FOLLOW UP ON SUBSCRIBER FILING CHAPTER 11 FROM APRIL 1, 2015 ARTICLE
In reference to Chapter 11 bankruptcy (4/1/2015):
This discussion could get pretty exciting. I'm first assuming there's no April Fool's joke hiding in your response.
First, you wrote, "If you have outstanding debt owed to you then any payment you received within 90 days of the filing could be recovered later as a preference." Do I correctly understand the court can demand money back that I received during a specified period? And would I be able to overcome that demand?
Next, let's assume I pull the plug on a client who has filed under Chapter 11. They seek to engage a new vendor who will want the programming codes for the client's panels. These codes constitute some powerful collection leverage under non-bankruptcy circumstances. Am I obligated to turn them over without getting paid, or how would I make the best lemonade out of that request?
Sorry, no April fool joke. And when you have to return a preference it's no joke at all. As a United States Bankruptcy Trustee I frequently go after and recover preferences. I also often represent clients against whom other bankruptcy trustees seek to recover preferences. So I know from what I speak.
Bankruptcy Trustees have certain statutory powers not available to creditors, or anyone else for that matter, created by the Bankruptcy Code. One of these special powers is the recovery of a "preference". A preference is a payment made by a bankruptcy debtor to a creditor on an antecedent debt within a certain time period preceding the filing of the bankruptcy petition. The time period is 90 days for most creditors and 1 year for relatives of the debtor.
Preference should not be confused with a fraudulent payment. A fraudulent transfer or payment is made by the debtor to someone who is not a legitimate creditor with the intent of hiding the asset and evading creditors. A preference is a payment made on a legitimate debt. So why can it be recovered by the Trustee? The reason it can be recovered is because the Bankruptcy Code attempts to treat all creditors equally, subject to a statutory order of priority, and therefore does not permit a debtor to "prefer" one creditor over others. A creditor who is "preferred" will be required to return the payment to the Trustee. Only a Trustee can bring a Preference Action in Bankruptcy Court and such actions are brought routinely except when the amount in controversy is deminimis.
There are defenses to a preference action. Maybe the payment wasn't for an antecedent debt, but for a current obligation. Or "new consideration" could have been provided by the creditor to justify the payment on the old debt, in which event the preferential payment will like be reduced by the new consideration. Or a creditor could try and rebut the presumption that the debtor was insolvent when the payment was made or that the creditor had special status entitling it to the payment, such as a secured creditor.
As I suggested in my article, if you have this issue, better call me [or call Saul, if you can find him].
I probably simplified my advice regarding pulling the plug on the account. Be careful. In the question I was responding to the subscriber was in default when it filed for bankruptcy. In that case you don't have to keep doing business with the subscriber. But if the subscriber is not in default then you can't pull the plug, terminate the contract, because the subscriber, now DIP, has 60 days to decide if it wants to reaffirm the contract. You can insist that the DIP make that decision within that time, but be watchful for omnibus motions to extend that deadline, which you can object to, especially if you're not getting paid.
Whether you have to turn over codes and passwords is not a bankruptcy question and therefore the Bankruptcy Court likely does not have jurisdiction to require you to do that. So that issue is decided by state court law, which hopefully turns on your contract terms. The Standard All in One Agreements not only specifies that the alarm company owns the codes and passwords, but all of the programming as intellectual property. You shouldn't have to disclose that information and you can charge for it if you decide you want to.