Knowing Your Customers Can Help You Avoid Losing Money If One of Them Declares Bankruptcy

It happens all too often: a company declares bankruptcy and then the company’s bank, vendors, or other creditors are forced to return a payment that the company made before declaring bankruptcy because the payment was a “fraudulent transfer” under the bankruptcy code. When that happens, the creditor typically files a proof of claim in the bankruptcy case to recover its payment. To succeed, the creditor must show that it provided some benefit to the debtor in exchange for its payment. In order to protect themselves, creditors should determine the true recipient of their products or loan proceeds before agreeing to any transaction.

In In re Walldesign, Inc., the sole owner of a drywall company (Walldesign) diverted the company’s funds into a secondary company account that he used to fund his personal lifestyle. Walldesign paid Freres out of its secondary account for wine barrels. At the owner’s direction, creditor Freres delivered the wine barrels to the owner’s vineyard. After Walldesign declared bankruptcy, Freres was required to return the payment because it was a fraudulent transfer. Freres then filed a proof of claim in Walldesign’s bankruptcy to recover the value of its wine barrels. 

The court disallowed Freres’ claim because the goods sold by Freres had actually been delivered to the winery, a party other than Walldesign. The court therefore concluded that Freres’ return of the funds fraudulently transferred to it did not give rise to an allowable claim against Walldesign’s bankruptcy estate.

It is important for vendors of products and services to understand who is paying for, and who is receiving, their products and services. Please contact our experienced creditors’ rights attorneys if you would like to learn ways to protect your company from fraudulent transfer claims, need assistance in dealing with a customer or vendor who is threatening to or has declared bankruptcy, or have other questions about prosecuting a bankruptcy claim.

Ross Adler
Erika Gasaway
Sepi Ghiasvand
Marie Gribble
Mark Heyl
Monique Jewett-Brewster
Steve Kottmeier
Breck Milde
Liam O'Connor
Chuck Reed
Jay Ross

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