Trustees and Creditors: Friends? Enemies? Depends.
Actions by trustees to recover funds expended by a company within 90 days preceding the filing of a bankruptcy are often misunderstood by creditors, be they individuals or businesses. One of the most common complaints is: “We didn’t do anything wrong, why is the trustee bringing suit? They still owe us money!”
What’s important to understand, and helpful to the eventual settlement of a preference attack, is that trustees are under a duty to all creditors, including the one sued, to attempt to pull certain funds back from all creditors to ensure all creditors receive an equitable share of the bankrupt’s assets. They have an ethical duty to ensure one creditor isn’t being treated more favorably compared to other creditors, even if the favored creditor hasn’t done anything wrong. Sound unfair? It is when you’re that creditor. In addition, trustees generally don’t evaluate each and every payment sent from the bankrupt in the 90 days preceding the filing to see if there are available defenses, because often times the payment fits the legal definition of a “preferential transfer.”
Developing the creditor’s defenses is the more time consuming endeavor, and it’s the creditor’s burden to show that the payment was made in the ordinary course of business, substantially contemporaneously with goods or services, or that goods went out after the contested payment. In addition, the trustee does not need to engage in this analysis before making demand or suing a preference case out. Despairing yet? Don’t. The two predominant philosophies for creditors on how to proceed are stick their head in the sand or charge.
Don’t always be either an ostrich or a bull, instead consider being an educator to the trustee regarding your business and your standard practices. Trustees often have hundreds of payments which went out in that 90 day period to multiple creditors, and this isn’t his or her only case. Educating the trustee through counsel about things like the industry standard of your company, showing how the parties conducted business in the past, and explaining the transactions between the creditor and the bankrupt through a position letter and informal discovery can influence a trustee’s opinion and convince them to settle favorably or not sue at all.
Know that it is impossible to completely eliminate all preference risk when dealing with a distressed entity. That being said, working with a trustee up front through counsel often pays dividends.