Bankruptcy preferences are not for the meek.
Before we look at a great article we shared this week, here’s how Bill Gray of Sands Anderson PC explains “preferences”:
“…in certain circumstances the Bankruptcy Code does require that some payments the debtor made before filing bankruptcy have to be returned to the debtor…Without such a law, a debtor could, prior to filing bankruptcy, “prefer” certain creditors by paying certain debts, yet not paying others.”
In other words, preferences are certain payments made to creditors prior to a debtor filing bankruptcy. Gray goes on to explain that the Bankruptcy Code (11 U.S. Code § 547 – Preferences) defines preferences as:
- a transfer of an interest of the debtor in property;
- to or for the benefit of a creditor;
- for or on account of an antecedent (pre-existing) debt;
- made within 90 days of the bankruptcy filing (or within 1-year if the transfer was to an insider);
- made while the debtor was insolvent; and
- which allows the creditor to receive more than it would have received if the payment had not been made, and the claim was paid through the bankruptcy process.
What happens if you have a security interest and your customer files bankruptcy? More specifically, what happens if you have filed a mechanic’s lien, you signed a lien waiver in order to obtain payment and your customer files bankruptcy? Is your mechanic’s lien protected against the preferences outlined in the Bankruptcy Code? Jeffrey L. Gansberg & Folarin S. Dosunmu (“authors”) addressed these questions in their recent article “Are My Lien Rights a Shield against Bankruptcy Preferences?”
“Imagine that you have worked on a construction project… To get paid, you had to sign a lien waiver, or the bank would not agree to fund the payment draw. Because you have no idea that the owner or the prime contractor is contemplating filing for bankruptcy protection, you sign the lien waiver and get paid. Then, out of nowhere, maybe two years in the future, you receive a demand letter to return the payment you received. The letter says something about a bankruptcy and a preference. As it turns out, the owner or prime contractor filed for bankruptcy after you were paid.”
Stop! What? Really?! Two years later you could receive notification that a payment you earned must be returned? Unfortunately, yes, the notification is real, but there is hope. The authors go on to explain that even though the demand indicates the debtor is permitted to recover the payment, the debtor may not really meet the requirements.
However, if the debtor is able to meet the requirements to legally pull back their payments to you, the authors mention that you could have a defense:
“The Bankruptcy Code provides defenses that might let you keep the money you received. While there are a number of these defenses, your mechanics’ lien rights implicate two of them: (i) the “contemporaneous exchange defense” and (ii) the “new value defense.” Depending on where the debtor filed for bankruptcy, one or both of these defenses might be available based upon the right you had to file a mechanics’ lien, but which you gave up in exchange for payment.”
This, of course, is a snapshot of their article & I encourage you to take 10 minutes to read the full version!
Read this week’s post to learn more about Conditional Lien Waivers in part 1 of our series on the language found within lien waivers.
“For conditional lien waivers, the “conditional” language typically appears prominently at the beginning of the document…This waiver has clear conditions: it is only effective once the creditor receives payment, payment has cleared and if the debtor files bankruptcy within 90 days after remitted payment, the waiver becomes null & void.”
Lien waivers may seem like child’s play next to “if” and “when” payment clauses. These payment clauses are slipped into contracts and surprisingly enough, they can go unnoticed until it’s too late.
View this week’s infographic and you will have a better Understanding of “If” & “When” Payment Clauses.
Stop by & see us at the CRF Credit and Accounts Receivable Open Forum & Expo – NCS will be at booth 46! Craig Slimmer, Director of Sales & Marketing, Therese Scarpella & Sandra Stelmarski, Account Representatives, will be providing free demos of NCS LienFinder™ plus giving away free goodies!
Check out these free webinars from NCS:
August 18: FREE Webinar – Protect & Collect: an Advanced Look at the UCC Process
September 1: FREE Webinar – Implementing a UCC Program: Overcoming Obstacles
September 15: FREE Webinar – Protect & Collect: Examining the Canadian Lien Process