Published On: Sat, May 18th, 2019

Do The Right Thing / Get Screwed Anyway: Secrets of Bonding 144

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You did a professional quality job, billed your client and got paid. Done deal. Now, six months later you get a letter from some attorney demanding that you return the funds! Are they insane? This is a horrible threat that you cannot avoid.


  • Spiffy Construction, Inc. performs work for their client Humongous Hotels in a professional manner and on January 6th generates a normal invoice for work completed: $262,800.
  • The invoice is reviewed and approved on January 18th. Humongous sends Spiffy a check for $262,800. Awesome!
  • Spiffy deposits the check. On February 3rd all the funds are used to pay bills and upgrade equipment.
  • On March 21st Spiffy receives a letter from an attorney demanding that they return the funds. Humogous Hotels has declared bankruptcy after they paid Spiffy. The attorney says failure to return the funds can result in a “preferential lawsuit.” What the heck is going on?!

This is not an imaginary scenario. It happens all the time and can be very bad for the defendant (aka the good guy.)

What is a Preferential Payment?

When a company declares bankruptcy, the court can review payments that were made in the period preceding the bankruptcy to see if some may have been (in the court’s opinion) inappropriate. They want to determine if such creditors were given extra favorable treatment at the expense of others.

In our example, Spiffy was paid less than 90 days prior to the BK, so the BK trustee is attempting to claw back the funds to be distributed as THEY see fit. Keep in mind, everything that happened prior to the demand letter was normal and legal. Spiffy did the work, billed the owner and got paid. Period, end of story. However, it’s not be the end of the story…

The trustee will attempt to prove that the payment received was more than would have been allowed if made by the BK trustee. That’s bad because Spiffy collected the full amount they were owned, but in BK proceedings, creditors are typically paid less than 100%.

Spiffy is now forced to pay for a legal defense against this claim. If they lose, they will have to give back money they legally earned. The situation keeps getting worse.

What are the remedies available to Spiffy and other companies caught in this untenable position?

Examples of Defenses Available to Spiffy Construction

Here are some common defenses Spiffy might raise.

  • Substantially Contemporaneous Exchange – this means the payment and delivery of product or services happened at the same time, such as a COD payment. A payment by check may also be included in this category if it clears promptly.
  • New Value – If a $100 account receivable was collected during the preference period, then an additional $75 AR was billed but not received, the preference amount could be claimed to be only $25, not $100.
  • Floating Lien – This is a creditors security interest in present or acquired assets such as accounts receivable. The creditor would need to show that their collateral position has not improved during the preference period
  • De Minimus – Means debts that are too small to include in the analysis.
  • Ordinary Course of Business – There is a history of accounts receivable showing invoices and payments from Humongous Hotels. The amount owed was in line with prior transactions.

The last example, “Ordinary Course of Business” may be the most natural defense to use in our Spiffy example. However, in order to raise this defense, the creditor must have appropriate records. Copies of contracts, invoices, AR schedules and bank statements are critical documents. Good recordkeeping is needed with an efficient means of storing and retrieving the data, possibly years after the original transaction.

Sometimes you can do the right thing, but you still get screwed. At least now you know there are possible solutions to pursue.

Reminder: We are not attorneys and are not intending to give legal advice. For that, call your ATTORNEY. For a bond, call us!

Insurance Agents and Contractors: Love the “Secrets” articles? You’ll really love it when we solve your tough bonding problem! We have the markets and the know-how to succeed even when others have failed. Call us with your next surety bond need. We guarantee a same day response.

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Steve Golia is an experienced provider of bid and performance bonds for contractors. For more than 30 years he has specialized in solving bond problems for contractors, and helping them when others failed.

The experts at Bonding Pros have the underwriting talent and market access you need. This is coupled with spectacular service and great accessibility.

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