Legal Blog

The Dreaded Bankruptcy Preference Demand: DON’T THROW IN THE TOWEL

Many of my business clients have been unlucky enough to not only be owed substantial money by a bankrupt company, but to also then receive a letter or lawsuit demanding the return of money paid by the bankrupt company to the client.  This is known as a preference demand or preferential avoidance action. The receipt of the demand is often shocking or unbelievable.  Further, the demand from the debtor or bankruptcy trustee for the return of the money is often written in a way that suggests that you have no alternative other than to pay the amount of money demanded.  The preference demand should not be viewed as a situation that you must surrender to – there are many defenses that can be used to defeat a preference claim. The most popular defense is the ordinary course of business defense.  The ordinary course of business defense works this way:  if the payments were in the ordinary course of business between the creditor and the debtor, or made in accordance with normal terms in the industry, then the trustee will not be able to recover the payment.  For example, if your customer historically paid you 30 days after invoice date, and, 10 days before filing bankruptcy, paid an invoice 30 days after invoice date, then the defense would apply.  If, on the other hand, 10 days before filing bankruptcy, the customer paid an invoice 120 days after invoice date, that would not be in accordance with the history of business, and the payment may be able to be recovered. In my representation of creditors sued in preference cases, I find that before clients contact me, they often attempt to resolve a preference case by relying solely on the ordinary course of business defense. The problem is that the ordinary course of business defense does not always provide a total defense. There are, however, many other defenses available to a creditor, including the substantially contemporaneous exchange defense. The substantially contemporaneous exchange defense works this way:  if your customer pays you at the same time that additional goods are sold or work is performed, with a value at least equal to the payment, then you will not have to return the payment. Another often overlooked but very important defense is the new value defense, which basically allows a creditor to deduct from any amounts that were paid to the creditor the value of services or goods provided to the customer after the date of the payment. All of the defenses to preference cases have their own specific requirements that must be satisfied in order to properly assert the defense.  You should consult qualified legal counsel to adequately represent you in a preference case to ensure that you receive the full benefit of all defenses and, therefore, minimize the amount, if any, that you are required to repay. So, if you receive a demand for repayment of a preference, don’t dread it – you have alternatives. One or more defense may apply.  As soon as the demand is received, conduct a detailed analysis of the business history between the bankrupt company and your company and compare that history to the payments at issue.  Then, consult qualified legal counsel to review all of your defenses. After the analysis and review are complete, you will know the strength of your case and be in a position to decide whether to fight or negotiate a settlement. If you have any questions regarding a preference demand or preferential avoidance action please contact Glenn D. Solomon Esq. at: Business Lawyer Glenn D. Solomongsolomon@offitkurman.com | 443.738.1522 Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has represented clients in preference actions all across the United States. Mr. Solomon has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, advising companies in financial distress and bankruptcy preference avoidance actions. You can also connect with Offit Kurman via FacebookTwitterGoogle+YouTube, and LinkedIn