Defending Preference Actions in Bankruptcy

Recently one of our trade association clients learned that bankruptcies can be painful for creditors, sometime even years after the debtor files for bankruptcy.  Our client only discovered that a judgment in excess of $86,000 had been entered against it as a result of a preference action (a suit by a debtor or its trustee seeking to recover payments made in the 90 days before the bankruptcy was filed) when the assets in its bank account were frozen.  Unlike in an ordinary lawsuit, service of a complaint in a preference action in bankruptcy can be accomplished through regular mail delivery.  The client, however, failed to receive the complaint.  As a result, it only discovered that suit had been brought after a default judgment had been entered and the assets in its account were frozen (for twice the amount of the judgment ($172,000)).  Fortunately, we were able to negotiate a resolution based upon defenses available to our client on the underlying preference action, but it nonetheless highlights the risks posed by a trade association customer or member's bankruptcy.  While you cannot prevent a member or customer from reorganization or liquidating, there are important steps that you can take to minimize your risk of suffering significant financial losses.

The full article can be read here.