Advice columns and etiquette guides are chock-full of suggestions about what to do when someone asks for something they previously gave you back. This advice is most often sought out at the end of a relationship when there are shared household items to divvy up or a diamond ring that is causing strife.
Some etiquette gurus suggest pushing back politely. Others say give the item back and move on with your life. As bankruptcy practitioners, we often wonder why the law of take-backs is not more fleshed out because, in our world, the law is quite clear.
If a debtor that owes you money, or someone you do business with declares bankruptcy, the court may order any assets the filer transferred to you within the last few months returned to the bankruptcy court so that they can be equitably distributed among all creditors.
These clawbacks are meant to guard against the preferential treatment of certain creditors and ensure all creditors are treated fairly. However, if you are the entity being forced to give back the money that is rightfully yours, you may question how fair this actually is.
Fortunately, there are exceptions to the clawback rule that you may be able to take advantage of. The three most common preference defenses 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
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 payment for some new good or service exchanged right when new assets were transferred to the creditor. The assets transferred 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 contracts and financial records that money coming in is being exchanged for something new of value, not paying off past due invoices.
This defense exists because policymakers want to incentivize companies to keep doing business with troubled organizations in hopes that they can get back on their feet.
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 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 a payment subject to clawback was received in the ordinary course of business between the creditor and the 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.
Don’t Give Up Without A Fight
If you have been hit with a preference claim, and the courts are asking you to give back the money or other assets that are rightfully yours, don’t hand anything over without a fight.
Hanson & Payne 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.