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Light Rain Bankruptcy Law
Q: I own a business in Eastern Long Island and recently received a notice from a bankrupt company that we haven’t done business with in years, demanding money and threatening to sue me. We did business with them before they filed for bankruptcy so how can they sue me?" This, and other similar questions and expressions of disbelief, are common among business owners, and managers and in-house counsel who find themselves caught in the complicated tangle of economics and law that constitute a business bankruptcy case.
A: The answer to why you are being sued now by a bankrupt company or its trustee lies deep in the heart of the United States Bankruptcy Code, where section 547 of the federal statute sets forth the law of “preferences” or “avoidance of preferential transfers.”
The law reflects a federal policy that those who received payments from a bankrupt company during the 90-day period preceding that company’s filing for bankruptcy should return those payments to the bankrupt company (“debtor”). The theory is that those who received such payments were “preferred”, whether intentionally or not, over those who did not receive any payments from the debtor during such prescribed period. Once the recipients of the preferred payments return the money to the debtor’s bankruptcy estate, the money can be pooled and redistributed on a pro rata basis to all creditors of the company, thus promoting one of the fundamental policies of the federal bankruptcy laws, equality of distribution.
Section 547 of the federal Bankruptcy Code, and the common law that has developed around it, is fraught with complications and uncertainty. Details aside, the basics of the law are as follows. The Bankruptcy Code allows a debtor, or a bankruptcy trustee that may have been appointed for the debtor, to sue to recover a payment made by the debtor, or a transfer of property of the debtor, that occurred on or within 90 days before the date of the filing of the petition in bankruptcy. The period is one year for those who have certain insider relationships with the debtor.
