Adversary Proceedings
Gathering Assets, Paying Debts, and Distributing Bequests
The approach of the Williams Law Firm in adversary proceedings is simple and straight forward. The client understanding of the adversary proceedings process is important to our team. In addition, we make sure that every client understands exactly what is happening, what it means now, and what it means for the future.
Defending bankruptcy Trustee lawsuits against your business in the District of Delaware
Being sued in an adversary proceeding in US Bankruptcy Court for the District of Delaware can come as a surprise to businesses from all over the country and around the world. As a named defendant, usually you have done nothing wrong and often have not even been paid the full amount you were owed.
Prior to being sued, as a trade creditor, you first receive notice that a business which hired you to perform services or which purchased goods from you and who usually still owes you money has filed for bankruptcy in the District of Delaware. You may think that all hope is lost for collecting those funds. By filing a timely claim there is a chance of recovery, especially for secure or priority claims.
That is not the end of the story for trade creditors who were paid 90 days before bankruptcy. If you were paid from the debtor within the 90 day period prior to filing for bankruptcy oftentimes the Trustee for the debtor sues to reverse those payments. You may not expect a lawsuit to recover payments you received within the 90 day period before the petition (the “preference period”). For many, a suit from a bankruptcy Trustee alleging “fraudulent transfer” or “voidable transfer” adds insult to injury because these funds were earned and received by you honestly, and you are an “innocent victim” of the bankruptcy system. Plus, you have no contact with Delaware, and now you need a Delaware lawyer to defend yourself. Fortunately, the vast majority of these cases get settled at mediation for a fraction of the claim, but it is important to have local Delaware counsel help you analyze the claims to determine your potential exposure and an appropriate settlement position, depending on the facts. These cases can range from five thousand dollars to millions of dollars.
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One threshold question many have is, “what is an adversary proceeding?” An adversary proceeding is a separate lawsuit filed in a bankruptcy case to return funds that a Trustee suspects may be preferential or fraudulent. The legislative intent is to protect creditors that may not have been paid because a debtor made payments only to certain creditors instead. The primary objective of the law is to treat all creditors prior to the bankruptcy evenly.
In an adversary proceeding, such as a preference claim, you have statutory defenses you can raise, including (1) new value and (2) ordinary course of business. These defenses prove you were dealing with the debtor during the preference period in a fair manner because you continued to provide goods and services after receiving payments and/or that you were paid during the preference period under substantially the same number of days from invoice to payment as previous payment periods for pre-preference aged receivables.
If you have been notified of a pending bankruptcy, The Williams Law Firm can help. We have years of experience representing creditors and businesses who wish to defend against adversary proceedings in a bankruptcy case. We will help you evaluate the strength of your defenses and determine how best to proceed to protect your interests in a cost-effective manner. We also work with lawyers from other jurisdictions as local counsel to move their admission Pro Hac Vice and can assist in the local procedures and analysis.
Here is more detail on the Fraudulent Transfer and Voidable Preference Actions
Under the Bankruptcy Code, the Trustee handling the bankruptcy case is able to sue to recover payments made to creditors within 90 days from the date of filing a bankruptcy claim if the payments qualify as “preferences.” In order to qualify, the payment must:
- Be made to an antecedent, which means previously incurred, debt.
- Be made while the debtor had fewer assets than liabilities.
- Be made to a non-insider creditor.
- Be made within 90 days from the date of filing a bankruptcy claim.
- Be more money than the creditor would have received if the bill had not been paid, but rather been paid through a hypothetical liquidation of the debtor’s assets in a Chapter 7 Bankruptcy.
If the debt appears to meet these qualifications, the Trustee is allowed to file a lawsuit against the creditor to avoid and recover these payments. For insider creditors, the 90-day period is extended to one year.
Our Role During Adversary Proceedings
How the Preference Action Process Works
Prior to the filing of a preference action, you usually first receive a demand letter from the Trustee or the debtor’s counsel directly. This letter outlines the claims and often demands a payment and invites anticipatory settlement discussions. If you receive this letter, you should work with a Delaware bankruptcy lawyer who understands preference actions to determine, first, if the claim is valid, then second, what action to take.
Sometimes, creditors are able to negotiate settlements with the debtor to avoid litigation and reduce costs of going to court by paying only a fraction of the claim. If you cannot reach a settlement that both parties will agree to, then the case will be filed in court to be determined by the federal bankruptcy judge. That will allow for further discovery, discussions, and mediation prior to trial.
The Bankruptcy Code provides some protections for companies against preference actions. If a payment was received contemporaneously with the goods being delivered or the services being provided then it is not antecedent debt and it is not a preference. Also, payments collected under the normal course of doing business, as defined in the code, may not be considered preferences. Other exemptions include purchase money security interest, a floating lien, or total payments that are too small to be considered preferences. Finally, payments received for which the creditor provided a new value to the debtor, are protected under the new value defense. Because of the complexity of these defenses, businesses facing preference actions need the help of a legal team who understands these defenses.
Defenses Against Preference Actions
Understanding Adversary Proceedings
In the adversary proceeding, the Trustee is the plaintiff. The complaint will list the facts in the case and ask for a judgment from the court. After the complaint is filed, the court issues a summons that the plaintiff will serve to the defendant. The defendant is given a period of time in which to respond, usually by filing an Answer and Affirmative Defenses. The plaintiff’s burden of proof is minimal, which shifts the burden to prove a statutory defense to the defendant. Some large bankruptcies have thousands of adversary cases filed. We look forward to discussing with you the defenses and helping you reach a favorable outcome.
At The Williams Law Firm, we understand that you work hard to build your business, and your business cannot afford to return payments made on bills you already collected. Our team will help you understand your rights under the Bankruptcy Code, when you face the challenges of a preference action, whether the lawsuit is for $50,000 or $5 million.
“Injustice anywhere is a threat to justice everywhere.”
– Martin Luther King, Jr.
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1201 N. Orange Street
Suite 600
Wilmington, Delaware 19801
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Phone: 302-575-0873
Fax: 302-575-1642
