Big surprise! I am owed money by a debtor, debtor goes out of business, and bankruptcy trustee sues me. How is that possible?
Suppose an individual or business debtor owes ten people $5,000.00 each. The debtor pays one of the creditors $5,000.00 but pays nothing to the others. The bankruptcy laws consider this “preference” to be unfair to the unpaid creditors. So the trustee can sue the company who was paid $5,000 to collect and divide up amongst all of the creditors.(Of course, the trustee and his attorney receive a fee for this recovery).
The preferential payment period is 90 days prior to filing of the bankruptcy(One year if the creditor is an insider). If the creditor was paid within this 90 day period for a prior debt, the trustee has a cause of action against the creditor.
What can the creditor do to defend? As a practical matter, these cases usually settle, but defending the case in court may be necessary to obtain a reasonable result.
Creditors have defenses. First, if the creditor received payment as an exchange for the delivery of the goods, such as by c.o.d., the creditor has a defense.
Second, subsequent new value creates a defense. For example, if the creditor was paid for an old debt on January 1, made a new delivery on February 1 which was not paid, and the Debtor filed bankruptcy on March 1, the February 1 delivery is new value which creates a defense.
Third, if there was a history of similar late payments, the ordinary course of business between the parties would create a defense.
The new bankruptcy law actually made it easier to defend these cases. If you have received a demand from a trustee, please immediately contact your attorney. Call now or click here.