On November 10, 2021, Walker County Hospital Corporation d/b/a Huntsville Memorial Hospital as the Debtor in Possession (the “DIP”) began filing adversary proceedings against certain creditors in the Bankruptcy Court for the Southern District of Texas.
According to our review of the Bankruptcy Case Docket, there were approximately 93 complaints filed between the 10th and 11th of November 2021.
The 93 complaints filed seek to avoid and recover transfers made by the debtors as alleged preferential transfers.
The claims against the defendant in this matter include a preference claim.
The Bankruptcy Code requires the defendant (a person, corporation, or entity against whom the DIP has lodged a complaint) to file an answer or response within 30 days of the Summons issue date. Failure to file a response may result in a default judgment against the defendant in the lawsuit amount.
A default judgment requires the defendant to refund the entire amount of the claim, and any claims the defendant may have against the DIP may be disallowed by the court, preventing you from pursuing them.
If your rights are in jeopardy and you have not yet retained counsel, you should do so immediately. Click here to contact us today for support.
Under section 547 of the Bankruptcy Code, preferential payments, also known as preferences, are payments made to creditors (a person or company to whom money is owing) before filing a bankruptcy case that result in the creditor receiving more than they would in the bankruptcy case.
In this case, the payments received by businesses from the DIP for a period of up to 90 days before filing for bankruptcy may be considered preference payments. This bankruptcy provision allows the Trustee to "claw back" those payments in an attempt to acquire the funds needed to distribute payments equally among the creditors.
There are some defenses that are typically applicable and could be utilized to protect the payments from being clawed back.
Defenses against preferential transfer.
- Under section 547, there are five elements of preference. If there is a lack of any of the following, we can use this in defense. The five elements are:
- Payment made to or for the creditor's benefit
- There was an antecedent debt (a legally enforceable duty to repay someone with money or property that existed before the moment in question) payable to the creditor.
- The payment was made while the debtor was insolvent.
- If the creditor was an outsider (unrelated to the debtor in any way), than a payment made within 90 days before the petition, or if the creditor was an insider (someone who has a position in a business, family members, business partners, etc.), than payments made one year before the petition.
- More than the creditor would have received if the debtor's case was filed in chapter 7 (liquidation).
- Ordinary Course of Business – A determination of "ordinary course" entails examining the debtor's and creditor's business activities to demonstrate a consistency of transactions between the 90 day preference period and the base period. The ordinariness of the transactions is determined by various factors, the most important of which is the timing of the payments.
- New Value – Generally, if the defendant provided goods or services to the debtor after the first alleged preference payment (based on the precise date of the alleged payment) but before the petition date, any such new value may be protected from avoidance.
- Contemporaneous Exchange for New Value – This affirmative defense requires that the alleged payment and the value delivered to the debtor were not only intended to be contemporaneous (happening at the same time or very close together) but also were, in fact, contemporaneous. If the defendant had any security interests or claims on the debtor's property, this defense might also apply.
- Ordinary Business Terms – This defense is applied when the alleged payments were within the industry standard of lateness/timing of payments.
Our Proposed Strategy
Typically, once we are retained as counsel, we first prepare an answer or response to the complaint, such as a motion to dismiss (requesting the complaint to be dismissed as it lacks legal sufficiency to go to trial) to file with the court before the filing deadline.
Because settlement in the early stages of litigation is generally encouraged to mitigate litigation costs, we prepare and draft a Position Statement for settlement negotiations. This Position Statement may be used for not only negotiation purposes but also, if required, it may also be converted into a formal pleading.
The Law Office of Magdalena Zalewski is experienced in Bankruptcy litigation and can help you defend yourself against the DIP’s allegations.