Legal Blog

Bankruptcy Preference Actions: Be Proactive, Not Reactive

My previous articles in my bankruptcy preference blog have discussed how to react to a bankruptcy preference demand that your company receives from a bankrupt company or bankruptcy trustee.  Several of the defenses that are available, such as ordinary course of business and new value, have been discussed in detail.  There are, however, steps that you can take before your customer files for bankruptcy to either avoid a bankruptcy preference claim being made against your company, or to proactively build defenses to any claim that may arise in the future.  Here are some tips to help you achieve that:

  1. Have your credit people regularly and actively manage your customers’ accounts.  This is obviously something that your company should be doing, regardless of whether a bankruptcy preference is forthcoming.  But it is particularly important if a bankruptcy preference case is filed.  One of the main defenses is ordinary course of business, which will require you to prove that the payments sought to be recovered were consistent with past transactions between your company and the bankrupt company.  By closely monitoring the status of your accounts payable, you can make efforts to obtain payments from your customers closer to the historical experience of payments;
  2. In addition to monitoring your customers’ accounts internally, you should regularly monitor your customers through information available over the internet, such as Google.  In this way, you may discover information that prompts concern about your customers’ overall financial health, which can lead you to monitoring the accounts more closely;
  3. Put your customer on COD.  All of this is sometimes not a practical alternative, but for accounts which have become troubled, it often is.  The benefit of this from a bankruptcy preference standpoint is that if a payment is made by the customer at the same time that goods or services are delivered, you will have a defense to a preference claim;
  4. If an account becomes aged beyond historical norms, you should come to an agreement with the customer as to which invoices future payments will be applied to.  The idea is to apply future payments to invoices with ages so that the days to pay the invoices will be consistent with historical experience.  For example, assume your customer has historically paid your company 45 days after invoice date, and your customer recently has delayed payments.  You have two invoices owed by the customer; one is 45 days late and the second payment is 90 days late.  Your customer makes a payment.  If you have an agreement with the customer that the payment will be applied to the invoice that is 45 days late, you will likely have a defense to any bankruptcy repayment claim; and
  5. Obtain collateral from your customer to secure unpaid invoices.  Although this is often resisted by customers, it can be achieved by inserting simple language in your terms and conditions portion of your contract or quotations.  The benefit of this is as follows.  One of the requirements that must be satisfied for a payment to be recovered in a bankruptcy case is that the creditor must have received more than if all of the assets of the bankrupt company were liquidated.  If you have certain assets of a bankrupt company as collateral to secure unpaid invoices, then it is possible that the amount that you received through the payment is the same that you would have received had the company’s assets been liquidated.

The lesson here is that there are proactive steps that you can take to minimize, or avoid, the financial distress that can be caused by a bankruptcy preference claim.   If you have any questions regarding a preference demand or preferential avoidance action please contact Glenn D. Solomon Esq. at:  | 443.738.1522   Business Lawyer Glenn D. Solomon 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