If a customer makes payments to you but then files bankruptcy, you may be legally required to return the money, even if you were unaware of the customer’s financial problems at the time. This is known as a bankruptcy preference claim, a lawsuit filed by a debtor or a bankruptcy trustee against a company to which the debtor made payments before declaring bankruptcy.
Fortunately, creditors in the transportation and logistics industry who have received payment for services rendered have defenses under the Bankruptcy Code that can be used to defeat a preference claim. But they must be asserted in court or a judgment against you might be issued.
From our offices in Atlanta, the attorneys at Mitchell-Handschuh Law Group, LLC assist our transportation and logistics clients by defending against bankruptcy preference claims throughout Georgia and across the United States.
Bankruptcy preference claims are intended to give equal treatment to similarly situated creditors in a bankruptcy action. One creditor should not be given “preference” over another. If a debtor paid some bills but not others before filing bankruptcy, the creditors who were paid have been given preference. To avoid this unequal treatment, Bankruptcy Code §547 allows preference claims, which are intended to “claw back” money paid to a creditor before the bankruptcy was filed. These funds become part of the pool of money that is used to pay all creditors.
The purpose of Bankruptcy Code §547 is: (1) to discourage aggressive creditors from racing to the courthouse to sue a debtor; and (2) to promote fairness and equity among creditors by evenly distributing whatever money is left under the supervision of the Bankruptcy Court.
A bankruptcy preference claim is usually filed by a bankruptcy trustee against creditors who were paid within a certain period of time, between 90 days and 1 year, before the debtor filed for bankruptcy. A creditor will receive a letter that identifies the amount owed and demands immediate payment. If the money is not repaid, the bankruptcy trustee can file a lawsuit against the creditor to try to recover the funds.
However, in many cases, a creditor can negotiate a settlement or convince the trustee to drop the claim, either because the money is not a preference or because the creditor has a defense.
To be valid, a preference claim must meet the following requirements:
If a creditor can prove all of the elements of a preference claim, the claim is “avoided” and the money must be returned unless the creditor has a valid defense. A preference payment is avoidable even if there is no dispute regarding the goods sold or services rendered, and return of the money can be demanded even if there was never any intent to make a preference payment.
There are several statutory defenses to a preference claim. Payment in the Ordinary Course and Subsequent Transfer of Value are the defenses that most commonly apply to transactions in the transportation and logistics industry.
To succeed, a creditor must show that the transaction was incurred in the ordinary course of business of the debtor. The creditor will need to establish: (1) that the debt relates to the debtor’s business; and (2) that the transfer was ordinary in the course of business of the debtor. The bankruptcy court will look to the history of the transactions between the parties and whether the days to pay are in line with past transactions.
A creditor can protect payments that were received during the preference period if the creditor has given new value that remains unpaid. Suppose a creditor makes a payment of $1,000, but the creditor then provided the customer with another $500 worth of goods or services. The creditor can offset the $500 value of the goods or services against the $1,000 preference payment.
The 11th Circuit Federal Court of Appeals firmly established the viability of this defense in the 2018 case of Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC). Even if this defense was not successful before 2018, it would most likely succeed now.
At Mitchell-Handschuh Law Group, our attorneys protect transportation and logistics companies against preference claims in bankruptcy courts throughout Georgia and across the country. We have extensive experience representing transportation and logistics providers at all stages of the business cycle.
We welcome questions about our defense of transportation and logistics providers in bankruptcy preference claims, and are pleased to assist clients in Metro Atlanta, throughout the State of Georgia, and across the country.