Preferential Transfers: Bankruptcy Trustee’s Demands for Payment

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Preferential Transfers: How To Fight the Bankruptcy Trustee’s Demands for Payment

A leading creditors’ rights attorney offers strategies for avoiding the “double whammy”

Pittsburgh, PA (February 2003)-It is a phenomenon that is sweeping the nation. As bankruptcy filings continue to increase, debtors and trustees are becoming more aggressive in demanding that creditors return payments received prior to the bankruptcy filing. That’s right. Not only are creditors having to face the losses that result from the bankruptcy protections afforded their customers, but they are actually being told that they have to return money they have already received. Known as preferences or preferential transfers, the purpose of this process is to recover payments that allowed a creditor to get an advantage a short time before the bankruptcy case was filed.

“I call this the ‘double whammy,'” says Pittsburgh-based creditors’ rights and bankruptcy attorney Robert S. Bernstein. “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!”

Seem unfair? Well, according to Bernstein, it might be more than unfair. That demand might not be worth the paper it’s written on.

“Just because you get an official-looking demand letter or pleading doesn’t mean you should automatically assume you have to return the money,” Bernstein says. “There are a lot of aggressive bankruptcy representatives out there sending these letters out without a lot of research as to which claims for preferential transfers are legitimate and which are not. The problem is that not every preference demand is legitimate, and unwary creditors are giving back money that is rightfully theirs. Every creditor owes it to himself to take a little time to investigate the legitimacy of the claim.”

Bernstein, who holds the rare distinction of being Board Certified in both Creditors’ Rights and Business Bankruptcy by the American Board of Certification, offers the following tips for contending with a potential “double whammy.”

  • First, do not immediately send that check! Take a careful look at the deadline for returning the payment set forth in the letter or pleading and, if necessary, get an extension. You need time to understand why the trustee is demanding the return payment and to ascertain whether or not you have any defenses to the claim.
  • Next, talk to legal counsel. You need to make sure that the bankruptcy trustee had the right to make the demand in the first place. For example, the burden is on the bankruptcy trustee to prove that the payment was made to or for the benefit of a creditor; was on account of antecedent (old) debt owed by the customer; was made while the customer was insolvent; was made on or within 90 days before the date of the Bankruptcy Petition; and that it enabled the recipient to receive more than it would receive if there was a liquidation of the customer’s bankruptcy estate. Each of these elements must be present in order for the claim to hold up in court.
  • Even if it appears that the claim is valid on its face, you may still have legitimate defenses to returning the money. For instance, you may be able to prove that the payment was made in the “ordinary course of business.” You could have what is known as a “subsequent new value defense.” It may turn out that the law of preferences is actually on your side.

“The point is you should never just knuckle under to a preference claim. You need to do your homework,” Bernstein explains. “And even if it turns out that the payment really is a preference, you still may be able to mitigate your losses. When faced with sophisticated resistance, it is not unusual for the bankrupt estate to accept a reduced amount to settle the claim.”

Bernstein heads up Bernstein-Burkley, P.C.’s Preference Defense Team, a group of experienced attorneys and staff who specialize in defending creditors from the proliferation of preference claims sweeping the nation. Together with his colleagues, he has created a system for cost-effectively defending against preference claims brought against his clients throughout the country. For more information on how to defend yourself against preference claims, contact Bernstein at 800-693-4013 or toll free at 1-800-927-3197; rbernstein@bernsteinlaw.com or visit the Publications area at www.bernsteinlaw.com.

 

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