for Bankrupt Customers
Inattention to Receivables and Procedural Deadlines Could Cost You
Henry E. Seaton
Reprinted from etrucker.com
If a customer files
for bankruptcy, you might not expect to receive payment for outstanding
freight bills. But did you know that you could be forced to return
money you already collected?
Bankruptcy laws were designed to balance the rights of creditors and
debtors, and like many compromises, the system is flawed. Carriers seldom
receive money on unpaid freight charges from bankrupt customers, but
it gets worse. Exploiting a legal maneuver known as a preference action,
the debtor-in-possession or the trustee in liquidation often demands
that carriers return freight payments they already received from delinquent
Freight charges are, with rare exceptions, unsecured debts and receive
the lowest priority in payment. Taxes and secured loans get paid off
first; carriers receive a pro rata share of what's left. If your debtor
is another carrier or a broker, your chances for recovery are better
in some jurisdictions because of the constructive trust doctrine, but
as a general rule carriers don't get large recoveries from debtors in
Given the odds, it's vital that you keep slow-paying shippers and brokers
current. Use COD provisions of the Bill of Lading Act, the threat of
recourse to other parties and other collection tools to try to keep
debtors from falling behind on payments. If you are paid late, you may
not get to keep in money if the debtor files bankruptcy.
In bankruptcy, a preference is any payment made within 90 days prior
to bankruptcy that is considered outside the ordinary course of business.
To protect as much money for the estate as possible - and secure their
own fees - trustees and their lawyers often review every invoice paid
during the three months prior to the bankruptcy filing and demand that
creditors repay the estate any payments they received 30 days after
This process makes no sense, but it's the law. Suppose a debtor paid
his brother-in-law on time but paid you late. The brother-in-law gets
to keep his money, but you may have to return a payment that you had
to browbeat out of a delinquent customer. A bankrupt estate may recover
thousands of dollars from small carriers by filing dozens of lawsuits
that carriers can't afford to defend.
Don't wait to respond to a trustee's preference demands. Show the trustee
that he's in for a fight if he pursues a claim against you. If your
defenses are valid, the debtor's attorneys may drop the demand before
it gets to the litigation stage. But don't count on it.
You have several potential defenses to preference actions. If you filed
a timely claim, you can offset unpaid invoices on subsequent shipments
against the repayment demands of the trustee. You can also defeat preferences
by proving that your customer's payments were not late compared to its
payment history prior to the 90-day preference period. Or you can avoid
the preference trap altogether by ensuring that you are paid in a timely
Carriers often fail to file a timely proof of claim in a bankruptcy
proceeding because they don't expect to recover anything. That's a mistake.
If your claim is big enough, request participation on the creditors'
committee. Seek out other carriers that have large claims. If the bankrupt
company owed money to several trucking companies, you may be able to
save money on legal fees and improve your odds by consolidating your
Finally, if the debtor is in reorganization and still needs your transportation
services, you can petition the court for an order authorizing payment
of your past, present and future freight charges. If the debtor-in-possession
supports your request, the bankruptcy court might rule that you are
an irreplaceable vendor and ensure that you are paid in full.
Copyright© 2006 Law Office of Seaton & Husk, LP. All rights