I used to think that lawyers got a bad rap about being a bunch of crooks. But I recently encountered a situation that made me re-think my desire to give lawyers the benefit of the doubt. A number of leading industry suppliers recently received a big surprise in the mail thanks to the aftermath of the Pallet Management Systems Inc. (PMSI) bankruptcy.
The bankruptcy trustee for PMSI has sent letters to many lumber, machinery and nail suppliers, demanding funds paid by the company to creditors be returned. In some cases the amounts in dispute are hundreds of thousands of dollars. One vendor said that if his company had to pay the money, it would ruin him.
Unfortunately for businesses stung by dead beats, the trustee is doing something fairly common in bankruptcy cases. Typically, a company doesn’t have any money or real valuable assets by the time it declares bankruptcy. One of the debtor’s most significant assets in many circumstances is its preference claims against creditors.
Preference payment laws are intended to ensure that all creditors are treated fairly and that a person does not siphon off money by favoring one creditor over another. While that may be the stated purpose of the law, in reality it exists to pay for the bankruptcy proceedings. Lawyers don’t mind if you work for free. But they certainly don’t intend on working for free.
“Courts are becoming more and more lenient about what they will accept under the preferential payment laws,” said one creditor in the PMSI case. Even a timely payment may be a preference if the debtor’s prior payments were consistently late. While the trustee bears the burden of proof, it can be fairly easy to show at least some perceived preference in cases, especially where payment terms change.
Hoping to generate capital and prey on creditors’ fears of long, expensive legal battles, trustees can use the preferential treatment law to their advantage. This appears to be what is happening in the case of PMSI. While the law may be written to ‘protect creditors’ it really ends up soaking the entities that have already been the financial victims of the bankrupt company. The law protects the lawyers and those who don’t pay their bills. It does not really protect companies trying to make an honest living.
One lumber supplier has already paid six figures in this case. The company decided to settle out of court based on the advice of its legal counsel. The lumber company learned the hard way that if payment terms change, it can provide the trustee ammunition to claim preferential treatment.
One creditor in this case said, “The basic concept of preferential treatment in ages gone by is to look for the crook. In PMSI’s case, there probably was no crook…The attorneys have created for themselves a cash cow.”
Current bankruptcy laws allow the trustee to sue for payments made 90 days before the bankruptcy filing. Most preference claims are settled without both sides having to go to court.
Bankruptcy laws have come a long way since the days of parading debtors naked in the streets, branding the palms of bankrupts with a “T” for thief or cutting off the ears of people who were excessively in debt. Now it seems the laws are swinging the other way and providing too much protection for debtors and their lawyers.
Abuses like those by PMSI’s lawyers are just another reason why it has become real hard to do business in the
