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Preference lawsuits: How to defend yourself

ultraman5In 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, and 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 the debtor has made to you?  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.  (A new value defense occurs if you extended new goods or services to the debtor, for which you were not paid, after you received the alleged preference payment.  The amount of the new value can be offset against the preference.)  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 Brooklyn Bankruptcy Law Firm at Rosenberg Musso & Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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