Question: I run a real estate appraisal business. One of my mortgage company customers recently filed for Bankruptcy. I was scared at first upon receiving the notice of filing; yet the mortgage company owes me very little money. I didn’t bother taking part in the bankruptcy as a creditor. However, the Bankruptcy trustee just wrote me a demand for the return of my last three months of payments totaling about $15,000.00. Why would I need to return this money?
Answer: Certain payments made within the 90 days preceding a bankruptcy filing may be known as “preferential transfers”. Some payments are considered preferential because troubled companies often to pay only certain (i.e., preferred) creditors, thus leaving other creditors out in the cold. Recovering these preferred payments is a tool for Bankruptcy trustee to use in order to make an equitable distribution to all creditors.
If such transfers involve insiders, (relatives, general partners, directors or officers of the debtor), the trustee or debtor in possession may “avoid” or cancel such transfers if they were made up to one year prior to the bankruptcy filing.
By getting a preferential transfer a creditor often receives more than it would have in a Chapter 7 Bankruptcy if the property had not been transferred prior to the filing. You may, however, have a defense to the claim of preferential transfer.
In defending against a preference claim you need to prove either (1) the payment was made in the ordinary course of business between the mortgage company and your appraisal company, OR (2) the payment was made according to ordinary business terms in your industry. Generally, the trustee may not recover preferential transfers to a creditor aggregating less than $5,000.
As your service of providing appraisal reports to the mortgage company, is documented on each HUD-1 Settlement Statement, you should be able to achieve “ordinary course of business” status.
Either ask your attorney to get involved, or call the Trustee’s office to explain this and follow up with a letter. This may take time and attention, however, it is better than giving up hard earned money you have already received and likely spent.
Attorney James Haroutunian practices real estate law, business, probate and estate planning representation in Billerica at 790 Boston Road. Contact him with questions at www.hlawoffice.com, 978-671-0711 or email: firstname.lastname@example.org.