D-D-D-Defense Against The Clawback Of Preference Transfers

If one of your customers files for bankruptcy, you can assume that any money they owe you is long gone. If you get paid back anything at all, it will be much delayed and probably pennies on the dollar. That is a well-known risk of doing business without asking for cash on delivery.

A less well-known risk is that money customers pay you will be clawed back if they file for bankruptcy. Payments received from someone who filed bankruptcy less than a year after making that payment to you may be considered “preference transfers.” The bankruptcy trustee can demand that you return such payments to the bankruptcy court so it can determine if you were given preferential treatment by your customer — in other words, getting paid when others were not.

There are several ways to defend yourself against the clawback of a preference transfer, and we have helped our Milwaukee area clients use all of them.

Why Does This Law Exist?

It seems unfair that a business should be punished just because one of its customers has filed for bankruptcy, but the law was actually drafted to combat unfairness. The clawback provisions are intended to prevent some creditors from being treated better than others. Under the law, all of a bankrupt business’ creditors are supposed to be treated equally.

It Still Seems Unfair

If your business is one that got paid and is being asked to give back money that is rightfully yours, you might not agree that the law promotes fairness. Fortunately, there are exceptions to the clawback rule that you may be able to take advantage of. The three most common are (1) the contemporaneous exchange for new value, (2) the subsequent new value and (3) the ordinary course of business defenses.

(1) Contemporaneous Exchange for New Value

Perhaps the most common defense is the contemporaneous exchange for new value defense. It applies when the payment sent to a creditor was intended by both the debtor and creditor to be a contemporaneous exchange for new value, which can include goods, services, credit, or the release of property previously transferred. The important thing is that the money paid was in exchange for something new. The money cannot have been exchanged in order to pay off old debts.

Organizations doing business with debtors who are in financial trouble should make it clear in their bookkeeping that money coming in is being exchanged for something new of value, not paying off past due invoices.

The law works like this because it wants to incentivize companies to keep doing business with troubled organizations in hopes that they can turn things around rather than be forced into bankruptcy.

(2) Subsequent New Value

This defense is only slightly different from the previously discussed defense. In order to claim the subsequent new value defense, the creditor must have given something of value to the debtor after a payment from the debtor was received. Once again, this exception was drafted in order to incentivize the continuation of business relationships in situations where the creditor could easily have been pushed into bankruptcy sooner.

(3) Ordinary Course of Business

This defense applies when the payment subject to clawback was received in the ordinary course of business between the creditor and debtor. In order to take advantage of this defense, the creditor must be able to show that its relationship with the debtor did not change in the time period leading up to the debtor’s bankruptcy filing. No special payments were received, things were just going along like they usually did.

Experience You Can Trust

Our firm has helped many Milwaukee area businesses take advantage of these and other exceptions to the preference transfer law. In our experience, the sooner a creditor acts after being notified of a potential clawback the better. However, it is never too late to try and protect the money you are rightfully owed from flowing into someone else’s pocket. Whether you have just been notified your business was doing business with someone who has filed for bankruptcy, or you have already been asked to return a payment flagged as a preference transfer, don’t hesitate to contact our office and find out what your options are.

Nursing Homes in Receivership Highlight Another Non-Bankruptcy Option

When a business is struggling to stay afloat, and there is a good reason to keep its operations running instead of shutting it down, putting the business in receivership may be an option. Right now, there are several nursing homes in Wisconsin making headlines for their decision to go into receivership. They provide a good example of how the whole process works.

Eight More Wisconsin Nursing Homes Go Into Receivership

This spring, eight skilled nursing facilities — aka nursing homes — run by a company called Dycora Transitional Health & Living were placed into receivership. The facilities will all remain open for the time being, but they will be operated by another company while a buyer is sought. Unless something comes up, the residents will not have to move out and the employees who work there will continue to get paid.

According to the Milwaukee Journal Sentinel, “Dycora is the third company to have its Wisconsin nursing homes placed in receivership in roughly the past two years… In September, Atrium Health and Senior Living reached an agreement with its lender to have a receiver appointed for 23 nursing homes and nine assisted living centers in Wisconsin and one nursing home in Michigan. Similarly, the Fortis Management Group reached a similar agreement with its landlord to have a receiver appointed for its 65 nursing homes and assisted living centers in six states, including 28 in Wisconsin, in July 2017.

The crush of receiverships, and in other instances closures, is blamed on Wisconsin’s low Medicaid reimbursement rate.

How Does Receivership Work?

Receivership is an alternative to bankruptcy. Instead of winding things down and selling off assets through the bankruptcy process, the business stays open but makes it clear that it is in trouble and is looking for someone else to take over its operations.

A company placed into receivership has a person known as a receiver appointed by the courts. The receiver can pay employees and vendors, and hire someone to keep the business running while looking for a buyer.

Receivership is an attractive option for the business owner, who would otherwise be forced to file for bankruptcy. Compared to bankruptcy, a receivership is cheaper, and it is a faster way to sell off a business.

When the business is providing an important service, as a nursing home does, receivership makes sense from a public good perspective. The employees will continue to get paid, and the people in the facilities will continue to be cared for. If the business filed for bankruptcy or shut down, the residents would be at risk of losing their home and not being properly cared for, and the employees would lose their jobs.

Buyers may be interested in purchasing a business in receivership because the company is selling for a good price, and because they can theoretically turn a profit more quickly by buying a business that is already up and running.

Not An Option For Everyone

Going into receivership is not an option for every troubled business. Winding down operations or going into bankruptcy is better in some circumstances, and negotiating a workout is better in others. What options are available to your business depend on the situation you are in. If you would like to find out what paths forward are open to your business, please contact our experienced team at Hanson & Payne, LLC to schedule an initial consultation.

Receivership as an Alternative to Bankruptcy

In Wisconsin, Chapter 128 is a bankruptcy alternative referred to as “receivership.” While many businesses and organizations file for Chapter 11 or even Chapter 13 bankruptcy, receivership can be a nice alternative. Receivership offers the benefit of more limited court appearances and other paperwork than what is involved in bankruptcy. Additionally, a business in receivership can potentially salvage the business through restructuring. Receivership is not, however, a viable alternative to bankruptcy for all businesses in financial distress.

What is Receivership?

Pursuant to Chapter 128, a court-appointed receiver is put in control of all assets, properties, and obligations of an organization. The receiver will comb through the business’s financial records in an attempt to find out the reason for the insolvency. Additionally, the receiver will notify all creditors of the business that it has gone into receivership.

A receiver may also be charged with continued operation of the business if it would be in the best interest of the creditors. If continued operation of the business is best, a receiver may choose to appoint an operating agent who will be tasked with managing the day-to-day dealings of the business. In most cases, the business will continue operations until it is sold off in a process comparable to an auction. The proceeds from the company’s sale are used to satisfy the debts, both secured and unsecured, of the company. The fact that the company has continued to operate throughout the restructuring and sale process makes the transition in ownership that much smoother.

In some cases, the business may be able to be rehabilitated. The receiver may be able to pinpoint the reason that the business has gone into a debt crisis and restructure the company accordingly. If the receiver can find a way to dig the business out of debt and restructure it so that it can become profitable once again, then the business may not need to be sold off. Some liquidation of the assets, however, may still be necessary in order to pay off the business debts. The receiver may also negotiate reductions in debt payment with creditors. Typically, a receiver will have more flexibility than a bankruptcy trustee would have in coming up with ways to pay of the debts of the business.

The receiver may opt for a third option beyond sale or rehabilitation of the company. In some cases, the business may be liquidated. The receiver will be in charge of managing the sale of company assets which can be heavily discounted in order to get the money needed to pay off some financial obligations. It is still possible that not all creditors will be properly compensated.

Wisconsin Bankruptcy Attorneys Protecting Your Best Interests

Bankruptcy can be a necessary path to dealing with times of financial turmoil. It is not always the best way and it can be a difficult time while you are deciding whether it is the right path for you. At Hanson & Payne, LLC, we are here to help you through the decision making process. We will walk you through all of your options. Whether bankruptcy is best for you or an alternative such as receivership, we are here to answer your questions. Contact us today.