BUSINESS WATCH

New Bankruptcy Act Not Just for Consumers — Legislation Will Impact Small Businesses By Thomas R. Ostdiek (continued)

 

 

within ninety days prior to the date the debtor filed bankruptcy.  A creditor can avoid giving back the payment if the creditor can prove that a transfer was (A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee; (B) that it was made in the ordinary course of business or financial affairs of the debtor and the transferee; and (C) it was made according to business terms that are standard in the particular industry.  Proving both (B) and (C) was often a difficult burden for the creditor to overcome.  Under the amendments, a creditor need only prove either (B) or (C), easing the burden on the creditor.  This change allows the creditor to avoid the cost of hiring an industry expert to testify regarding the standard business terms within a particular industry.

 

A second change has added a threshold level for the bringing of a preference action.  With respect to a nonconsumer debt, the trustee may not bring a preference action unless the aggregate value of the property sought by the trustee as a preference is greater than $5,000.00.  Any creditor which has collected payments totaling less than $5,000.00 from a debtor within ninety days prior to the date of filing of the bankruptcy petition is now immune to a demand from the trustee to return the payments.

 

A third change beneficial to small business creditors is related to the place where preference actions may be brought.  Under the prior law a preference action was most often brought in the court where the bankruptcy action was filed.  For small creditors of large companies, this meant facing such an action in a Delaware, New York or California court, or somewhere else in the country, making it nearly cost prohibitive to defend such actions.  Under the amendments, any preference action related to a nonconsumer debt seeking less than $10,000.00 must be filed in the district court in the district in which the defendant resides, even if the bankruptcy was filed in another district – except where the creditor against whom a preference action is brought is an insider of the debtor.

 

Conclusion

 

Most of the provisions in the Act do not go into effect until October 2005 (although some are retroactive and others became effective upon execution). While the full impact of these changes upon small businesses remains to be seen, the Act promises to change the landscape for small businesses as all constituencies seek to define the scope of the Act.  If you have any questions regarding these or other new changes to the Bankruptcy Code and how they may impact your small business and the way you handle credit transactions with your customers, we would be happy to discuss them with you.

 

 

 

 

To all current Business Watch Listings

Please read our Disclaimer first.

The Web Site of Fitzgerald, Schorr, Barmettler & Brennan, P.C., L.L.O., the Omaha law firm with over a century of experience and solutions