For most lawyers human beings, it’s been a goofy three months (we’re now well into the Covid-19 pandemic). Amid the quarantine, I’ve been incredibly fortunate to see my firm’s workload go up, but millions of my fellow Americans, including a whole bunch of lawyers, have seen their income and savings vaporize in a matter of hours. Even as I’ve gotten busier, I’ve begun to more diligently follow the advice of one of my favorite law professors, who insisted that a good attorney absolutely must read the news, religiously. I quit being a newshound some time ago, but lately, that has come to seem more irresponsible every day.
Enter the New York Times, which made me an offer I couldn’t refuse back when this sinister little microbe was hammering the greatest city in the world. A more recent, awful headline ran on June 18, just as the Empire State started to get things under control:
“A run of defaults looks almost inevitable. At the end of the first quarter of this year, U.S. companies had amassed nearly $10.5 trillion in debt — by far the most since the Federal Reserve Bank of St. Louis began tracking the figure at the end of World War II.”
Disconcerting, to say the least. It dawned on me that I’m about to get busier as the pandemic drags on, especially as more and more large entities go under.
Now, for me to say I’m an expert in corporate bankruptcy law would be like saying I can hit a major league fastball. Sure, I understand the physics involved, and I know the mechanics it takes to connect Wonderboy with Mr. Spalding and put the thing over the fence (going “yard” as they used to say). But I don’t have what it takes to do it. I leave it to the experts– many of whom I’m fortunate to call my clients– and the folks this post is directed toward.
What I do know about corporate bankruptcies is that there’s a thing called “preference payments” looming over the procedure. At first, I didn’t know what that meant exactly, and looking it up didn’t help much. So a kind client put it in terms I could understand: in the months leading up to bankruptcy, a debtor can’t pay its “preferred” creditors, but not pay others, because doing so puts those others at a disadvantage. Payments made to any creditors within 90 days prior to filing may be subject to clawback under the preference payment doctrine.
Pretty reasonable, I would think. And how do those payments get clawed back? By an adversary proceeding connected to to the insolvency procedure itself. The trustee literally sues the creditors (who were paid previously) for the return of those payments. A regular bankruptcy summons is issued, and the creditor has to show up to defend against the claim, lest he/she/it be held in default. Y’all in the bankruptcy bar know all of this.
Easy. The Hague Service Convention kicks into gear…
… and the action must be served just like any other civil suit in a U.S. court. That means particular rules are in place that don’t apply if the creditor is in Chicago or Fargo or Buffalo. See here for the methodology… but heed a particular caution: modify the summons well before you throw out the first pitch in the service procedure. And make sure you do it the right way. Fail either, and you’ve got yourself a natural disaster.
* Yeah, I know that’s a softball in the picture above. Spalding still makes softballs, but not Major League baseballs. Those would be courtesy of Rawlings, but “goodbye, Mr. Rawlings” isn’t the old catchphrase.