What Should I Do If I Get Served with a Lawsuit by a New York Bankruptcy Trustee?

In chapter 11 cases pending in the United States Bankruptcy Court for the Southern District of New York and the United States Bankruptcy Court for the District of Delaware, we frequently receive calls and emails from people who have been sued by the trustee or debtor-in-possession.

 It’s best to discuss your situation with Bankruptcy Lawyer in New York beforehand.

What exactly is a preference claim?

To recoup what the trustee considers to be preferential payments paid by the debtor before the bankruptcy, the trustee may launch an adversary procedure in the Bankruptcy Court.

Any preference claims must include the following:

  • A payment made by a debtor to a creditor within 90 days of a bankruptcy filing (1 year for payments to “insiders”)
  •  for an existing obligation payable to the creditor at the time of payment;
  • When the debtor was insolvent and the creditor obtained payment as allowed by law during a chapter 7 bankruptcy case, the creditor was able to recover a greater amount than if the debtor had been liquidated in a chapter 7 bankruptcy case.

It is important to remember that the trustee (or debtor in possession in a chapter 11 case) is not disputing that you, the creditor, delivered the goods or services for which you were paid while making a preference claim. 

Instead, the purpose of the preferred recovery provisions of the Bankruptcy Code is to further the goal of “equality of distribution” among similarly situated creditors. If you were one of the debtor’s creditors who received payment within the 90 days prior to the bankruptcy filing, but others did not, the bankruptcy law as written by Congress will likely punish you.

Should I simply pay the amount demanded if a New York trustee sues me for a preference claim?

Some consumers, after being sued by a bankruptcy trustee or debtor-in-possession, incorrectly assume that they have no choice but to pay the whole amount requested. Even if the creditor/defendant doesn’t have a perfect defence, it still could be able to settle for less than what was originally asked in the complaint.

To do this, you must think carefully about the countermeasures you can do against the opponent’s action.

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