Wednesday, March 5, 2014

Preference Payments and Defenses in Bankruptcy



A “preference payment” sounds like a good thing.  To a credit manager, believe me, it is not.  Imagine a situation where a customer, way behind on his invoices, suddenly comes current with a $20,000 payment.  You accept the payment, and for good reason.  Payroll is due, and fortunately the client paid you in time to fund payroll and your business survives another month.  Two months later, your client files for bankruptcy protection, and you get a notice of the filing, but you say “phew! Glad I got the money when I did!”

This euphoria may only last for a few weeks, however, when, in a letter from a bankruptcy trustee or debtor in possession, you discover a term you wish you’d never heard: Preference Payment.

If your customer files for bankruptcy within 90 days after he gives you a full or partial payment on his outstanding balance, it may be considered a “preference payment”. Preference payments are called that because they arise in situations where a creditor “prefers” you over other creditors at a time when they were insolvent, which is considered to be unfair to other creditors similarly situated.

Fortunately for you, there are defenses that you can raise against a preference claim, namely:
·         contemporaneous exchange,
·         new value, and
·         ordinary course of business.

These defenses exist mainly to encourage creditors to continue doing business with, and extending credit and new inventory to, financially challenged customers.

But what is a preference?
The Bankruptcy Code allows a trustee or debtor-in-possession (typically a Chapter 11) to recover any payments or other transfers of assets by a debtor to a creditor within 90 days of the debtor’s bankruptcy filing.
The preference provision has two main purposes: (1) to prevent a debtor from favoring any of its general unsecured creditors over the others in the downward spiral; and (2) to discourage creditors, upon hearing that the debtor is about to file bankruptcy, from rushing the courthouse and disperse the assets of the debtor.

Proving a preference. To back up the preference claim, a trustee or debtor-in-possession must show that five conditions applied to the payment:
·         The debtor made a payment or transferred property to, or for the benefit of, the creditor.
·         The payment or transfer occurred within 90 days of the debtor’s bankruptcy filing (or a full year for payments to insiders) (the “preference period”).
·         The debtor made the payment to reduce an existing debt owed to the creditor.
·         The debtor was insolvent when the payment occurred (this is presumed.
·         As a result of the payment or transfer, the creditor received more from the debtor than he would have received in a Chapter 7 liquidation of the debtor.

Defenses
OK, so you took a payment.  All is not lost, as there are some defenses, although narrow, that may allow you to keep the payment even if it was received with 90 days of the customer’s bankruptcy filing.  

Contemporaneous Exchange Defense.  The first defense to a preference, which would not apply in the $20,000 example above, is contemporaneous exchange.  This is a situation like a cash on delivery (or C.O.D.) for inventory items, or items sold at the same time (or relatively the same time) as payment is received.  This defense exists whether or not you had a previous relationship with the customer.  The point here is that you provided goods/services in exchange for payment, and that payment was before or around the time the goods/services were provided.

New Value Defense.  The new value defense, similar to “contemporaneous exchange”, is available to a creditor if, during the preference period, a creditor provides “new value” to the debtor for which a serious of payments to the creditor could be attributed.  For example, let’s say Debtor Company (“DC”), even though they are extraordinarily $10,000 behind on their invoices, places an order for $10,000 worth of new goods and you delivered the goods the same day, which happened to be 60 days before DC filed bankruptcy.  Now, two weeks before the bankruptcy filing you get a check for $20,000.  The New Value defense would allow you to keep at least $10,000 of the $20,000 simply because you provided new value to DC during this preference period.  Basically, this defense recognizes it would be unfair to a creditor that is increasing the value of the bankruptcy estate during the preference period to be penalized for having done so.  These computations can be complicated, so it is imperative that you work with professionals to determine these amounts accurately.

Ordinary Course of Business Defense. The most common defense asserted for payments beyond a contemporaneous exchange is ordinary course of business. Fortunately, the test takes into account not just the credit and collections practices that are appropriate to your industry but also the payment history between you and your customer.

To successfully raise the “ordinary course of business” defense, the creditor must prove both of the following: The debt on which you received the payment was incurred in the ordinary course of business between you and the debtor; and the payment was made in the ordinary course of business between you and the debtor, according to ordinary business terms.

Whether the debt was incurred or the payment was made in the ordinary course of business is relatively objective and easy to prove or disprove.  Basically, was it a normal, everyday credit transaction (like between a seller and a buyer of inventory).

The second consideration in each element is more subjective, as it takes into account the specific, historical invoicing and payment relationship that existed between you and the debtor prior to the 90-day preference period. If the alleged preference payment was consistent with the manner in which previous payments were made, that strengthens your defense against the preference claim.

Example A: DC was a long-time customer that paid its bill, with charges ranging from $500 and $6000, between 35 and 60 days after the due date.  Two weeks before filing its bankruptcy petition, DC made a $5,000 payment on its account, 52 days past the due date but obviously within the 90-day period. When a preference claim is made against that payment, you would have a strong case that the payment was consistent with DC’s existing payment history, and therefore the payment was not a preference but in the ordinary course of business.

Example B: For its first six months as a customer, Debtor Company II paid its bill on or before the due date. However, charges for the seventh month went unpaid for 80 days before a check finally arrived within the preference period. A week after you received that payment, DCII filed for bankruptcy protection. The inevitable preference claim will be much more difficult to defend as “ordinary course” than in the case of DC, because of (a) your short credit experience with DCII and (b) the variety between DCII’s payment history and this payment.

Although it is not fun to receive a preference payment demand letter from a trustee, it is important that you have adequate counsel to discuss the applicability of these defenses to your situation.  

By: Marc Lippincott

Friday, September 6, 2013

Texas Residential Construction - List of Subcontractors & Suppliers



When providing labor and materials to residential projects, additional notices and contract disclosures must be provided to the owner.  One of the additional disclosures that must be made is a list of subcontractors and suppliers.  Texas Property Code § 53.256



Before any material is furnished or the labor is performed the original contractor must provide the owner with a written list that identifies by name, address, and telephone number each subcontractor and supplier the contractor intends to use in the work to be performed.

If a subcontractor or supplier is later added or deleted, the contractor must provide the owner with an updated list of subcontractors and suppliers not later than the 15th day after the date a subcontractor or supplier is added or deleted.

However, it should be noted that failure to provide the list will not invalidate a lien claim.

The list must contain the following notice conspicuously printed, stamped, or typed in a size equal to at least 10-point boldface or the computer equivalent:

"NOTICE:  THIS LIST OF SUBCONTRACTORS AND SUPPLIERS MAY NOT BE A FINAL LISTING. UNLESS YOU SIGN A WAIVER OF YOUR RIGHT TO RECEIVE UPDATED INFORMATION, THE CONTRACTOR IS REQUIRED BY LAW TO SUPPLY UPDATED INFORMATION, AS THE INFORMATION BECOMES AVAILABLE, FOR EACH SUBCONTRACTOR OR SUPPLIER USED IN THE WORK PERFORMED ON YOUR RESIDENCE."

Alternatively, an owner may waive the right to receive the list of subcontractors and suppliers or any updated information.  The waiver must be in writing and may be included in the contract.  If the waiver is not included in the contract, the separate waiver statement must be signed by the owner.

The waiver must be conspicuously printed in at least 10-point bold-faced type and read substantially similar to the following:

"WAIVER OF THE LIST OF SUBCONTRACTORS AND SUPPLIERS. AN OWNER IS NOT REQUIRED TO WAIVE THE RIGHT GRANTED BY SECTION 53.256, PROPERTY CODE, TO RECEIVE FROM THE CONTRACTOR AN ORIGINAL OR UPDATED LIST OF SUBCONTRACTORS AND SUPPLIERS.

"BY SIGNING THIS DOCUMENT, I AGREE TO WAIVE MY RIGHT TO RECEIVE FROM THE CONTRACTOR AN ORIGINAL OR UPDATED LIST OF SUBCONTRACTORS AND SUPPLIERS.

"I UNDERSTAND AND ACKNOWLEDGE THAT, AFTER SIGNING THIS DOCUMENT, THIS WAIVER MAY NOT BE CANCELED AT A LATER DATE.

"I HAVE VOLUNTARILY CONSENTED TO THIS WAIVER."

Thursday, March 14, 2013

Texas Lien Claim - General Contractor on Residential Project



Perfecting a statutory lien claim on a residential project requires that the General Contractor follow the same process and procedures and provide the same notices and affidavits as on commercial projects.  However, the deadline associated with filing the affidavit claiming lien is one month earlier when working on a residential project.

To perfect a statutory lien, a General Contractor must timely file an Affidavit Claiming Lien with the county clerk in the county where the property is located.

The lien affidavit must be filed by the fifteenth (15th) day of the third (3rd) month after the day on which the indebtedness accrues which is either:

  • on the last day of the month in which the original contract was completed, settled, or abandoned; or
  • on the last day of the month in which written notice by the General Contractor or Owner is received by the other party stating that the contract is terminated.

The Affidavit Claiming Lien must contain the following:

  • a sworn statement of the amount of the claim;
  • the name and last known address of the owner or reputed owner;
  • a general statement of the kind of work done and materials furnished;
  • the name and last known address of the person by whom the claimant was employed or to whom the claimant furnished the materials or labor;
  • the name and last known address of the original contractor;
  • a description, legally sufficient for identification, of the property sought to be charged with the lien;
  • the claimant's name, mailing address, and, if different, physical address

The affidavit must be signed by the person claiming the lien and must be sworn to (the signature line of the affidavit must represent that the affidavit was “subscribed and sworn to” and the affidavit must be notarized). 

The General Contractor must then send notice that the lien affidavit has been filed and a copy of the lien affidavit to the Owner within five (5) business days of its filing.  The notice and copy must be sent by certified mail.  Failure to send the notice within the applicable time period will void the lien claim.

To enforce your lien claim, you must file suit within the later of:

  • one year after the date after the last date you may have filed a lien affidavit; or
  • one year after completion, termination, or abandonment of the work under the original contract.
 By: Sarah Berry, Attorney

Friday, February 22, 2013

Texas Lien Claim by Subcontractor on Private Commercial Project



The procedure for a subcontractor to perfect a lien claim requires more steps and is more complicated than the procedures that general contractors follow. 

Subcontracts must provide written notice of their claim to the General Contractor and Owner of the property before filing an Affidavit Claiming Lien. 

The notice must:[1]

(1)   provide notice of the unpaid claim; 
(2)   include Fund Trapping language;[2]
(3)   be sent by certified mail to the General Contractor and Owner; and
(4)   be mailed not later than the fifteenth (15th) day of the third (3rd) month following each month in which the labor or material was provided for which the claimant has not been paid.

Once notice is given, to perfect its statutory lien claim, the subcontractor must timely file an Affidavit Claiming Lien with the county clerk in the county where the property is located.

The Subcontractor must file its lien affidavit by the   fifteenth (15th) day of the fourth (4th) month after the last month the Subcontractor provided labor or materials to the project.[3] 

The Affidavit Claiming Lien must contain the following:[4]

(1)   a sworn statement of the amount of the claim;
(2)   the name and last known address of the owner or reputed owner;
(3)   a general statement of the kind of work done and materials furnished and a statement of each month in which the work was done and materials furnished for which payment is requested (you are not required to set forth individual items of work done or materials furnished) (you may use abbreviations and symbols customary in the trade);
(4)   the name and last known address of the person by whom the claimant was employed or to whom the claimant furnished the materials or labor;
(5)   the name and last known address of the original contractor;
(6)   a description, legally sufficient for identification, of the property sought to be charged with the lien;
(7)   the claimant's name, mailing address, and, if different, physical address; and
(8)   a statement identifying the date each notice of the claim was sent to the owner and the method by which the notice was sent.

The affidavit must be signed by the person claiming the lien and must be sworn to (the signature line of the affidavit must represent that the affidavit was “subscribed and sworn to” and the affidavit must be notarized).  The contract, invoices, and any notices may be attached.

The Subcontractor must send notice that the lien affidavit has been filed and a copy of the lien affidavit to the General Contractor and Owner within five (5) business days of its filing. [5]  The notice and copy must be sent by certified mail.  Failure to send the notice within the applicable time period will void the lien.

To enforce the lien claim, suit must be filed within the later of:[6]

(1)   two years after the date after the last date you may have filed a lien affidavit; or
(2)   one year after completion, termination, or abandonment of the work under the original contract.


[1] Tex. Prop. Code § 53.256(b)
[2] Tex. Prop. Code § 53.256(d)
[3] Tex. Prop. Code § 53.052(a)
[4] Tex. Prop. Code § 53.054
[5] Tex. Prop. Code § 53.055
[6] Tex. Prop. Code § 53.158(a)

Blog by attorney Sarah F. Berry