Preferential Claims Kick Businesses
Already Down From Bad Economy
October 12, 2011
By Sahely Mukerji, firstname.lastname@example.org
| "The current U.S. Code 547 is extremely
unfair and even more so in these economic times," Kris
Vockler of ICD High Performance Coatings recently found.
Kris Vockler is a woman on a mission. She wants to change the U.S.
Vockler, vice president of operations at ICD High Performance Coatings
in Vancouver, Wash., recently received a letter from the law firm
of Ackerman & Felberg LLP in New York stating that ICD must
return the money that it received from Arch Aluminum and Glass Co.
in payment for invoices during the last 90 days before Arch filed
bankruptcy in Tamarac, Fla. Arch filed
for bankruptcy in November 2009. In an ironic twist, ICD also
is a creditor that was owed money by Arch.
"According to U.S. Bankruptcy Code Section 547(c)(e), money
paid to us by Arch, up to 90 days prior to declaring bankruptcy,
might be considered preferential and have to be given back to the
creditor pool in the suit," Vockler says. "One bit I'm
not sure of is how several entities connect to each other. First
we have the group of creditors, us, and then you have a liquidation
firm who started contacting all of us, asking for money back. I'm
not 100 percent sure yet if the money going back goes to the creditor
pool or if it's just a convenient way for a second law firm to gather
funds from us all. I can only imagine it works similarly to a personal
debt, where a credit company will pay for a fraction of what was
owed and turn around and harass someone for the full amount. Hence,
netting them a profit.
"Either way, the current U.S. Code 547 is extremely unfair
and even more so in these economic times," Vockler says. "Although
it started with the true intentions of ensuring company X didn't
get paid preferentially over company Y just prior to a bankruptcy,
it's misused in its current form today."
"I call this the 'double whammy,'" says Robert S. Bernstein,
creditors' rights and bankruptcy attorney at Bernstein Law Firm,
P.C., Pittsburgh. "Your customer files bankruptcy. You know
you're not going to be collecting the rest of what you are owed
anytime soon, if ever, and then you get this letter from someone
representing the debtor's bankrupt estate demanding that you return
a payment already received." He adds, "So not only do
you have a dead account, but now you're supposed to send money back
to the debtor's bankrupt estate."
In Vockler's case, all funds paid to Arch within 90 days before
it filed for bankruptcy are under scrutiny, unless those payments
meet certain criteria. "From what I understand, the criteria
used in this case is 'did the creditor follow a methodology in collections
that differed from the previous two years?' If a creditor doesn't
have a good trail of how they tried to collect past due funds, they
are pretty much seen as having gotten preferential payment, because
they can't prove otherwise.
From what I've studied, this
is the most common defense against having to give back funds as
well as one of the most common ways to test if funds are able to
be taken back."
A preferential transfer is "a transfer (payment, lien, title)
that was: (1) to or for the benefit of the creditor, (2) for or
on account for an antecedent debt owed by the customer before the
payment was made, (3) made while the customer was insolvent, (4)
made on or within 90 days before the date of the Bankruptcy Petition,
and (5) that such payment enabled the creditor to receive more than
it would receive if there was a liquidation of the customer's bankruptcy
estate under Chapter 7 of Bankruptcy Code," Bernstein says.
"It's an incredibly unfair code, particularly in this economic
climate," Vockler says. "On top of losing money, this
is just ridiculous. It had altruistic intentions, but it needs more
exceptions, a better way to calculate, something [to make this fair
to all parties concerned." To elaborate, "let's just pick
some example numbers, which in no way represent us," she says.
"At the time of bankruptcy, your customer owes you $100,000,
but now they won't be paying that but you will be able to be in
a pool of creditors, in which you might see a percentage of that
back. Next, you get notice from a liquidating firm that says your
customer paid invoices in the previous 90 days, amounting to $50,000.
They then ask you to send them a check. You then pay your legal
counsel to argue that down, maybe down to only $10,000. Gee, just
when you came to grips that you lost money, you lose more."
To protect your business from preferential claims, be on the lookout,
Bersntein says. "Sometimes you can see it coming," he
says. "You know the customer is destined for a bankruptcy,
but you have some leverage that enables you to get a payment. Maybe
that leverage is a collection action or a product the customer desperately
needs. Whatever the leverage, you get a payment that might be preferential.
If faced with the choice of taking it or not, take it! You can always
give it back, but you may also have defenses or reductions that
will help you keep the payment even if it is preferential."
The important thing is to take advantage of possible defenses by
making sure that if you do get a payment and are giving something
for it - more product, lien release, etc. - you do that in the right
way to make sure you can use it to defend a possible preference
claim, Bernstein says. "For example, if you are owed $50,000
that is past due and the debtor wants new product of $10,000, make
sure that you deliver the new goods after you get the $10,000 check
you are going to demand," he says. "In that way, you can
argue both that the $10,000 was for the new goods and that the new
good was 'new value' that you extended subsequent to the payment.
That will allow you to reduce any claim of preference by the new
credit that was extended after receipt of the allegedly preferential
Another way to protect against a preference is to have liens on
the assets of the customer in excess of the amount owed to you,
Bernstein says. "Then you are not an unsecured creditor and
If you do get a preference claim letter, "do not send back
the money just because someone asked!" Bernstein says. "Make
sure you consult with your bankruptcy counsel, be sure that you
analyze your defenses. Even with no real defenses, there is always
a possibility of settling for a reduced amount."
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