Preference Actions: What is the “New Value” defense?

"New Value" Defense. Not "True Value."

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 subsequent posts I explained the “Ordinary Course of Business” Defense and the “Contemporaneous Exchange” Defense.  Next I’ll explain the…

“NEW VALUE” DEFENSE

The “New Value” Defense (also known as the “Subsequent Extension of New Value” Defense) is used in situations where a trade creditor was providing goods to a debtor (well, before the debtor was a debtor) on credit on a periodic basis and the debtor made a series of payments to the creditor during the preference period (i.e., the period of 90 days prior to the debtor’s bankruptcy filing).

In other words, you deliver goods to your customer on several different days over the course of a month, and your customer gradually makes several different payments to you over the same period.  And each delivery doesn’t necessarily match neatly up with each payment.  Then the debtor files for bankruptcy, and a year later you get a letter from the trustee who is suspiciously eying those payments you received 90 days prior to your customer’s bankruptcy filing.

The “New Value” Defense simply helps you make the argument that if you received a payment of $10,000 on November 1, and you had subsequently delivered $4,000 worth of goods on November 5, and your customer filed for bankruptcy on November 6, then the “preference payment” in dispute would be reduced to $6,000 rather than $10,000.

Notably, in this situation you could still apply the “Ordinary Course of Business” Defense and dispute the $6,000 “preference payment” claim on that basis.

Most trade relationships, of course, are not as simple as the one described above.  There may be multiple transactions and deliveries of goods.  And calculating the amount of the “new value” can be complicated, both mathematically and legally, as courts have differed in their interpretations.  More on that in a future post.

The key to defending yourself is to have an experienced bankruptcy lawyer, particularly one who knows the ins and outs of preference actions.  Rosenberg Musso & Weiner’s 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 New York lawyer to help you navigate and figure out the best and most practical strategy, please feel free to 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 “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.

Lenny Dykstra learns more about Chapter 11 as trustee appointed in the case

Dykstra battles with Trustee in losing effort to retain control of his Chapter 11 case. (Note: No trustees were hurt in the making of this post.)

Previously, I posted about Lenny Dykstra and why someone like him would file for Chapter 11, which is more typically used for business bankruptcies, rather than Chapter 7 or Chapter 13 which are for individual bankruptcies.

Regardless of whether it was the right path strategically speaking, things don’t seem to be going so well for him at the moment.  The bankruptcy judge recently decided to appoint a trustee to oversee the case because Dykstra could no longer administer his finances.

While not a great development for Dykstra, it does provide a good opportunity here to highlight some of the different roles of a trustee in Chapter 7, 11 and 13 bankruptcies.

So why was a trustee appointed?  Shouldn’t there already be a trustee in a Chapter 11 bankruptcy case?  Years ago the answer would be yes.  A trustee was automatically appointed in Chapter 11 cases to oversee the case.  However, since the 1978 bankruptcy law went in to effect, in most cases the debtor actually continues to administer its own finances.

What?  You mean the same debtor that got itself into trouble in the first place?  Yep.  It’s called “Debtor-in-Possession” or “DIP” for short.  The idea is that, despite all the problems leading to the bankruptcy, the debtor is still likely the best positioned to know how to run the the debtor’s business.  The ability to keep control of the case also served as an incentive to get companies to file for Chapter 11 to enable a reorganization so that both debtor and creditors could move forward with their lives and businesses rather than get tangled up for a long time.

For a counterexample, look at Japan during the 1990s when it was completely stagnant.  The lack of “attractive” bankruptcy laws, from a debtor’s perspective, led companies to stand pat and avoid reorganization.  As a result, valuable assets stayed locked up in non-productive uses for a long period.

Getting back to American soil, while typically a debtor in a Chapter 11 stays in control of the case as a Debtor-in-Possession, in some cases a bankruptcy judge will appoint a trustee to administer the debtor’s finances instead.  This generally happens when the judge believes that the debtor is doing such a poor job, perhaps as a result of incompetence or fraud, that the debtor’s estate and creditors would fare better with an independent trustee at the helm.

In Dykstra’s case, it sounds like he didn’t have much of a plan for moving forward, according to Stephen Grocer of  the Wall Street Journal’s Deal Journal (“Lenny Dykstra Wiffs in Bankruptcy Case“).  The judge recognized that and appropriately appointed a trustee.

Who Are Your New York Chapter 13 Trustees?

A lot of New York readers may not know who their own Congressional representatives are in Washington, D.C.  And perhaps as few know the state legislator from their district.  But I’m willing to bet that almost no readers know who the Chapter 13 trustees are for their district in New York.  So I’ve listed them below for your benefit.

First, a few things about the Chapter 13 Trustee.  As you’ll see below, there are one or two individuals appointed to serve as Chapter 13 Trustees for each court district.  This is unlike Chapter 7 trustees or Chapter 11 trustees who are members of a panel and selected at random for each case.

Chapter 13 Trustees are in fact private practice attorneys.  They are not government employees.  And the one or two Chapter 13 trustees for each district handle all of the Chapter 13 bankruptcy cases that are filed in their district.

And now, here are your New York state Chapter 13 Trustees.  (FYI, a complete state-by-state list of Chapter 13 trustees can be found at http://www.usdoj.gov/ust/eo/private_trustee/locator/13.htm.)

EASTERN DISTRICT OF NEW YORK

Marianne DeRosa
100 Jericho Quadrangle, Suite 208
Jericho, NY 11753
Phone: (516)622-1340
http://www.usdoj.gov/ust/r02/central_islip/ch13-trustees.htm

Michael J. Macco
135 Pinelawn Road
Melville, NY 11747
Phone: (631)549-7900
http://macco.lawoffice.com

SOUTHERN DISTRICT OF NEW YORK

Jeffrey L. Sapir
399 Knollwood Road, Suite 102
White Plains, NY 10603
Phone: (914)328-7272
http://www.usdoj.gov/ust/r02/manhattan/ch13-trustees.htm

NORTHERN DISTRICT OF NEW YORK

Andrea E. Celli
350 Northern Boulevard
Albany, NY 12204
Phone: (518)449-2043
http://www.13network.com/trustees/alb/albhome.asp

Mark W. Swimelar
250 South Clinton Street, 5th Floor
Syracuse, NY 13202
Phone: (315)471-1499
http://www.cnytrustee.com/DEBTORATTY.HTM

WESTERN DISTRICT OF NEW YORK

Albert J. Mogavero
110 Pearl Street, 6th Floor
Buffalo, NY 14202
Phone: (716)854-5636

George M. Reiber
3136 S.Winton Road, Suite 206
Rochester, NY 14623
Phone: (585)427-7225
http://www.usdoj.gov/ust/r02/rochester/ch13-trustees.htm

If you are seeking Chapter 13 bankruptcy help in New York–anywhere in New York, including Manhattan, Brooklyn, Queens, Staten Island, The Bronx or Suffolk County, Long Island–please get in touch for a free initial consultation and I’ll be happy to explain all of your options to you as well as how the Chapter 13 process works.

Can I keep my home if I file for bankruptcy in New York?

The equity in this home may exceed the homestead exemption in New York.

Yes, you can keep your home if you file for bankruptcy in New York. But it’s not a given.  And depending on your circumstances, there are a few different ways to do it.

If you file for Chapter 7 bankruptcy in New York, then you can keep your home as long as the remaining equity in your home (i.e., the amount that you have not yet paid back) does not exceed the homestead exemption for New York, which is $50,000 for an individual and $100,000 for a couple.  If the remaining equity exceeds the homestead exemption, then a trustee can sell your home to pay off creditors.

If you’re in this situation, then the other option for keeping your home is to file for Chapter 13 bankruptcy in New York.  Chapter 13 bankruptcy means you work with your creditors, and with the supervision of the bankruptcy court, to create a repayment plan that usually takes 3 to 5 years.  The idea is that under a Chapter 13 repayment plan, you can reduce the amounts you owe to unsecured creditors (though not to your mortgage lender, who is a secured creditor).  With reduced payments, ideally you would be able to make the payments on your mortgage and keep your home.

The non-bankruptcy alternative for trying to keep your home is loan modification and its cousin foreclosure mediation.   Whether you can negotiate a loan modification with your mortgage lender depends on your circumstances as well as on your mortgage lender.  There is some hope that Congress will put increased pressure on banks and other mortgage lenders to encourage them to enter into loan modifications with homeowners rather than move forward with foreclosure.  But waiting around for Congress to act may not be an option for you.

If you’re worried about losing your home to bankruptcy in New York, you don’t have to make this decision on your own.  The best first step is to meet with a good bankruptcy attorney in New York who has experience and whom you trust to steer you in the right direction.

Please feel free to contact me for a free initial consultation.  I’ll answer all of your questions, figure out the best strategy to help you move forward.  The key, as always, is preparation and planning.

The Means Test and the Unemployment Trap

Rising unemployment in the U.S. has made the “means test” all the more significant for individuals considering filing for bankruptcy in New York and elsewhere.

The means test refers to the eligibility requirement under the 2005 bankruptcy law.  To be eligible to file for Chapter 7 bankruptcy in New York, an individual’s income must be equal to or below the median income for the state of New York.

FYI, the median income for the state of New York is as follows:

• One person – $46,523
• Two-person family – $57,006
• Three-person family – $67,991
• Four-person family – $83,036
• Add $6,900 for each individual in excess of four people

It’s important to note that a debtor’s income is based on the previous six months.  That means that if you lose your job and need to file for Chapter 7 bankruptcy, then you may need to wait several months before you are eligible.   At the same time, this leaves debtor in a Catch-22 situation.  if you have no income, then it’s going to be hard to convince the trustee that you can fund a Chapter 13 bankruptcy, which is in essence a repayment plan.

In other words, your best option might be to simply wait a few months before filing for Chapter 7.  Even if you’re drowning in debt.

But don’t give up!  If you sit down with an experienced bankruptcy lawyer in New York for a free initial consultation (and remember, a good bankruptcy lawyer should offer a free initial consultation), then your bankruptcy lawyer can help you figure out if there are ways to characterize your income in ways that will be helpful to your situation and your needs.

If you’re considering filing for bankruptcy in New York, preparation and pre-bankruptcy planning can be critical to your case.  So get in touch for a free initial consultation where you can explain your situation, ask questions and most importantly, get answers.  There are always solutions and alternatives.  It’s just a matter of thinking them through with an experienced bankruptcy attorney.