Preference Actions: What is the “contemporaneous exchange” defense?

In a previous post (“Defenses to Preference Actions – Part I“), I explained that there are three common defenses to preference actions (also often called “preference lawsuits”) that you can use if you’ve received a demand letter from a bankruptcy trustee, from counsel to a Debtor-In-Possession or counsel to a creditors committee.

In a subsequent post I explained the “Ordinary Course of Business” Defense.  Next I’ll explain the…

“Contemporaneous Exchange” Defense

The “Contemporaneous Exchange” Defense (also sometimes referred as the “Contemporaneous Exchange for New Value” Defense, but not to be confused with the “New Value” Defense), simply means that in the debtor paid money to you in exchange for something of value.

For example, if you delivered goods to the debtor, and right then and there the debtor paid you for those goods, then that would be a contemporaneous exchange for new value.  If a trustee pursued a preference action against you for that transaction, then you would likely be successful employing the “Contemporaneous Exchange Defense.”

Of course, the devil is in the details and the facts of a particular situation are the key to a successful or unsuccessful defense.

Timing, for example, is an important element.  If you deliver goods or perform a service for the debtor without receiving payment.  Then a month later you get the debtor to pay what they owe you, you have a much weaker “contemporaneous exchange” defense.  Why?  Because the exchange was not contemporaneous.

Getting into the nitty gritty a bit, there was a big court decision in 2007 that revolved around the issue of credit transactions.  (Hechinger Investment Company of Delaware, Inc. v. Universal Forest Products, Inc., Nos. 06-2166, 06-2229, 2007 U.S. App. LEXIS 13155 (3rd Cir. June 7, 2007))  And the court decided that even in the instance of a credit transaction–in other words, where there’s a delay between the transaction for goods and the actual payment for those goods–it can still be valid to invoke the “contemporaneous exchange” defense.

The main takeaway for any creditor involved in transactions such as these is to be aware that trustees can pursue preference actions against you, even for seemingly valid and legitimate transactions.  However, you also have some good defenses at your disposal.

The key to defending yourself is to have an experienced bankruptcy lawyer, particularly one who knows the ins and outs of preference actions.

Our experience both representing trustees and representing creditors against trustees gives us unique perspective on how to help our clients deal with preference actions.

If you’re facing a preference action in New York and need a skilled and experienced lawyer to help you navigate, please contact me for a free initial consultation.

Go to www.nybankruptcy.net to learn more about Rosenberg Musso & Weiner LLP and/or to set up a free consultation.

Preference Actions: What is the “Ordinary Course of Business” Defense?

In a previous post (“Defenses to Preference Actions – Part I“), I explained that there are three common defenses to preference actions (also often called “preference lawsuits”) that you can use if you’ve received a demand letter from a bankruptcy trustee, from counsel to a Debtor-In-Possession or counsel to a creditors committee.

The first one I’ll explain is called the “Ordinary Course of Business” Defense.

Simply put, under the “Ordinary Course of Business” Defense a creditor makes the case that the payment they received from the debtor was not a payment for an outstanding debt, but rather a payment made in the “ordinary course of business.”

Example:

You’ve been providing materials, goods or services to the debtor for several years (i.e., before it became known as “the debtor”).  Every month you sent an invoice to the debtor.  Every month the debtor paid it.  Then one day the debtor filed for bankruptcy.  So you ended your relationship with the debtor and that was that.

Or so you thought.

Now it’s a year later (a trustee has 2 years from the date of a bankruptcy filing to initiate a preference action against a creditor), and you get a demand letter in the mail saying you owe money to the debtor’s estate.  The amount is the same as the last transaction you did with the debtor, right before they filed for bankruptcy.

“This is crazy,” you think.  “As an avid reader of the NYBankruptcyNet blog, I know full well what a preference is.  And I don’t think my transaction constitutes a preference.”

And you’re right.  A payment made in the ordinary course of business by the debtor to  the vendor, or a payment made to the vendor under “ordinary business terms,” is a valid defense against a preference action.*

You know that.  I know that.  And if the trustee is up on her bankruptcy law, then she knows that as well.  Great, so everyone can just forget this ever happened and go home, right?

Wrong.  Because the trustee’s duty is to recover as much as possible for the debtor’s estate.  So if you want to keep your money, you’re going to either have to prove your case in the bankruptcy court or negotiate a settlement with the trustee.

Still, it’s better than having no defense.  And it means that with the help of an experienced bankruptcy lawyer, you can sidestep the preference action.  Or at least negotiate a better result than you would without the “Ordinary Course of Business” Defense.

If you’re the subject of a preference action in New York, please contact me for a free consultation.

As a New York bankruptcy lawyer who has experience on both sides of New York preference lawsuits-–the trustee side as well as the creditor site–-I know the lay of the land, and I’ll help you figure out the best strategy for your situation.

*Note:  Before the 2005 bankruptcy law went into effect, the Ordinary Course of Business Defense required you to prove that the transaction was (1) in the ordinary course of business and (2) that the payment was made under “ordinary business terms.”  Under the new law, it’s “or” instead of “and,” which means you only have to prove one or the other.

Go to www.nybankruptcy.net to learn more about Rosenberg Musso & Weiner LLP and/or to set up a free consultation.

Defenses to Preference Actions – Part 1

In previous posts on this site (What is a Preference?  And why should you care? and Preference Actions:  How to Defend Against Them), I’ve addressed the topic of preference actions (also commonly referred to as preference lawsuits).

If you read those two posts, then you know that, from a creditor’s perspective:

1. Preference actions seem unfair at first, but they’re fully legitimate under the bankruptcy laws and they’re a reality that you have to deal with; and
2. There are things you can do in preparation for defending yourself, and they require a fair amount of effort and thought.

However, you can take some comfort in knowing that there are some very legitimate defenses to preference actions against you.  The three most common defenses are:

1. “Ordinary Course of Business” Defense
2. Contemporaneous Exchange Exception
3. New Value Defense
   

If you’re faced with a preference action, you don’t have to know all the legal nitty gritty or all the case law.  (That’s my job.)  But you may find it helpful to be aware that these defenses exist and also be familiar with the basic concept of each defense so you can gauge whether you think you have a case worth fighting.

We’ll cover each of these defenses in ensuing posts on this blog.

In the meantime, if you’re facing a preference action or preference lawsuit by a trustee in New York, please feel free to contact me for a free initial consultation.  I’ll be happy to answer all of your questions about bankruptcy, trustees and of course preference actions and help you figure out the best strategy for protecting your assets.

Go to www.nybankruptcy.net to learn more about Rosenberg Musso & Weiner LLP and/or to set up a free consultation.

http://sendables.jibjab.com/view/iMBjXuKayYap6fb4

Are any debts non-dischargeable in a bankruptcy case in New York?

The goal of a bankruptcy case is to get the discharge.  This is true whether your bankruptcy is in Brooklyn, Queens, Manhattan, Long Island or anywhere else in New York or the rest of the U.S.  And it’s the same whether it’s a Chapter 7, Chapter 11 or Chapter 13 bankruptcy.

The discharge is what gives you the “clean slate” or the “fresh start.”  It means you are no longer obligated to pay the unpaid portion of unsecured debts such as credit card debt, and that those creditors are no longer permitted to seek payment from you.

However, there are also certain types of debts that are “non-dischargeable.”  That is, you still have to pay them in full even after your bankruptcy case is complete.  Here’s a list of some of those non-dischargeable debts:

1. Any debts that you failed to include on your list of debts for your bankruptcy filing.

2. Debts resulting from criminal activity (e.g., fines levied by the court) as well as debts resulting from death or injury caused intentionally by you or caused while under the influence of drugs or alcohol.

3. Student Loans.  There’s been discussion in Congress (as I noted in a recent post) of a more lenient standard for discharging student loans.  But until you hear otherwise, you still have to pay them back regardless of any bankruptcy filing.  The only exception is “undue hardship,” with heavy emphasis on hardship.

4. Tax liabilities incurred within the previous 3 years.  And that goes for federal, state and municipal taxes.

5. Debts that were fraudulently incurred.  The classic example is where you max out your credit cards prior to a bankruptcy filing (which I discussed in a previous post) under the mistaken belief that you’ll be able to just wipe away all of that debt once you file.  Fraudulent debts also include any debts you incurred where you lied or misrepresented yourself, e.g., to get a loan, as well as any attempt to pay off taxes (non-dischargeable debt) with a credit card (which would otherwise normally be considered dischargeable debt).

6. Alimony and court-ordered child support.

7. Secured debt, i.e., your mortgage, your car or debt incurred that is backed by collateral.  Technically, these are dischargeable, but you can’t discharge the lien or security interest the creditor has in the collateral.  (“Debts are dischargeable, but liens survive.”)  So for all intent and purpose, you need to pay these back in full or the secured creditor has the right to the collateral (e.g., the house or car) via the bankruptcy process.

On this topic, it’s worth noting that there has been discussion in Congress on a “mortgage cramdown bill” that would, if passed, empower a bankruptcy judge to change the terms of the loan or reduce the principle of the loan as part of the bankruptcy process.  As with student loans, however, until you hear otherwise, assume that mortgages must be paid in full and cannot be discharged in a bankruptcy case.

To learn more about the bankruptcy process, please feel free to contact me for a free initial consultation.  You can get all of your questions answered about what you can keep and what you can’t as well as which of Chapter 7, Chapter 11 or Chapter 13 would be the right option for you.

Go to www.nybankruptcy.net to learn more about Rosenberg Musso & Weiner LLP and/or to set up a free consultation.

Bankruptcy Mistakes: Don’t do these things before you file for bankruptcy in New York

Bankruptcy is often a counter-intuitive process.  Some things that seem innocuous or insignificant may be anything but.  In particular, there are some common mistakes that people make in perfectly good faith.  If you’re thinking of filing for bankruptcy in New York, here are a few things to be aware of.

1. Don’t withdraw your retirement money. It’s natural to think you’re going to need more cash on hand if you’re getting ready to file for bankruptcy.  However, retirement plans such as IRAs and your 401(k) are actually protected from creditors.  That is, unless you take the cash out, in which case it becomes part of the debtor’s estate.  Additionally, you’ll have to pay taxes on the money you take out.  In other words, the government meant what it said when it told you to put the money away for retirement.

2.  Don’t disregard lawsuits against you. If you’re familiar with the automatic stay, then maybe you’re thinking that you’ll be protected from lawsuits in the same way you’re protected against creditors.  However, while creditors are limited primarily to threatening phone calls, lawsuits can have serious consequences that can be implemented before you file.  As a result, make sure you (or your lawyer) respond to any legal filings against you.

3.  Don’t try to re-pay family and friends in anticipation of your bankruptcy filing. A trustee in a bankruptcy case can reach back one year prior to your bankruptcy filing and undo any such transfers or transactions.  This is intended to prevent debtors from favoring some creditors over other creditrs by transferring assets to a third party and then claiming they have nothing left.  Of course, if you’re unaware of this concept, it might seem perfectly reasonable and morally just to pay back a sibling who helped you out during a rough patch.

4.  Don’t hide the ball from your lawyer. Always be honest with your lawyer about your assets and your transactions.  Your lawyer is on your side.  Yes, it can feel awkward or even embarrassing to have to disclose certain details.  But remember it’s your lawyer’s job to make sure you get the full benefit of the bankruptcy laws.  And they can’t do that unless they have all the information available.  On top of that, if it comes to light during the case or even after your discharge that you’ve withheld information or hid assets, you’ll not only lose the assets you hid, but the entire discharge can be undone.  This means all past bankruptcy protections are removed and creditors can once again come at you full force.

Of course, the most important step in all of this is to make sure you’re working with a knowledgeable, experienced and trustworthy bankruptcy lawyer.  A good bankruptcy lawyer will help you successfully navigate the bankruptcy process and help ensure that you avoid all of the potential pitfalls.

Please feel free to contact me for more information and for a free initial consultation.

New Bankruptcy FAQ section

Just want to let everyone know that the Bankruptcy FAQ section from our website is now also available on this blog.

In the Bankruptcy FAQ section, you can find answers on the following topics:

• What disclosures must a collection agency provide to a debtor?
• What actions must a collection agency avoid?
• Are there any alternatives to filing bankruptcy?
• Are student loans discharged in a bankruptcy proceeding?
• What effect does a bankruptcy filing have on the collection of alimony and child support?
• Does a bankruptcy discharge eliminate all debts?
• How much property does the debtor have to give up in a bankruptcy proceeding?
• Will a debtor lose his or her home by filing bankruptcy?
• How long are bankruptcy and other credit information included on the debtor’s credit report?
• What happens if the debtor’s salary increases after filing a Chapter 13 wage-earner plan?
• The Bankruptcy Code uses such confusing terminology. What is meant by such terms as preference and fraudulent conveyance?
• How can a debtor determine whether a debt is secured?
• Learn More: Bankruptcy Law

And if you don’t find the answers you’re looking for (or you don’t have time to look), feel free to contact us for a free initial consultation if you’re considering filing for Chapter 7, Chapter 11 or Chapter 13 bankruptcy in New York, facing foreclosure, dealing with preference lawsuits or any other kinds of bankruptcy issues.  We’ll answer all of your questions and help you figure out the best solution for your financial problems.

Preference lawsuits: How to defend yourself

In a previous post I explained to all the New Yorkers out there what a preference lawsuit is and why you should care.

While reading it may have helped make you feel smart at cocktail parties, in the back of your mind you were probably also wondering, “So what exactly should I do if I’m the subject of a preference lawsuit?”

Here are a few things to keep in mind:

1.  Don’t hide your head in the sand: The preference action won’t go away if you ignore it, and you have 30 days to respond.  So your first step should be to contact an experienced bankruptcy attorney to help get your head around the situation and figure out if it’s a big problem or a little problem.  It’s important to make sure you’re in good shape to file an answer to the suit within the 30-day period, or at least contact opposing counsel to seek an extension if necessary.

2.  Readjust your expectations: Sure, you did everything by the book.  You stayed within the terms of your contract with the debtor (before the debtor was actually a debtor).  There was nothing remotely fraudulent in your actions.  You were just doing fair and honest business like you always do.  Maybe you even cut the debtor some slack out of the goodness of your heart.

But you know what?  It doesn’t necessarily matter.  Because preference actions don’t work like other lawsuits.  The trustee has an incentive to recover as much as possible for the debtor’s estate, there’s a fixed set of rules that govern these suits.  Whether it’s fair to you in the grand scheme of things, well, that’s not really the trustee’s problem.  As long as the trustee can demonstrate that its suit is supported by the five factors listed in the previous post, then the trustee has established a claim and it’s up to you to defend it.

Additionally, it’s fairly easy for a trustee (especially in a Chapter 11 case) to file preference lawsuits in large numbers, send them out and see which ones stick.  Because they know that a lot of creditors will likely just write a check rather than spend time fighting the suit, regardless of fairness.

3.  Get your story together: Your defense is all about your story.  What payments were made and when?  Was it a transaction in the ordinary course of business (which can be a valid defense to a preference payment lawsuit)?  How does this payment compare with previous payments you’ve made to the debtor?  What are the standard business practices in your industry?  You need to gather all of this information together–payments, invoices, e-mails and other communications, shipping documents, etc.– and explain it to your lawyer so that your lawyer can help figure out all of the defenses available to you and your best strategy going forward.

For example, knowing the number of days after the invoice date passed before the payment was made is necessary for figuring out if the ordinary course of business and/or new value defenses are available to you.  The more preparation you can do in advance, the more time and money you’ll save when you meet with your lawyer.

4.  Get a good, experienced New York bankruptcy lawyer: Not all New York bankruptcy lawyers have expertise defending preference lawsuits and dealing with preference payment issues.  And why should you help an inexperienced lawyer cut his or her teeth on your dime?  An experienced bankruptcy lawyer knows how to strategically analyze the entire situation and make the trustee prove its case.  A lawyer with expertise in preference payment matters also knows how to evaluate a case to give you a sense of when to hold’em and when to fold’em.

I’ve worked on both sides of New York preference lawsuits–the trustee side as well as the creditor site–and the main thing I can tell you is that knowing the lay of the land makes a big difference.

If you live in New York, and you’re the subject of a preference lawsuit, or you’re worried about preference payments becoming an issue for your, please feel free to contact me or any of the attorneys at Rosenberg Musso & Weiner for a free initial consultation.

What is a preference payment? And why should you care?

Let’s say someone owes you money.  You know they’re having financial difficulties, so you go to them and try to get them to pay it back to you before they file for bankruptcy.  You have a good relationship with them and they’re kind enough to make sure you get paid back.

Three weeks later, the debtor files for bankruptcy.  “Whew!” you think.  At least I got my money back before they filed.

Several months later, you get something in the mail saying that the trustee representing the debtor’s estate is suing you to recover the money the debtor used to re-pay you.

“What the…?!” you think.  That was money rightfully owed to you.  What kind of crazy logic says I have to give it back?

The answer is that the money you were repaid may have been a “preference payment.”  And preference lawsuits happen all the time.

In a nutshell, a “preference payment” is any payment or transfer of value that a debtor makes to you in the 90-day period before the debtor files for bankruptcy that is made in connection with a pre-existing debt.  The idea is to prevent debtors from circumventing the bankruptcy process and to also prevent creditors from pushing to the front of the line ahead of other equally situated creditors.  Otherwise, a debtor could transfer all of its assets to one creditor, then file for bankruptcy and leave all the other creditors with nothing.  So the bankruptcy code allows the trustee representing a debtor’s estate to reach back 90 days prior to the bankruptcy filing and recover any preferential payments.

How do you know if you received a preference payment?

For a trustee to succeed with a preference lawsuit, it must prove the following:

1. There was transfer of an interest in the debtor’s property
2. It was made within 90 days of the date that the debtor filed for bankruptcy
3. It was made in connection with a prior existing debt
4. It was made while the debtor was insolvent (the debtor, however, is presumed to have been insolvent during the 90-day period), and
5. It results in the creditor receiving more than it would otherwise receive if the debtor’s assets were sold off in a liquidating proceeded and the proceeds were distributed equally among all creditors.

You don’t need to be an expert on preference payments.  That’s what bankruptcy lawyers are for.  However, you do need to take it seriously if you are the subject of a preference lawsuit and you need to be aware that these do occur and may affect you.  Also that they can happen many months after a bankruptcy case has commenced.

If you’re facing a preference lawuit in New York (or Brooklyn or Suffolk County, Long Island) in connection with a bankruptcy, and you have questions about what to do, get in touch with us for a free consultation and make sure you respond to it properly and protect your own interests.