Delaware Bankruptcy Preference Defense Lawyer

Defense of Avoidance Actions and Preference Litigation and Creditors’ RightsIf you are in business long enough, you will encounter customers who file for bankruptcy protection under the United States Bankruptcy Code. You may also receive a demand letter and/or be served with a suit seeking recovery of an allegedly preferential payment to your business under 11 U.S.C. §547. Although you are owed money, you cannot collect it and must cease collection efforts.

The Law Office of James Tobia, LLC represents parties in varying stages of litigation in the United States Bankruptcy Court for the District of Delaware, most frequently representing defendants, both small and large, in bankruptcy preference litigation and related avoidable transfer claims.

Proofs of Claim and Relief from Stay

If your customer files for bankruptcy protection while owing you money, there are several important things you must know. Upon the filing of a bankruptcy petition, an automatic stay immediately goes into effect and generally prevents creditors and other parties from taking most actions against the bankruptcy estate, the debtor and the debtor’s property. 11 U.S.C. §362. This “blanket injunction” continues until a Bankruptcy Court order lifting stay has been entered or the stay has been expired. The Law Office of James Tobia can represent you in seeking relief from the automatic stay.

In addition, you may file a proof of claim, alleging what the Debtor owes you, so that you may share in the distribution of assets that the Debtor may have available to distribute to creditors. It is important that your filing is complete and accurate and made within the required time period. Often, the Debtor or its representative will object to claims, for such reasons as disputing the amount of the claim, or the classification of such claim, and other reasons. Upon such an objection, the creditor will have the right to prove the validity of the claim. The Law Office of James Tobia, LLC can help you protect your rights and make a bad situation easier by representing you in the fling of the claim and claims litigation.

Bankruptcy Preference Litigation: “The Clawback Suit”

The Law Office of James Tobia, LLC has extensive experience representing business defendants in Avoidance and Preference actions brought in the United States Bankruptcy Court for the District of Delaware. We can help protect your business and management from the strain of such events, by helping your business navigate through this complicated process so as to limit the potential, direct financial impact of the complaint and the immediate, less direct impact of draining time and focus from management. We endeavor to free our clients from the legal claims as quickly as possible and at the lowest total cost by aggressively presenting defenses to the opposing party as early as possible.

Section 547 of the Bankruptcy Code, 11 U.S.C. §547, empowers a trustee to avoid certain transfers of debtor’s interest in property made during the 90 days (or 1 year for insiders) prior to filing for bankruptcy on the presumption that you may prefer certain creditors to the detriment of other creditors. For example, it is assumed that an individual would pay debts owed to friends and family before an enemy. Or a business may pay debts from vendors who are exerting undue pressure upon the company as it struggles to avoid filing for bankruptcy protection.

Thus, a trustee, acting on behalf of the Debtor, may file suit against you or your company, attempting to recover or “claw back” all payments that you received from the Debtor during those 90 days (or 1 year for insiders) prior to the bankruptcy filing, with the intent of dividing those assets more fairly among all creditors. The rationale for such suits and the underlying avoidance powers is that similarly situated creditors should be treated the same and collecting such avoidable preferences allows the debtors’ property to be redistributed equally among similarly situated creditors.

Common Defenses in Preference Actions

It is not all bad news. While the trustee may file suit seeking to avoid the alleged preferential transfers, the trustee may not avoid such transfers to the extent they fit within several affirmative defenses contained within Section 547(c). For example, the most common defenses that may be available to a Defendant under Section 547(c) may include:
  • the transfer was a contemporaneous exchange for new value given to the debtor (i.e., the debtor received something of value in exchange for the transfer); 11 U.S.C. §547(c)(1)
  • after such transfer, Defendant gave new value to or for the benefit of the debtor (i.e., the Defendant extended additional credit to the Debtor after receiving the transfer) 11 U.S.C. §547(c)(4); or
  • the transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the recipient (i.e., Defendant made the transfer under ordinary business terms). 11 U.S.C. §547(c)(2)
Does this sound familiar?

Your customer has not paid you, and your finances are suffering because of non-payment. Then, the customer filed for bankruptcy protection and you had to face the prospect of non-payment. Now, you are being sued by the customer or someone on their behalf. That’s right, they owe you money and now they are suing you! Is that some sort of joke? There is nothing funny about it.

That’s right -- your business already may be suffering from the financial stresses which result from your customer’s bankruptcy filing and now your business is faced with a claim that you owe money. We understand that if you have recently received a demand letter or complaint, you are probably struggling to understand how it can be possible, let alone knowing how to respond.

If you have received a demand letter or complaint, contact us here, email us at info@tobialaw.com or call the firm’s Wilmington offices directly at (302) 655-5303 to schedule a free initial consultation. We can discuss the circumstances and share with you our initial observations at no charge.

We cannot emphasize enough the importance of having a lawyer experienced in these types of cases. There is a unique formula to this dance that may not be appreciated by lawyers who do not regularly participate in these cases. We frequently encounter clients who are ready to settle cases for an amount far in excess of what we believe their liability should be. We welcome the opportunity to discuss your case with you. If you received a demand for payment and are considering accepting it in order to avoid litigation, contact us first so that we can help you evaluate whether you really should pay that settlement. We also are willing to discuss alternate billing arrangements with you, including reverse contingency fee arrangements. Call us at (302) 655-5303 or contact us today at info@tobialaw.com.
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