Legal Madness: 60,000 Lawsuits Push Creditors to Return Payments to Debtors

LOS ANGELES – You probably are not going to believe this until you read it twice, but this is the fact: banks and thousands of small companies are legally being forced to return money to debtors even though the debts are legitimate. Thanks to the resurgence of an old law some 60,000 “preference actions” are being instituted by debtor companies that claim they paid bills within 90 days of declaring bankruptcy. This, in effect, says the law, supposedly results from some creditors getting paid before others, thereby resulting in them getting preferential treatment.

This is “legal madness,” Westlake Village, Calif.-based Spiwak and Iezza, which has handled some 10,000 collection cases in its 12 year history, said today.

“The last thing a creditor should be forced to do is return money to delinquent debtors,” maintained Lisa Spiwak and Nick Iezza, founding partners of the 20-member law firm, which represents numerous financial institutions and is considered an authority on collection law.

Yet that is exactly what is happening, according to the Administrative Office of U.S. Courts, which has reported that there were some 60,000 law suits filed last year based on preference actions. And those that filed them are huge companies, such as Enron, WorldCom, 360networks and Bethlehem Steel, reports Business Week (Nov. 15).

“There are two major legal strategies that creditors can implement to avoid this legal madness,” the lawyers said:

• Ordinary Course of Business Exception, which allows avoidance of a preferential payment if it can be proven that the payments made during the 90-day period were paid in the “ordinary course” of a debtor’s business and not due to extraordinary pressure by the creditor. “If it has been proved that payments by the debtor have been made in a consistent manner prior to the bankruptcy, the exception will apply,” Spiwak stated.
• New Value Exception, which also can avoid the claim of preferential payment by debtors, providing it can be proved that the payments made in the 90-day period were for “new value” being exchanged for the payment, such as those paid for new goods or services.

“Only those banks and creditor companies who have managed their collection process in anticipation of preference actions will be successful in defending against such an action,” added Iezza, whose firm’s clients include Wells Fargo, U.S. Bancorp, Universal Studios and Sysco Food Services.