Bracing for Bankrupt Customers
Inattention to Receivables and Procedural Deadlines Could Cost You
By Henry E. Seaton
October 2000
Reprinted from

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 customers.

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 liquidation.

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 invoice.

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 manner.

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 efforts.

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.
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