jury trials are more expensive and complex; the preference defendant can hope that will translate into settlement leverage.
- Is there any Statute of Limitations for bringing bankruptcy preference actions?
The timing of preference claims is affected by 3 major factors:
- the Statute of Limitations;
- the desire of the debtor to re-establish goodwill (and trade credit) with the supply base; and
- the discontinuation of the debtor’s business operations
The Statute of Limitations period for bringing preference actions is often quoted as being 2 years from the date of the filing of the bankruptcy. Actually, the calculation of the Statute of Limitations is more complicated and an experienced attorney must be consulted to determine this.
- Are adversary proceedings and the original bankruptcy case separate?
Adversary proceedings and the original bankruptcy cases are separate but still “Associated” Cases. A complaint to recover bankruptcy preferences is a lawsuit separate from the original bankruptcy case. It will have its own case number. It will have its own named plaintiff and a named defendant. Only a complaint will appear in the original bankruptcy case docket. After that, the adversary proceeding will have its own, separate docket. Although an adversary proceeding is a separate case, it is referred to as an “associated case” of the original bankruptcy case.
- What is a role of Creditors Committee in a Bankruptcy preference action?
The members of the Creditors Committee are selected by the United States Trustee assigned to the particular bankruptcy. The Creditors Committee is charged with representing the interests of the unsecured bankruptcy creditors as a whole. It is not representing the interests of any one creditor or even one particular grouping of creditors. The creditors committee can be both an advocate and an adversary for any single bankruptcy creditor. The creditor’s committee functions can be grouped into three categories: evaluation and investigation, advocacy and prosecution.
- One of our customers filed for bankruptcy protection and we received several payments during the 90 day period immediately before the filing date. Do we have to return each of these payments as preferences?
It depends upon the nature of the transactions. The Bankruptcy Code provides several defenses to a preference claim. Please consult an experienced attorney to identify the possible defenses available in your case.
- What makes a creditor secured?
A secured creditor is a person or business that loaned money on the condition that if the borrower failed to repay the debt they had a right to one (or some) of the borrower’s possessions. Loans secured in this way are known as secured debts. In simple words, this means when the borrower gets a secured loan, the borrower promises that if the borrower does not pay what he/she owes, the creditor can take a physical thing of value from the borrower to help repay the original debt.
- Can you give me some examples of a secured creditor?
Secured creditors possess specific legal rights which allow them to take the ownership of an asset back, should the debtor default on the corresponding security agreement. Some examples of secured creditors would be:
- The financial institution that holds your mortgage (if you don't make your payments then the creditor may take possession of and sell your house);
- The financial institution that holds your car loan
- A leasing company;
- A rent-to-own company;
- A finance company; and
- Any other creditor that you pledge your possessions to in order to receive credit.
- Is there a way for a creditor to obtain secured rights without the debtor's permission?
Yes, there are Mechanic's liens for creditors who have done work to a vehicle or property and governmental tax liens. Also, courts can grant any creditor an attachment pending a trial or an execution after a judgement has been awarded. When recorded properly at the registry of deeds, these vest secured rights in the creditor which may give a creditor even more rights than a mortgage holder.
- How do unsecured creditors get paid?
Either the debtor pays them voluntarily or by a court order. Even unsecured creditors may gain secured rights through the courts.
- Why do some creditors get paid sooner than others, and what can I do about it?
Debtors may give payment preference to creditors with a perfected security interest, creditors holding their personal guaranty, and creditors that make or distribute a proprietary product or a product in high demand.
- What if the customer files for bankruptcy or becomes insolvent just after I shipped them goods?
If you sell goods to a customer who is insolvent or who has very recently filed for bankruptcy, you may have the right to stop goods in transit or reclaim goods recently received by the insolvent customer that remain unsold. Your ability to exercise these "reclamation right" requires prompt action on your part. This is a very factually driven and detail-oriented process, and you should immediately call counsel to discuss the facts of the customer's insolvency or bankruptcy.
- Even though my company is a secured creditor, I have just been informed that some unsecured creditors are receiving priority payment in the bankruptcy proceedings. Isn't this contrary to the letter and spirit of the Bankruptcy Code?
It may be possible that the unsecured creditors have likely invoked the Necessity of Payment Doctrine, also called the Rule of Necessity, and been designated Critical Vendors. Critical Vendors are unsecured creditors who provide goods and services that are critical to the bankrupt business getting back on its feet. Therefore, the courts may look first at which creditors are essential to the bankrupt's business. They get paid first to avoid a disruption in service. Other creditors with greater or equal priority interest just have to wait in line and hope there is something left over for them. Therefore, it is crucial to keep tabs on bankruptcy proceedings from the start in order to protect your interests.
- In bankruptcy, what is a fraudulent transfer? How does this relate to a preference payment?
A fraudulent transfer involves the sale or transfer of property made by a debtor with intent to defraud creditors or for which the debtor received less than the transferred property's value. A preference payment is payment made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor in question was an insider) that results in that creditor receiving more than the creditor would have received in the bankruptcy case. Preferential transfers may or may not be fraudulent.
- Is there any bar date for filing a proof of claim?
Yes. A Bar Date is a deadline for filing a Proof of Claim. The Bar Date is set by Court order. If you do not file a Proof of Claim by the Bar Date, you will be barred from asserting your potential claim against a debtor.
- I received a Bar Date Notice and Proof of Claim form. Does this mean that I have a Claim?
No. As a routine part of the Chapter 11 process, the Debtors must mail the Bar Date Notice to all known and potential creditors, including current and former vendors and employees who may have done business with the company before the filing. Receiving a Bar Date Notice does not necessarily mean you are owed money. In addition, you do not necessarily have a right to payment just because you received the Bar Date Notice and Proof of Claim form.
- Can I sell my claim against a bankrupt company in exchange for an immediate payout?
Yes. Bankruptcy proceedings can be long and drawn-out, thereby causing major problems for both the debtors and the creditors. Meanwhile, there is another option for recouping the missing funds: Some companies make a practice of buying out bankruptcy debt and giving creditors cash on the spot in exchange for their claims, although at a discount. This option is best fitted for those who are in desperate need of money and can’t afford to wait for another company’s bankruptcy proceedings to finish. The benefit of selling a bankruptcy claim is that, a seller gets a certain percentage of it upfront, regardless of how the bankruptcy ends up progressing. On the other hand, if one can wait to let the bankruptcy process take its course, then it might be worth to wait for a payout from the actual debtor. After all, the types of companies that purchase bankruptcy debt don’t do so for charitable purposes. They, too, are looking to make money by buying a claim at a significant discount and reaping the benefits of a larger payout down the line. There may be possibility that by selling one’s bankruptcy claim up front, one might therefore end up short-changing himself by not waiting for an official reorganization payout.
- Are there any kinds of debts which cannot be discharged in bankruptcy?
Yes. These include the following circumstances:
1. If the debtor committed fraud or used false or deceptive conduct;
2. If the debtor deliberately injured you or your property;
3. Injury or death caused by drunk driving;
4. Child support, maintenance or alimony obligations;
5. Other debts contained in a divorce or separation decree may be non-dischargeable, under certain circumstances;
6. Some governmental debts cannot be discharged, such as most student loans, some kinds of taxes, and credit cards / loans which were used to pay taxes. This might affect you if you have co-signed on such debts.
- What if I have a lien on the debtor’s property?
If you have a valid lien against the debtor’s property (home, car, personal property, etc.), you may still have valid rights against that property, even after a debtor has filed bankruptcy. But see an attorney before taking any action against the debtor or the property.
- When can I file a claim in Bankruptcy Court to collect money?
If the debtor has to pay money or turn over assets to the court, you may be able to collect a share by filing a Proof of Claim form with the Bankruptcy Court. The official Court notice will tell you whether you may file a claim, and the deadline for filing a claim. If you do not receive a claim form, these are available at the Bankruptcy Court Clerk’s office.
- Someone who owes me money just filed for bankruptcy-what can I do?
First, you must stop all collection against the debtor who has filed for bankruptcy. The notice is actually an order from the federal bankruptcy court which prohibits any kind of collection. If you already have an attorney representing you against the debtor, notify your attorney immediately.
Second, you may wish to see an attorney to discuss your legal rights. But note that there are strict deadlines by which you must take certain actions, so see an attorney as soon as possible. Your attorney will review the case to see whether you have a good case against the debtor, and whether it is worth the time and cost.
Finally, if you learn a person who owes you has filed bankruptcy, but don’t get a notice, you should still contact an attorney to protect your legal rights. Also, see an attorney if you didn’t learn about the bankruptcy until a deadline has passed – it is possible you may still have legal rights.
- What does the notice from the Bankruptcy Court mean?
The notice from the Bankruptcy Court means that someone has identified you as a “creditor.” In other words, the person or company believes it owes you money, or might owe you money. The person or company who files bankruptcy is known as the “debtor”
- What is a preference?
Preferences are payments or other transfers made within 90 days prior to a bankruptcy filing, on account of an antecedent or pre-existing debt, at a time when the debtor was insolvent, that allow the transferee to be "preferred" by recovering more than it would have recovered had the transfer not been made and the defendant instead had simply filed a proof of claim for the amount involved. If a preference payment was made to an insider, the preference period is 1 year prior to the petition date. Preference payments are subject to recovery and returned to the bankruptcy estate. The trustee can demand that return of transfers received within 90 days (or 1 year) prior to someone's bankruptcy filing. Any payment received is shared proportionally, with other creditors.
- What is justification for beginning a preference case?
A “preference payment” is any payment or transfer of value that a debtor makes to you in the 90-day period before the debtor files for bankruptcy that is made in connection with a pre-existing debt. The idea is to prevent debtors from skirting the bankruptcy process, to deter creditors from getting benefitted from available asset at the expense of other creditors, and to give power to trustee to recover monies or assets in order to make an equitable distribution to all the creditors. Otherwise, a debtor could transfer all of its assets to one creditor, then file for bankruptcy and leave all the other creditors with nothing. So, the bankruptcy code allows the trustee representing a debtor’s estate to reach back 90 days prior to the bankruptcy filing and recover any preferential payments.
- Is there any deadline to respond to trustee’s complaint? What if I have missed the deadline?
Most of the time you must respond within a certain amount of time or else you will default. The rules of civil procedure provide all the deadlines you need to know in your case. For example, under the federal rules of civil procedure, a plaintiff must serve a summons on the defendant within 120 days of filing the complaint, and the defendant in turn must, generally, file an answer with the court within 25 days of receiving the complaint. The time requirements may vary depending on what state you are in, or if you are in federal court.
- What is a preference claim?
A preference claim is an adversary action initiated by a trustee or an unsecured creditors’ committee on behalf of the bankruptcy estate of the debtor for the recovery of a preference payment.
- What are the elements in a preference case?
Before the court avoids payment or transfer, it must be satisfied that:
1. A transfer of property was made; something passed from a bankrupt to a creditor; AND
2. It occurred at a time when the bankrupt was insolvent; AND
3. It occurred within the relevant time period before the bankruptcy; AND
4.The transaction gave the creditor an advantage over other creditors (usually determined as the creditor receiving more than they would have if they had proved for that debt in the estate).
- What if I do nothing in response to a preference action?
If you fail to respond to the claim within time, the claimant can ask the court to enter default judgment against you just by lodging an application. This means asking the court to decide that you owe the money which has been claimed by the debtor.
- What are pre-emptive measures for reducing the risk of preference liability?
The best way is to avoid the preference payments and reduce the risk of preference liability by taking certain proactive measures. Some of the measures include: business should stop taking credit and instead require advance payment or COD. Alternatively, if the business must have credit terms to accommodate its customers, then it should strive to maintain consistency. If the parties have agreed to certain arrangements, then the business should stick to them as much as possible. The other possible measure could be to have the terms of business consistent with the terms of others in the similar industry. Also, when the purchaser is late with its payments, a business should not engage in collection measures that are unusual compared to the practices of its other customers or the general industry practice. Payments resulting from such collection activity are more difficult to protect from preference liability. In addition, a business should maintain meticulous records of all transactions with its customers because thorough and complete records are crucial for establishing defenses against preference claims.
- What will happen in my case? What is a typical process in a preference case?
The Bankruptcy Code permits the trustee to avoid and recover from creditors payments made within the 90-day period before the bankruptcy filing. A “preference” is defined by Section 547 of the Bankruptcy Code as:
- Payment on an “antecedent” (meaning a previously incurred as opposed to current) debt;
- Made while the debtor was insolvent (meaning its assets are less than its liabilities);
- To a non- insider creditor, within 90 days of the filing of the bankruptcy;
- That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.
Section 550 of the Bankruptcy Code allows the trustee to avoid and recover any preference payments by filing a lawsuit against the creditor. Typically, a preference action is often preceded by a “demand letter” from the debtor or the trustee. The demand letter sets forth the trustee’s claims and demands immediate payment. Most of the times, the trustee is willing to settle the preference action for an extremely reduced amount if the settlement is reached before the lawsuit is filed. Consequently, when the creditor receives a “preference demand letter,” the creditor should always have experienced bankruptcy counsel review the case to determine whether the creditor has valid defenses. Bankruptcy counsel can often negotiate a favorable settlement and allow the creditor to avoid having to expend large sums of money in litigation. If the parties do not reach a settlement, the preference action is initiated with a complaint filed with a bankruptcy court. The preference complaint is similar to any other lawsuit with the exception that it is filed in a bankruptcy court, rather than federal district or state court.
- Must there be a debtor creditor relationship?
Yes. The transaction must have involved or been done at the direction of a creditor of the bankrupt, and must have satisfied a debt that would have been provable in the estate if the transaction had not been done.
- Must there be a transfer of an asset?
Yes. There must have been a transfer of some property between the parties. It is common for that transfer to be a payment of money, but any asset passing from the bankrupt to the creditor will be sufficient to be a transfer of property.
- Must the debt be unsecured?
Yes. A preference cannot be given to a creditor holding a security over assets. Secured creditors either give up their security (if the creditor is paid in full), or the bankrupt gains equity in the secured asset (if the creditor is not paid in full). But if the security was not properly created or the value of the security is less than the amount of the payment, the transfer or part of it may be preferential.
- How is preferential treatment determined?
The creditor must have received more than he would have received if the case were a Chapter 7 liquidation case, the transfer had not been made, and the creditor received payment of the debt provided by the provisions of the Code or if creditor had refunded the monies and proved for that amount in the bankruptcy. This is a purely mathematical calculation. If the creditor did not receive more by way of the payment than they would have received from a dividend in the bankruptcy, there is no advantage or preferential treatment.
- How long does a trustee have to sue for a preference claim? What time period is relevant for preference claim?
Section 546(a) of the Bankruptcy Code has a two part test for determining the time limit for bringing bankruptcy preference actions. Bankruptcy preference claims are time barred after the later of (1) 2 years after the bankruptcy filing or (2) 1 year after the appointment of a trustee. Under this calculation, if a trustee is appointed in the second year of a bankruptcy, it will have a full year to decide whether to bring preference claims. Because most trustees are appointed within the first year of a bankruptcy filing, as a general rule of thumb, 2 years from the date of filing of the bankruptcy is going to be the cut-off date for filing of bankruptcy preference claims. However, to properly determine the statute of limitations in a case that has been converted from Chapter 11 to Chapter 7, it is necessary to know the date a trustee was appointed. The transfer must have happened during a 90-day (1 year in case of insider) period before the bankruptcy. The period differs depending on how the bankruptcy was commenced. For a bankruptcy started by a:
- Creditor's Petition - 6 months before the filing of the creditor's petition
- Debtor's Petition (where a Creditor's Petition is pending) - the period starts on the commencement of the bankruptcy; defined as the time of the earliest act of bankruptcy within the 6 months before the creditor's petition was filed.
- Debtor's Petition - 6 months before the presentation of the Debtor's Petition
- My customer paid me for services/goods and then filed for bankruptcy. The trustee is now requesting that I return the payment. What should I do?
You should contact a competent bankruptcy attorney to determine whether or not there are defenses to the trustee's preference action.
- What is a preference risk to a lender's Lien?
Section 547 of the Bankruptcy Code authorizes a trustee to invalidate certain transfers of property made by a debtor before the filing of its bankruptcy petition. The key characteristics of such transfers are that it (a) was a transfer of the debtor's property, (b) was made within 90 days before the filing of the bankruptcy petition and (c) was made on account of a pre-existing ("antecedent") debt owed to a creditor by the debtor. A lien granted under these circumstances is vulnerable to avoidance, which would leave the once-secured creditor with an ordinary, lower-priority unsecured claim for repayment of its loans.
- Are there any limits on smaller preference claims?
The Act has a special provision that applies to bankruptcy cases filed by a debtor whose debts are primarily business debts, as opposed to consumer debts. (Consumer debts are those incurred primarily for a personal, family or household purpose. Business debts are all other types of debts.) In cases involving primarily business debts, the Act prohibits actions to recover preferential transfers unless the total of all of the allegedly preferential transfers received by a particular creditor is at least $5,000 or more. This will eliminate smaller preference actions and is a welcome change for creditors that extend credit to their business customers.
- What is the significance of a transfer date in a preference action?
In most cases, when the transfer has occurred is apparent. However, in some cases, it may not be clear. The time of transfer is important, because only by knowing when the transfer occurred can it be determined whether it occurred within the preference period, whether the debtor was insolvent at the time, and whether the transfer was for an antecedent debt.
- How can I reclaim my goods from the Debtor?
After bankruptcy has been declared, your reclamation rights are governed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The new bankruptcy law expands your rights to reclaim goods purchased from you by someone who has filed bankruptcy:
- You can assert a reclamation demand for goods received within 45 days of the bankruptcy filing by filing a written demand.
- The goods must have been sold in the "ordinary course" of your business and the goods must have been received while the debtor was "insolvent" (using the bankruptcy definition above).
- If the 45-day period expires after the bankruptcy case is filed, you must make the reclamation demand within 20 days after the bankruptcy filing.
- Who may recover preferential payments?
In personal insolvency matters, only trustees of bankrupt estates and trustees of Personal Insolvency Agreements (where the Agreement includes recovery of these preferential transactions) may claim the return of preferential payments.
- Why do trustees void preferential payments?
The Bankruptcy Code permits a trustee to avoid and recover such payments. The policy behind this rule is to diminish the advantages that a creditor might get by litigation or by aggressive collection actions that force the debtor into bankruptcy. The trustee's main role is to distribute the bankrupt's assets fairly between their creditors. To do so, the trustee must discover whether any creditor has received treatment that would have given him a distribution - before the bankruptcy - that was not equitable when compared to the distribution given to the other creditors in the bankruptcy. Hence, the Trustee is able to void transactions that involve one creditor so that they can make a more equitable distribution to all creditors.
With respect to insiders, the policy is to prevent those closest to the debtor, who may have advance knowledge of the debtor's financial distress, from gaining an advantage at the expense of other creditors who were ignorant about it.
- I was on a special vendor list. How can they sue me for preference now?
Critical/Special Vendors are not immune from preference risk.
- I didn’t do anything wrong. How can I be sued for preference?
Bankruptcy preference law generally does not consider whether the business knew that the debtor was insolvent or if it was trying to gain preference over other creditors from the debtor's last bit of available cash. Therefore, even "good guys" can fall victim to a preference lawsuit if all six elements are present. The end result of a successful preference claim is that the plaintiff gets the ability to avoid or take back the transfer from the creditor, and the creditor has a corresponding claim against the debtor's estate.
- I didn’t know there was any bankruptcy filed. How can I be sued for preference?
Bankruptcy preference law generally does not consider whether the creditor business knew that the debtor was insolvent or if it was trying to beat other creditors to the debtor's last bit of available cash. Therefore, even "good guys" can fall victim to a preference lawsuit if all six elements are present. The end result of a successful preference claim is that the plaintiff gets the ability to avoid or take back the transfer from the creditor, and the creditor has a corresponding claim against the debtor's estate.
- What is a preference demand letter? What is the best way to respond to a preference demand letter?
A business facing a preference allegation usually learns of the allegation from one of the two sources. The business may get a letter from a representative of the debtor's estate that details the allegation and typically demands payment based on the allegation or proposes a settlement. Alternatively, the business may be served with a complaint filed in a bankruptcy court where the debtor's bankruptcy is pending.
The initial reaction to a formal or informal preference demand is anger and frustration. Though it seems to be unfair notion that the debtor has the right and audacity to recover a payment for a legitimate debt from one of its loyal customers, it may be recovered as per Bankruptcy laws.
A preference demand letter should neither be ignored nor feared. Rather, it should be considered as an opportunity for creditors to fully utilize the defenses available to them under the Bankruptcy Code. Ignoring an informal demand letter may result in the business wasting an opportunity to achieve a cost-effective and reasonable settlement that gets out of the hand once formal litigation is initiated. Further, ignoring a complaint or other formal legal pleading may result in the loss of a common, meritorious defense to the preference allegations. Therefore, when a business receives a notice of a preference complaint it should adequately and timely respond to the allegations, preferably with the assistance of legal counsel.
- What happens if anyone receives a preference transfer?
Unless the customer files for bankruptcy protection within 90 days of your receipt (and, in the case of a check, it being honored by the payor's bank) of the transfer, there is no preference exposure. However, if the customer does file for bankruptcy protection during the 90 days after receiving the potential preferential transfer, it is possible that the person receiving the transfer may be sued to recover the transfer.
- Should I accept a preferential payment?
So far, you accept that you may later be sued for recovery of the alleged preference, the answer is yes. First, the customer may never file bankruptcy, or may do so more than 90 days after making the transfer to you. Second, you may have defenses to the alleged preferential transfer which will allow you to retain some or all of the payment. Finally, at the least you get to keep the transfer, interest-free, until the customer or a bankruptcy trustee actually sues you and successfully recovers it.
- Who is a Preference Collector?
In a Chapter 11, the debtor is the first owner of preference claims. If the debtor is still a "debtor in possession" when the adversary proceeding is brought, then you will be dealing with one of two sets of lawyers - either the debtor's lawyers or the lawyers for the creditors committee. (In some cases, the bankruptcy court will order the creditors committee to take over the task of collecting preferences.) If a "Plan of Liquidation" has been approved in the bankruptcy case, the preference action can be brought by the debtor, the creditors committee or the "plan administrator". This was the situation when the sample complaint below was filed. If the Chapter 11 has been converted to a Chapter 7, the trustee is the "plaintiff" in the adversary proceeding. The trustee's lawyers are the lawyers who you will be dealing with. The trustee's lawyers may have been hired just for the purpose of bringing preference actions. If the debtor has sold all or most of its assets in a court approved bankruptcy sale (a "Section 363 Sale"), then the right to bring bankruptcy preference claims may have been sold to the purchaser as part of the Section 363 Sale. If this purchaser buys the preference claims and decides to pursue collection, then you might be dealing with the purchaser and its lawyers.
- Who makes decisions in bringing Bankruptcy Preference Claims?
The person bringing the preference claim may be the debtor, the trustee, the creditor committee, a plan representative or a purchaser under a Section 363 sale. Bankruptcy preference claims are time barred after the later of 2 years after the bankruptcy filing or 1 year after the appointment or election of the first trustee. Alternatively, if a trustee is appointed in the second year of a bankruptcy, it will have a full year to decide whether or not to bring preference claims.
- What is an earmarking defense?
“Earmark” refers to the funds which have been earmarked to be paid to a specified creditor. When a loan is made by a third person to a debtor to enable the debtor to pay off a specified creditor, it cannot be avoided by the trustee as a preference since the debtor never actually had control of the funds. The funds had been assigned to a particular creditor and the transfer had not diminished the debtor's estate.
- Which are the most commonly used defenses against Demands for the Return of Preferential Transfers?
New Value Exception : New value given to the debtor involving sales made to the debtor during the 90-day preference period reduces the size of the preference. Receipt of preference payments can be offset by sales made on open account terms if the debt that arose from those sales remained unpaid at the time of the bankruptcy filing.
Ordinary Course of Business exception: Payments received in the ordinary course of business are not preferential, but the burden is on the creditor to prove this exception applies. The courts and trustees tend to interpret this particular exception narrowly. Courts look at industry standards and at the creditor's payment history with the debtor. In addition, different district courts have varying interpretations of what constitutes a payment in the ordinary course of business.
Contemporaneous Exchange of Value Exception : An example of a contemporaneous exchange for value exception would be a sale made on COD or wire transfer terms during the preference period. This exception applies only to the extent the new value equals the payment received. For example, if a creditor demanded a 3 for 1 exchange, only 1/3 of the payment received would not be considered preferential.
No Improvement In Position By A Secured Creditor : A trustee may not avoid a transfer of a perfected security interest in inventory or receivable or the proceeds of either, except to the extent that the aggregate of all such transfers (or perfected security interests) caused a reduction in the ratio between the indebtedness to that creditor and the value of that creditor's collateral as of the date of the petition and the 90th day prior to the bankruptcy filing date - which prejudices other creditors holding unsecured claims
- How has the law related to ordinary course defense changed?
Section 547(c)(2) of the Bankruptcy Code has provided a creditor with a defense to a preference complaint if the creditor can prove that the payment was (a) for a debt incurred in the ordinary course of business between the debtor and the creditor (b) made in the ordinary course of business between the debtor and the creditor and (c) made according to ordinary business terms in the relevant industry. The creditor must prove all three of these elements in order for the defense to be successful. The Act amends Sec. 547(c)(2) to make the ordinary course defense available if the creditor can prove that the debt was incurred in the ordinary course of business and either of the other two prongs of the defense is satisfied.
- I am owed money in my case. Can it be set off against what plaintiff is seeking in this case?
Yes. This is possible under Subsequent New Value Defense. You may have received a demand to return a "preferential transfer," the purpose of which is to recoup payments that allowed a creditor (you) to supposedly get an advantage before the bankruptcy case was filed.Not every preference demand is legitimate. Take a careful look at the deadline for returning the payment and if necessary, get an extension. You may have defenses against returning the money. The burden is on the bankruptcy trustee to prove that the payment should be returned under the law. Even if the demand is legitimate, you could still have a "subsequent new value" or "ordinary course of business" defense or there may be opportunities to reduce the amount. In any case, you owe it to yourself to thoroughly investigate your options before handing over a check.
- What constitutes ordinary business terms?
Ordinary business terms signify that a creditor is required to prove that the payment was consistent with some objective industry standard and not just a subjective analysis that the payment was consistent with the parties' prior dealings. The Courts have held that only dealings that are so "idiosyncratic" as to fall outside the broad range of terms offered by other firms in the creditor's industry should be deemed extraordinary, not consistent with ordinary business terms and not subject to the ordinary course of business defense. The court emphasized that strict conformity with some industry standard is unnecessary to prove ordinary business terms. Debtors and creditors in a particular industry do not enter into identical credit arrangements and no court should impose an inflexible "one-- size-fits-all" set of billing practices when determining ordinary business terms.
- How is the Ordinary Course of Business defense typically analyzed?
The Ordinary Course of Business (“OCB”) defense is often the most difficult to establish. Depending on the magnitude of the claim, it typically requires the assistance of outside counsel as well as financial experts. The OCB defense has three components which are stipulated by the Bankruptcy Code. The Code requires that two of the three elements outlined below must be established in order to support an affirmative defense. The payment by the debtor must be made on debt incurred in the ordinary course of business or financial affairs of the debtor and the creditor. The payment to the creditor must be made in the ordinary course of business or financial affairs of the debtor and the creditor. The payment to the creditor must be made according to ordinary business terms. The first component is the easiest to prove for most creditors since they are simply required to show that the transactions are “normal and incidental” to the business operation of the debtor. However, this component may prove more challenging for a creditor who engages in isolated or infrequent transactions with the debtor. Components two and three are often referred to as the “subjective” and “objective” tests of the OCB defense, respectively. Prior to the Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 (“BACPA”), the successful utilization of the OCB defense as an affirmative defense to a preference action requires that payments from the debtor to the creditor meet both the subjective and the objective tests. Post BACPA, it is only required that such payments meet either the subjective test or the objective test. As a result, it is generally believed that this affirmative defense should be easier and less expensive to prove as compared to pre-BACPA.
To make a determination that payments received during the preference period are made in the ordinary course of the financial affairs of the debtor and creditor, the courts have historically considered not only the timing of payments but also the method of payment, as well as typical communication between the parties prior to payment and contractual terms or agreements between the parties, etc.
- What evidence do I need to prove a contemporaneous exchange for New Value defense?
When asserting this defense, you must prove that the debtor and you intended the transfer to be a contemporaneous exchange for new value which was provided to the debtor. For example, if you delivered goods to the debtor and right then and there the debtor paid you for those goods, then that would be a contemporaneous exchange for new value. Courts have held that the transactions that appear on their face to be a contemporaneous exchange for new value will not be considered as such if there is evidence that the parties did not intend the exchange to be contemporaneous. The intent of the parties can be difficult to prove, especially if you have an uncooperative debtor. However, the conduct of the parties and any writings and communications between them can be used to establish intent.
- What evidence do I need to prove an ordinary course of business defense?
The ordinary course of business defense [OCB] is intended to protect routine payments of credit transactions from preference exposure, however, it is more difficult to prove than the other preference defenses. The courts have also reached conflicting decisions where both the trustee/debtor-in-possession and the creditor can cite cases in support of their positions. The OCB defense has three components, as stipulated by the Bankruptcy Code. The Code requires that two of the three elements outlined below be established in order to support an affirmative defense. The payment by the debtor must be made on debt incurred in the ordinary course of business or financial affairs of the debtor and the creditor. The payment to the creditor must be made in the ordinary course of business or financial affairs of the debtor and the creditor. The payment to the creditor must be made according to ordinary business terms.
The first component is the easiest to prove for most creditors as they are simply required to show that the transactions are “normal and incidental” to the business operation of the debtor, however, this component may prove more challenging for a creditor who engages in isolated or infrequent transactions with the debtor. The components two and three are often referred to as the “subjective” and “objective” tests of the OCB defense, respectively. The subjective element concerns the consistency of the parties' course of dealing and the objective elements concerns the relationship between the parties' course of dealing and industry norms.
To determine whether payments received during the preference period are made in the ordinary course of the financial affairs of the debtor and creditor, the courts generally evaluate the course of dealing between the debtor and creditor by comparing the preferential transfer to the history of payments, mode of payments and any collection activity between the parties for a significant period prior to the preferential transfers.
- What kind of arguments would you be making on my behalf?
There are potential defenses available against repayment; particularly if the demand is for a relatively small sum, the case can be put to negotiation as well. If negotiation does not settle the claim, the debtor or the trustee can file a suit against the creditor in the bankruptcy court. The Bankruptcy Code provides several defenses to preference liability in order to encourage creditors to continue conducting business with a financially troubled debtor in the hope of avoiding a bankruptcy filing. The three most common defenses are:
- The contemporaneous exchange for new value,
- The subsequent new value and
- The ordinary course of business defenses.
The argument to be made in a specific case is a fact specific enquiry and entirely depends upon the background and facts of the case.
What defenses are available to creditors?
There are many defenses available to the preference transfers.
The “Contemporaneous Exchange” defense (also sometimes referred as the “Contemporaneous Exchange for New Value” defense, but not to be confused with the “New Value” defense), simply means that the debtor paid money to you in exchange for something of value. In a contemporaneous exchange, the debt incurred is not considered to be antecedent even if there is a slight delay between payment and the receipt of the value paid for.
For example, if you delivered goods to the debtor and right then and there the debtor paid you for those goods, then that would be a contemporaneous exchange for new value. If the debtor paid by check, then this would still be considered a contemporaneous exchange even though the check probably will not be honored for at least a day, since the check is being used as a means of payment and not as an extension of credit. The criteria required for a transaction to be considered a contemporaneous exchange is that it was intended to be a contemporaneous exchange and that it was, in fact, such an exchange.
Ordinary Course Payments
Ordinary Course of Business defense comes into play when a creditor makes the case that the payment they received from the debtor was not a payment for an outstanding debt, but rather a payment made in the “ordinary course of business”. Since a business must continue making payments to remain viable, Sec.547(c)(2) provides an exception for ordinary business transactions or ordinary course payments, which are payments made in the ordinary course of business. The Code requires that the debt incurred must have been for an ordinary transaction between the debtor and the transferee or the payment of the debt was in the ordinary course of business or according to terms common to the business. The Supreme Court has ruled that ordinary course payments can be for either short-term or long-term debt and has extended ordinary course payments to include transactions that were modified because of the debtor's lower creditworthiness.
The subsequent new value defense is perhaps the most commonly used defense. The focus is on the period after the potentially preferential payment where a vendor provides goods or services on open account and the debtor pays the vendor at various points during the preference period. The new value defense is used in situations where a creditor provides goods to a debtor (before the filing of bankruptcy by debtor) on credit on a periodic basis and then the debtor also makes a series of payments to the creditor during the preference period (i.e. the period of 90 days prior to the debtor’s bankruptcy filing). To the extent that the creditor extended new value to the debtor by shipping goods or providing services on open account following any payment, such new value reduces the preference claim.
There are two policy reasons for the new value defense: First, creditors who have enhanced the debtor's estate by providing new goods and/or services on credit after having received a payment from the debtor, should not be penalized; creditors who continue to extend credit to their customers after receiving payment of existing indebtedness without an offset for new credit extended following the payment face the risk of substantial additional losses as a result of their customer's bankruptcy filing.
Purchase Money Security Interests (PMSI)
A purchase money security interests (PMSI), is the property interest held by a creditor that lent the debtor money to buy specific property, and where, by contract, the property serves as collateral for the debt. Since the debtor obtains new value by purchasing the property, Sec.547(c)(3) excepts PMSIs from avoidable transfers as long as the debtor uses the new value to obtain the collateral specified in the security agreement. However, to be protected from avoidance, the federal law - which trumps any conflicting state law - requires that the security interest must be perfected within 30 days after the debtor receives the collateral.
- What is an ordinary course defense?
The Ordinary Course of Business (“OCB”) defense is often the most difficult to establish and depending on the magnitude of the claim, typically requires the assistance of outside counsel as well as financial experts. The OCB defense has three components, as stipulated by the Bankruptcy Code. The Code requires that two of the three elements outlined below be established in order to support an affirmative defense.
The payment by the debtor must be made on debt incurred in the ordinary course of business or financial affairs of the debtor and the creditor.
The payment to the creditor must be made in the ordinary course of business or financial affairs of the debtor and the creditor.
The payment to the creditor must be made according to ordinary business terms.
- What is a new value defense?
The “New Value” Defense (also known as the “Subsequent Extension of New Value” Defense) is used in situations where a trade creditor was providing goods to a debtor (well, before the debtor was a debtor) on credit on a periodic basis and the debtor made a series of payments to the creditor during the preference period (i.e., the period of 90 days prior to the debtor’s bankruptcy filing).
- What in Inchoate Lien defense?
An inchoate lien is a lien that has not yet been perfected. For example, in construction an inchoate lien may arise as soon as a contractor begins work or supplies materials to the project. In a state that does not recognize inchoate liens a sale of the property or a bankruptcy may cut off lien rights.
- Must the vendor provide expert testimony to prove up the ordinary course of business preference defense?
A vendor need not employ an expert in proving up the ordinary course of business defense. In re Bridge Information Systems, Inc., 297 B.R. 759 (Bankr.E. D.Mo.2003), the bankruptcy court ruled that non-expert testimony was sufficient for the creditor to establish the prevailing industry terms among similarly situated vendors faced with a similar transaction in which the debtor made the challenged payment. The Court went on ease the creditor's burden by stating, "Evidence need not be in the form of empirical data of the [creditor's] competitors' collection practices."
- Are prompt payments protected by the "ordinary course of business defense [OCB]”?
Yes. If that was the practice followed in the historical/pre-preference period between the debtor and the creditor, then prompt payment may be protected by OCB defense. Alternatively, prompt payments may be protected under contemporaneous exchange defense.
- What defenses are not available to a defendant in a preference case?
The creditor cannot rely on the defenses when they knew or had reason to suspect that the bankrupt was insolvent, and that the transaction would give them a preference over other creditors.
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