Wednesday, April 13, 2005

Dear Pallet Enterprise Editor,

The following is my story, which reveals the ridiculous state of affairs with respect to the everyday consequences of the current corporate bankruptcy law.

And without question, my story is certainly not the most tragic of human interest stories. However, it does seem to rank right up there with armed robbery. But in this case, the weapon is a lawsuit that takes unfair advantage of both the cost and complexity of the law.

Most businesses know that when one of their customers files bankruptcy that is a bad sign. It is bad because the unsecured creditor knows that their company will usually get nothing, or very little for their outstanding invoices.

Now, however, there is a new twist being added which is referred to as "preferential treatment." This law requires the unsecured creditor company (the victim) to repay any money that they received in the 90 days prior to their customer’s bankruptcy filing date. It was passed to ensure that all unsecured creditors are treated fairly and that a customer does not siphon off money by the bankrupt company favoring one creditor over another. Money collected from the creditors is supposed to be equitably redistributed back to them. In reality, very little of the money is ever redistributed to unsecured creditors, often less than 1%, because the majority of the preferential claim money goes to the lawyers, trustees and administrators for the work they did in collecting the money. The preferential treatment process is simply making paperwork which generates huge fees for the lawyers and trustees at the expense of the unsecured creditors. Make no mistake – the process is obviously not for the benefit of the unsecured creditors.

My company, North Central Pallets, has faced two preferential treatment claims over the past year. One of the claims was dismissed by a judge. And the other is still being negotiated. My company was targeted not because we did anything wrong but just because we had been paid within 90 days of the bankruptcy filing date. All payments were received within the standard course of business, and I have decided to fight as long as possible to protect my rights.

If you speak with any lawyer you will be told that there are several defenses against preferential treatment claims. I believe that if any person, other than a lawyer, looks into these defenses along with the attendant circumstances they will be amazed. They will be amazed at how unfairly the law is being applied. They should certainly be amazed at what kind of treatment is considered preferential, including the use of a collection agency.

I have spoken to several lawyers about this legislation. Each lawyer has agreed that this is a terrible law. But they have all said that as long as it is the law there is nothing that they can do. One lawyer went on to say that the lawyers will never do anything to change this "terrible" law because all the bankruptcy lawyers are making so much money as a result of it.

Let’s draw a parallel between current bankruptcy law and a person having cancer. Cancer is a "terrible" thing just like a bad law can be a "terrible" thing. When a person has cancer, they will usually go to the doctor. The doctors would do their best to help the cancer stricken patient.

Under these circumstances it would be reasonable to expect any frightened patient to ask the doctor some serious questions. One of those questions would surely be, "Doctor, is there any hope of a cure for my cancer in the future?" Can you imagine what the public uproar would be if the doctor gave the following answer, "We know that your disease is terrible, and we will do all we can to treat your disease. However, with respect to a cure, there is very little hope because the doctors are making too much money just treating the disease. Furthermore, the doctor’s lobby would surely kill any hope of a cure."

Another outrageous answer would be if the doctor suggested that the patient go see his congressman to deal with the cancer problem. The doctors, after all, did not make the cancer disease.

Based on the above answers, we would all think that the doctors were crazy. They are the medical professionals with the responsibility to provide us all with the best medicines and treatment possible. Yet these are the very answers we get from the legal community about my company’s preferential treatment situation.

If any normal person takes the time to understand what is happening, then that person would easily come to the conclusion that the current use of the preferential treatment laws are bad. It is very clear that these laws are simply "revictimizing" the victim. Without question, this is harmful and terrifying to all small businesses that must extend credit. Without question, this legislation is bad for all minority and women owned businesses.

There is a place for preference claims. If a supplier receives a true preference, then that is clearly not right. Our point is not that "preference claims" are wrong. Our point is that the "preferential treatment" is being abused and drastically misapplied. It is clearly not being pursued for the protection or benefit of the unsecured creditors. It is being pursued for the primary purpose of enriching the legal community at the expense of the small business community.

How many small businesses can afford $400 per hour lawyers to protest such claims? As a result, the victims are routinely encouraged to simply pay the preferential claims and thereby avoid compounding the problem with additional and exorbitant defense costs. Hence, my company is stuck in a "Catch 22 " situation, which resembles the legal equivalent of either extortion or robbery. This seems obvious and is wrong. I think the law needs to be changed or modified in order to refocus on its original intent which was probably fairness.

— Pat Hanley, president and owner,
North Central Pallets
Argos, Indiana