PROBLEM SOLVED: The Preference Claim -
My Customer Filed Bankruptcy and Now Wants the Money Back?!?
Problem: My customer filed a Chapter 11 bankruptcy a year ago. Now, I received a letter demanding that I pay back the money we were paid for work we did before they filed. Can they really do this?
Solution: Yes, but you should know that almost always, these claims can be reduced by a review of your defenses, and by negotiation.
Story: Our law firm received a call from a service company who was holding a letter from an attorney representing a bankruptcy trustee. The letter said that the $71,369 that was paid by the bankrupt customer was money paid in the 90 days prior to the bankruptcy filing, and they wanted it to be paid back into the bankruptcy. Even though these were payments for services and equipment that were properly provided, this is a claw-back effort to force you to pay back money that you received in that time period. This is a claim based on a bankruptcy code concept to prevent one creditor from being “preferred” over other creditors. Theoretically, the money would be recovered, and then redistributed to all creditors on a pro-rata basis. In actuality, statistics indicate less than 10% is typically re-paid to creditors because it usually goes to legal and professional fees.
The Court will take the parties prior agreement, how the goods and services are provided, and enforcement of payment terms in determining if the actions fall within the ordinary course of dealings between the parties. Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), 463 B.R. 302, 306 (Bankr. D. Del. 2012).
Analysis: Since the debtor is presumed insolvent in the 90-day period prior to the filing, the trustee can resort to Bankruptcy Code 11 U.S.C. § 547 (b) to try and force a return of all such payments in that time period. Just know that you do not have to automatically roll over and pay the money back. You have defenses that are also included in the Code – if you take immediate action. The three most common defenses are: (i) ordinary course of business, (ii) contemporaneous exchange, and (iii) subsequent new value. For the Ordinary Course defense, we analyze the payment history to determine if the payment history during the 90-day period was similar to historical trade actions, which can eliminate any portion of the claim which meets the normal history. The Contemporaneous Exchange defense is best understood as cash-on-delivery (COD) or pre-payments, all of which are absolute defenses to a preference claim. The Subsequent New Value defense essentially rewards the creditor who provided multiple services and products on credit to the debtor by giving a dollar-for-dollar defense against the preference claim for each new sale. The defenses are cumulative, so you don’t have to pick the best one.
Conclusion: In the situation of our client with the $71,369 demand, we were able to define an initial settlement offer by creating a statistical analysis. We calculated the average days to pay, the weighted average days to pay, the range of DSO, and the standard deviation. The analysis indicated that all payments in the preference period were in the ordinary course, and our offer to settle was only $5,000. The offer to pay only 7% of the initial claim was accepted. Doré Rothberg McKay represents trade creditors in every major O&G bankruptcy.
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