What to do When the Mailman Brings Bad News

May 27, 2015

Sometimes the mailman brings business owners an unpleasant surprise – a complaint filed by a trustee in a bankruptcy case alleging that the business received payments, sometimes years ago, from a company now in bankruptcy. The trustee’s complaint alleges that the payments were preferential transfers made by the bankrupt debtor in the 90 days prior to the filing of the bankruptcy, or were fraudulent transfers that may have been made up to several years before the filing. The trustee’s complaint seeks to recover the payments. What does the business owner do?

There are two things the business owner should not do – ignore the complaint, or panic. Even if the complaint is from a bankruptcy court across the country, and even if it seems grossly unfair to be required to repay money you rightfully earned from the bankrupt company, the bankruptcy court can assert jurisdiction over you and will enter a judgment against you if you fail to respond. Once the trustee has a judgment, he will be able to collect it using your local courts. Accordingly, you must pay attention to the complaint.

There is no need to panic, however, or to assume the worst. In large business bankruptcies there may be hundreds of cases filed against businesses like yours that received payments from the debtor company. The trustee and his lawyers will be interested in settling most of those cases, and understand that they will need to offer discounted demands to accomplish a reasonable number of settlements. In some situations, the court establishes a period for negotiation and meditation before the defendants ever have to hire a local lawyer and file an answer. Unless your business is very large and did extensive work for the debtor company, the trustee likely has bigger fish to fry and will want to reach early settlements with the smaller defendants.

Moreover, there often are valid defenses to the trustee’s claims. Although it may not be cost effective to hire a lawyer in the city where the bankruptcy court sits to fight against the trustee’s claims, such defenses can be used to negotiate a reasonable settlement. Applicable defenses include that the payments were made to your company in the ordinary course of the business between your company and the debtor company, or that you provided the debtor with additional goods or services, for which you were never paid, after receiving the payments that the trustee is trying to recover.

The first thing to do after the complaint arrives is consult with your company lawyer. Your lawyer can look at documents filed in the case, and perhaps public information in the media, to determine the status of the case and where the claims against your company fit in. The second thing to do is check your records to verify that you actually received the payments. It is very common for a trustee to inherit records from the debtor that are in shambles – for many companies in trouble, accurate recordkeeping is an afterthought during the painful slide into insolvency. Thus, it is important to review your records to see if the alleged payments were made to you, and if you have any claims against the debtor – in other words, if you had unpaid invoices at the time the debtor filed the bankruptcy.

Finally, talk with your company lawyer about your goals. You and your lawyer will need to make a careful economic judgment – how much would it cost to fight the trustee’s claims, how strong are your defenses, what discount can be negotiated with the trustee? While resolving such claims can be expensive and frustrating, it usually is not the terrible outcome you contemplated when you opened the mail and found the complaint.

 

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