Of all the challenges that businesses must face, preference claims can be one of the most unexpected as well as devastating. What is a preference claim? It is a claim made during bankruptcy on a payment that occurred within a certain amount of time before the bankruptcy. It involves the bankruptcy petitioner seeking to recover the recent payment and can truly set a business back financially.
To get help with preference claims and other issues involving business debt and bankruptcy, trust The Weisblatt Law Firm. Phone consultations are free, so pick up the phone and reach out for the legal representation and guidance you deserve. Call (713) 666-1981 today.
Understanding Preference Claims
Specifically, preference claims are claims on money that has been paid to other parties prior to a person’s filing for bankruptcy. When successful, a preference claim permits the bankruptcy petitioner to essentially seize payments they made within the preceding 90 days before filing for bankruptcy. The rationale behind preference claims is that recovering these payments allows for a more equitable distribution of funds to creditors during bankruptcy.
How to Fight Preference Claims
Fortunately, businesses have options to defend themselves against preference claims. Depending on the circumstances, one or more of the following defenses or strategies can provide a strong defense against the seizure of a payment.
Ordinary Course of Business
A common and powerful defense to a preference claim is the “ordinary course” defense. This defense can protect payments of debts made in the ordinary course of business. Its purpose is to protect normal, ongoing transactions between the debtor and creditor that were associated with attempts to reduce debt before bankruptcy.
To be successful with this defense, the creditor must typically prove:
- The debt was incurred in the ordinary course of business.
- The payment of the debt was made in the ordinary course of business.
- The payment was made in accordance with common, ordinary business terms.
Determining precisely what the ordinary course of business is can often result in disputes. Both subjective and objective standards may come into play.
Contemporaneous Exchange for Value
This often-disputed defense provides a narrow challenge to preference claims. To be successful, the creditor’s attorney must prove that goods or services were provided contemporaneously with the payment received from the debtor. They must also prove that both parties intended for the payment and receipt of goods or services to be contemporaneous.
In most legal proceedings, intent can be a challenge to prove, but it is not impossible. Depending on the circumstances, a creditor’s attorney may have readily available evidence to show that both parties intended the exchange and payment to be contemporaneous. For example, a cash-on-delivery (COD) order accompanied by a Payment Agreement stating COD and other terms would be effective proof.
The Weisblatt Law Firm vigorously protects its business clients and their bottom lines from business and legal overreach.
New Value Defense
The new value defense is an effective method for creditors to protect payments received from preference claims. Essentially, if the creditor and debtor engage in a transaction that creates new value for the debtor, the transfer from debtor to creditor will be safe to the extent of the payment received.
Consider a business that orders and pays for $50,000 worth of goods from a creditor. The creditor delivers half of the goods, but the debtor files for bankruptcy before the other half can be delivered. The new value defense would allow the creditor to shield $25,000 from a preference action.
In addition to the above-detailed defenses, other effective defenses may also be available, such as those involving the transfer of security interests between the debtor and the creditor. In all cases involving preference actions, businesses are strongly encouraged to consult with an experienced business attorney. These attempts to claw back money rightfully received in exchange for goods, services, or in payment of debts should be contested and defended against.
Bankruptcy trustees can be zealous in their attempts to recover pre-bankruptcy payments. Having an attorney deal directly with trustees gives business owners peace of mind and the time to concentrate on important business matters.
Contact an Experienced B2B Debt Collection Attorney for Help
Preference claims can come out of the blue and wreak havoc on a business. Fortunately, powerful defenses to preference claims are often available. If a party is attempting to recover a recent payment from you because of bankruptcy, do not hesitate to call an experienced B2B debt collection lawyer.
The Weisblatt Law Firm is a premier business law firm that handles numerous B2B debt issues for clients. Contact our office to speak with Attorney Wesiblatt and learn how he brings decades of experience to bear on every case he takes. Call (713) 666-1981 for a consultation today.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel. Attorney Bio
