Bankrupt Customers, Trustee Preference Claims, Return of Customer’s Payments…Oh My!

Times are tough, and customers are going into bankruptcy. You should know that the Bankruptcy Code gives a debtor in bankruptcy the right to avoid and recover certain payments (called "preferences") made during the 90 day period before the bankruptcy filing. Thus, your customers, actually their priority creditors through the trustee, may be able to recover all payments they have made to your business within the 90 day preference period, subject to certain defenses, the main one of which is that payments made to you were made in the “ordinary course of business” between you and your customer.

If you have had a longstanding customer relationship, and such relationship did not significantly change as your customer approached bankruptcy, then you are probably in a good position to use the “ordinary course of business” defense against the bankruptcy trustee’s preference claim. If you have not had a longstanding relationship with a customer or you make material changes to your credit practices during the 90 day preference period, maintaining such an “ordinary course of business defense” is problematical. For example, you may uncharacteristically start enforcing or changing credit terms, or withhold shipment pending payment with your soon to be bankruptcy debtor. If you have an important customer facing financial difficulties, you might consult with a seasoned bankruptcy lawyer before increasing pressure for payment.

Should you take your customer’s payment even though you suspect there may be a bankruptcy trustee claim to demand return of this payment coming? You should definitely take the payment. Best case: The trustee does not pursue the preference action, based upon various defenses or otherwise, and you keep the entire payment. Worst case: you or your bankruptcy attorney negotiates a lower settlement amount with the trustee based upon various defenses, such as the “ordinary course of business” one discussed above.

Important Proviso: The above material does not constitute legal advice and should not be relied on. It does not create an attorney-client relationship. Each locality has differing laws. A legal matter cannot be satisfactorily resolved without a comprehensive review and analysis of all the unique facts and laws at issue by an able attorney. Your matter may result in a loss of rights if you do not timely retain such an attorney.

Contact: If you would like to discuss this matter further in a more private forum, please feel free to contact me directly at the email address provided through my firm’s website located at http://www.BealBusinessLaw.com.