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Publication Category: Creditors' Rights

Understanding the Home Improvement Consumer Protection Act

The Pennsylvania Home Improvement Consumer Protection Act (“HICPA”), 73 P.S. § 517.1, is a fairly recent law that substantially impacts the rights and duties of both consumers and contractors. The purpose of the HICPA is to regulate and offer additional guidelines for the transactions that take place between consumers and contractors. It imposes a number of additional requirements upon contractors and sets forth penalties for “Home Improvement Fraud.” Some of the most important requirements by which contractors must now abide include the following:

All contracts must be in writing, be legible and contain:

a. the signature of the consumer or his/her agent;

b. the signature of the contractor or his/her agent;

c. the date of the transaction;

d. copies of all required notices (attached to the contract);

e. the name, address and telephone number of the contractor (PO Boxes are not valid);

f. a description of the work to be performed as well as the materials (this cannot be                       changed without a written change order signed by both the owner and contractor);

g. estimated start date and completion date;

h. the total price due;

i. the telephone number for the Bureau of Consumer Protection (1-888-520-6680); and

i.  contain the contractor’s registration number.

This last requirement can be a source of problems for both homeowners and contractors. Additionally, not only must the contract contain a contractor’s registration number but it must also be displayed on all advertisements.

The Bureau of Consumer Protection, run by the Office of the Attorney General, issues contractor registration numbers. In order to determine whether a contractor is registered and, if so, obtain the contractor’s registration number, homeowners can call the telephone number listed above which must also be listed in all contracts. In order to register with the Bureau of Consumer Protection, contractors must complete an application which may be obtained online or can be requested and mailed with the $50.00 fee to the Pennsylvania Office of Attorney General, Bureau of Consumer Protection, 15th Floor, Strawberry Square, Harrisburg, PA 17120. Registration must be renewed biannually.

The HICPA also criminalizes “Home Improvement  Fraud.” Included in the definition of home improvement fraud is the receipt of advance payment by a contractor and the contractor’s subsequent failure to perform or provide the services or materials specified in the contract. If the amount of advance payment taken by the contractor is over $2,000, the act is automatically deemed a third degree felony. If the homeowner is 60 years of age or older, the offense will automatically become a second degree felony. There are additional criminal penalties and prohibited behavior identified in the HICPA. Answers to frequently asked questions can be found on the website of the Pennsylvania Office of the Attorney General.

Although the courts have had few opportunities to interpret the HICPA to date, the Pennsylvania Superior Court has held that an oral contract can be enforced by a contractor if substantial work has been performed and the contractor has been left uncompensated under a theory of quantum meruit.(Durst v. Milroy, 52 A.3d 357 (Pa.Super. 2012). Quantum meruit is an equitable remedy used to provide restitution for unjust enrichment in the amount of the reasonable value of services. Essentially, where no contract exists but denying a party payment for services rendered would be unconscionable, the law will imply that a contract exists. The Pennsylvania Superior Court has applied the same theory to allow payment to a contractor who entered into a written contract with a consumer, performed services pursuant to the contract but failed to register with the Bureau.(Shafer Elec. & Const. v. Mantia, 67 A.3d 8 (Pa.Super. 2013).  In essence, a consumer cannot allow work to be performed by a contractor, benefit from that work and then refuse payment altogether by relying on the requirement that the contractor be registered pursuant to the HICPA.

Although the two cases cited above have allowed recovery by a contractor who has not complied fully with the Act, it is in the best interest of every contractor who anticipates performing services in Pennsylvania to abide by the Home Improvement Consumer Protection Act in order to avoid potential legal troubles. It also benefits homeowners to be familiar with the Act so that they know their rights and limitations.

Subcontractors and Suppliers Beware: Your Rights to Mechanics Liens May Soon Be Slashed

A mechanics lien is an extraordinary and powerful tool for subcontractors and suppliers seeking recovery for nonpayment. Although all states differ in the specifics of their mechanics’ lien laws, Pennsylvania has traditionally maintained very strong mechanics’ lien laws to the benefit of subcontractors and suppliers. Although the requirements for placing a mechanics’ lien on a piece of property in Pennsylvania are rigid and extremely detailed, mechanics’ liens for new construction take priority over almost all other liens.

However, House Bill 1602 (“HB 1602”) may change that. This bill seeks to alter mechanics’ lien laws to make them more favorable to property owners and, thus, more difficult for subcontractors and suppliers to obtain. While HB 1602 still needs to be approved by the Senate and signed by the Governor, if it’s passed in its current form, it would place new obstacles in the path of subcontractors and suppliers seeking repayment.

As it stands now, HB 1602 would allow property owners to file a “Notice of Commencement” (“NOC”) which would need to be posted conspicuously on the job site and delivered to the general contractor within seven (7) days of filing. Should a property owner choose to file a NOC, all subcontractors and suppliers would be required to file a “Notice of Furnishing” (“NOF”) within twenty (20) days of commencement of work or delivery of materials. Should a subcontractor or supplier fail to file a NOF within the required time period, their lien rights will be lost. Additionally, the general contractor must only give a subcontractor or supplier a copy of the NOC if asked to do so by written request.

Practical Advice for Creditors in Preference Defense

Practical Advice for Creditors

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

In the last several issues, we have covered the definition of a preference, as well as the explanation of defenses to preference actions. This week’s installment will cover some practical advice for creditors who are faced with that “double whammy.”

When you get that letter (or pleading) from someone representing the bankrupt estate and asking for return of a preferential payment, DO NOT SEND A CHECK! Stop and think. First, make sure you have some time to review the facts. If the document gave a deadline that is coming close, call the writer and ask for another few days or weeks to gather the facts. If it was an actual Complaint that was filed, you probably should have your lawyer involved in getting the extension of time. Make sure you know the exact payments they are complaining of. Then, start to get your information together.

Did you actually get the payments? Did they clear the bank? Remember, there is no preference if the check didn’t clear. Were the payments within terms for the invoice paid? Was there anything unusual about the payment stream? If there wasn’t, there may not have been a preference at all!

Look at the customer’s history for the year prior to the bankruptcy filing. Compare invoice dates, payment terms and actual payments. Calculate the number of days from invoice/shipment date to when payment was actually received. Even if out of terms, was there a narrow range of days late? Were the suspect payments late but within that range? [Ordinary Course of Business Defense] Did you ship to the debtor after the suspect payment and not get paid for that shipment? [Subsequent New Value Defense].

If you feel comfortable with what you know and what the facts are, you may want to call the person demanding the repayment and lay out your defenses. Remember, they don’t want to spend a tremendous amount of time or money on the collection. If you can make a good argument and have facts to support it, you should be able to settle it. Most trustees and others will be willing to settle a preference claim at 80% without batting an eyelash. To get further, you need to show some reasonable defense.

When negotiating a settlement, it is helpful to estimate what your cost of defense would be, even if you think you have a “slam dunk.” Depending on the amount at stake, your lawyer, the local Court, distance, etc., your cost could be anywhere from $750 on up into the tens of thousands. You should also recognize that the claimant (Trustee, Debtor, Committee) needs to get something out of a settlement.

Based upon all of this, it would not be unreasonable to offer $500-$1000 to settle a $10,000 claim, where there are arguable defenses. Of course, each settlement situation is different, but this may give you an idea. When in doubt, it is a good idea to ask a lawyer knowledgeable about the bankruptcy process. While it may help to get the advice of a lawyer familiar with the Court and the players in the locale where the case would be filed, any knowledgeable bankruptcy lawyer can help you analyze the case and discuss settlement options.

One of the proposals from the National Bankruptcy Review Commission is that no preference claim of less than $5,000 can be brought at all and that claims under $10,000 must be filed in the Court where the CREDITOR is located. If those pass, it will make life a bit easier for creditors on those nuisance preference claims. It will change the inconvenience factor and, therefore, the settlement leverage. It remains to be seen what Congress will do with the NBRC recommendations.

Preference Actions, Part 6: Preference Time Periods: The Beginning and the End

Part 6: Preference Time Periods: The Beginning and the End

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

The fourth element a Bankruptcy Trustee must prove in order to avoid a preference transfer seems to be the most commonly remembered by creditors because it defines the time periods for which a transfer can considered a preference. Section 547(b)(4) of the Code provides that, in order to be deemed a preference, a transfer must be “made on or within 90 days before the date of filing of the petition or between 90 days and one year before the filing of the petition, if such creditor at the time of the transfer was an insider.”

Determining the scope of the preference period is simply a matter of counting back 90 days from the bankruptcy petition date. This holds true in involuntary bankruptcy cases where creditors file a petition to have the debtor placed into bankruptcy. In involuntary cases, there is a “gap” period between the filing of the petition and the date which the bankruptcy court holds a hearing and makes a decision whether to enter an order for relief. The petition date and order for relief date in an involuntary case are usually different and should not be confused.

Sometimes a debtor files an emergency petition for bankruptcy, but the petition has a defect such as failing to include the required schedules. Bankruptcy courts will usually dismiss the case if the debtor does not cure the defect in the time allowed under the Bankruptcy Rules (15 days). See, Bankr. R. of P. 1007(c). If the debtor then files a motion to reopen the case proposing to cure the defect, the court may enter an order reopening the case. When this occurs, the petition date is considered to be the date the order to reopen is entered, and not the date when the petition was initially filed. For example, if a debtor files an emergency petition on January 1, but fails to complete the filing and the court dismisses the case on January 16, the debtor then files a motion to reopen on January 17 and the court holds a hearing and enters an order reopening the case on February 15. Unless the order expressly states otherwise, the preference period begins to run from the reopening date, February 15 as opposed to January 1.

With respect to “insider” preferences, the term insider is defined under the Code and includes, but is not limited to, relatives, general partners, directors, officers, persons in control, managing agents and affiliates of the debtor. See, 11 U.S.C. Section 101(31).

A bankruptcy trustee may avoid an insider transfer if it is made within one year before the filing of the petition and ending 90 days before the filing, and the creditor to whom or for whose benefit the transfer was made is an “insider” at the time of the transfer. However, if the transfer is made to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be considered to be avoided only with respect to the creditor that is an insider.

The insolvency presumption which was addressed in the prior article will not apply to transfers occurring more than 90 days before the filing of the petition. Therefore, the trustee will have to prove the debtor was insolvent when the insider transfer was made. If the transfer was made within 90 days before the date of the petition, creditors who are “insiders” are treated like creditors who are non-insiders (i.e. trade creditors, etc.).

Preference Actions, Part 5: Preference Transfers Made While Debtor was Insolvent

Part 5: Trustee’s Burden for Preference Transfers Made While Debtor Was Insolvent

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

The third of five elements the Trustee must prove in order to avoid a preference transfer is set forth in Section 547(b)(3) of the Code. This Code Section requires that transfers within 90 days of a bankruptcy petition must be “made while the debtor was insolvent.”

The Trustee’s case is buttressed by Section 547(f), which provides that “the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.” Although the Trustee must still establish the other four elements for an avoidable preference claim, Section 547(f) shifts the burden to the creditor to come forward with evidence to rebut the insolvency presumption.

A balance sheet test is used to determine insolvency. A debtor is considered insolvent when its debts are greater than its assets, at fair valuation, exclusive of property exempted or fraudulently transferred. “Fair valuation” is recognized by most courts to mean fair market value of the debtor’s assets and liabilities at the time of the alleged preference transfer. Section 101(32) separately defines partnership insolvency as: a financial condition such that the sum of such partnership’s debts is greater than the aggregate of, at fair valuation, all of such partnership’s property, and the sum of the excess of the value of each of the general partner’s non-partnership property, exclusive of property, over such partner’s non-partnership debts.

The insolvency presumption in the Code makes the Trustee’s job much easier and leaves creditors with a difficult task. Because of this, Trustees often will pay little attention to this element of their case. However, for creditors there is information and evidence at their disposal which may assist in rebutting the presumption. Some debtors file bankruptcy because they cannot pay their debts as they come due, but have assets in excess of their debts. Bankruptcy schedules filed by all debtors list the amount of assets and liabilities. If the assets on the schedules exceed liabilities, then creditors have a sworn admission of solvency by the debtor.

In Chapter 11 cases, debtors are required to file periodic financial statements, such as balance sheets, which should reveal the debtor’s solvency or insolvency just before bankruptcy. If this information does not help, then creditors might consider hiring an expert to value the Debtor’s estate so a more accurate balance sheet analysis can be done. Secured creditors may have appraisals of certain property and these appraisals can be obtained by asking the secured creditor or by subpoena.

Next – Part 6: Preference Time Periods: The Beginning and the End

Preference Actions, Part 4: Trustee Burden for Preference Transfers For or On Account of an Antecedent Debt

Part 4: Trustee’s Burden for Preference Transfers for or on Account of an Antecedent Debt

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

The second element the Trustee must prove in order to avoid a preference transfer is set forth in Section 547(b)(2) of the Code. This Code Section requires that the transfer made by the Debtor within 90 days of the bankruptcy be “for or on account of an antecedent debt owed by the Debtor before such transfer was made.” See Section 547(b)(2).

The term “antecedent debt” is not defined by the Code, but a common sense definition applies. A debt is antecedent if it is incurred before the transfer or payment from the Debtor. The most simple example is the Debtor orders goods and is invoiced on February 1. The Debtor later pays the invoice on July 30th, which is within 90 days of a bankruptcy filing.

As straightforward as it may appear, this element can become problematic when the debt and payment are nearly contemporaneous. Generally, a contemporaneous exchange of equal value will not be considered an antecedent debt. But take for example a secured financing creditor (such as an equipment financier) who intends a contemporaneous transaction. If, however, the financing creditor does not perfect immediately or within the statutory grace period, then the transfer may be deemed for or on account of an antecedent debt owed by the debtor before the transfer was made. Therefore, it is advisable for secured creditors to immediately perfect their security interests so that this potential problem is averted.

Next – Part 5: Preference Transfers Made While Debtor was Insolvent

Preference Actions, Part 3: Just What Do They Mean?

Part 3: Just What Do They Mean?

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

Last time, we outlined the five elements of a preference claim that must all be met by the Trustee (or the one seeking to recover the preference claim). In the next few issues, we’ll look at the elements themselves and what they mean.

(1) To or for the benefit of a creditor. This one might be obvious. But, there is always more to the Bankruptcy Code (and interpretations) than meets the eye. This test means that the transfer (remember that a preference can be more than just a payment, but a transfer of any kind) must be either to a creditor directly or one that benefits a creditor.

The simple case is a check paid by the debtor to you, the creditor. Once cashed and paid by the debtor’s bank, the debtor has made a transfer to you of the amount debited from his account. Pretty simple. Let’s complicate it a lot. Say you have a corporate customer and have obtained the personal guarantee of the principal shareholder. Suppose further that the guarantee agreement (or the state law) gives the guarantor the right to recover from the customer any amount the guarantor pays on the guarantee. The guarantor would be subrogated (not subordinated–a completely different concept) to the rights of the creditor to the extent the guarantor made payment. The fact that the guarantor has a contingent claim against the customer probably makes the guarantor a creditor (whose claim is contingent) of the customer.

If that customer makes a payment on the account, who has benefited? Obviously, the customer has benefited. The guarantor has also benefited by having her liability and, therefore, her contingent claim, diminished. There, the payment was a transfer (by the customer) for the benefit of a creditor. In the proper circumstances a claim may be made against the guarantor for the return of a preference, to the extent the other elements are met. Not quite so obvious, heh? Next time, we’ll explore the meaning of “antecedent debt.” Don’t miss it!

Next – Part 4: Trustee Burden for Preference Transfers For or On Account of an Antecedent Debt

Preference Actions, Part 2: Prove It, Mr. T

Part 2: Preference Actions, Prove It, Mr. T

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

The “double whammy” just hit you. One of your customers filed bankruptcy, causing you to look at a significant write-off, and now you just received a letter from Mr. Bankruptcy Trustee (“Mr. T”) requesting that you immediately return the customer’s last payment or Mr. T will file a Complaint to avoid the payment and seeking to have you remit it back to Mr. T’s estate. On its face, Mr. T’s letter sounds compelling. But wait a minute! Just exactly what is a preference payment and who has to prove what?

The burden of establishing that a payment is a preference initially falls on Mr. T. In order to avoid any payment or other transfer of interest of the bankrupt customer, Mr. T must show that the payment was: (1) to or for the benefit of you the creditor, (2) for or on account for an antecedent debt owed by the customer before the payment was made, (3) made while the customer was insolvent, (4) made on or within 90 days before the date of the Bankruptcy Petition, and (5) that such payment enabled you to receive more than you would receive if there was a liquidation of the customer’s bankruptcy estate under Chapter 7 of Bankruptcy Code. See 11 U.S.C. Section 547(b).

All of these elements must be proven in order for Mr. T to establish a preference. Some of the elements are not difficult to prove. For example, Section 547(f) of the Code presumes that the bankrupt customer (“Debtor”) was insolvent on and during the 90 days preceding the date of filing the Petition for Bankruptcy. The analysis of receiving more than you would under a Chapter 7 liquidation can be more tricky, especially if the customer’s case is a Chapter 11 reorganization in which case the customer is usually acting as Mr. T. Consider writing Mr. T requesting that he explain in detail what proof he has or bring to his attention what elements he will have difficulty proving. But do not cave in and pay his preference claim. Even if he thinks he can establish a preference claim, you may have defenses. These defenses will be addressed in the forthcoming articles in this series, and you might consider raising them in a letter to Mr. T.

Next – Part 3: Just What Do They Mean?

Preference Actions, Part 1: The Double Whammy

Part 1: The Double Whammy

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

Almost every credit manager has been faced with the “double whammy.” Your customer files bankruptcy and you are looking at a big write-off. You do your investigation and decide it’s a dead end and you bite the bullet.

Weeks, months or years later, you get a nice threatening letter from a Bankruptcy Trustee telling you that the last payment you did get from the debtor was a “preference” and that you should write a check immediately to return it!. That is the double whammy.

But, take heart. There are ways to reduce the risk and to defend against the claim. Careful application of payments from a troubled customer, can help. After the fact, look at “ordinary course of business” payments or “subsequent new value” as defenses. By all means do not write a check until you have discussed the matter with bankruptcy counsel to determine your defenses. Even if your defenses are shaky, any preference claim can be settled for less than 100% In the coming weeks we’ll explore the issues in more depth and help take some of the mystery out of the Dreaded Preference.

Next – Part 2: Prove It, Mr. T

Defending Preference Actions: Purchase Money Security Interest Transfers

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

The third statutory defense to a bankruptcy trustee’s preference action protects lenders who receive a purchase money security interest from a bankruptcy debtor. Section 547(c)(3) provides:

(c) The trustee may not avoid under this section a transfer —

(3) that creates a security interest in property acquired by the debtor–

(A) to the extent such security interest secures new value that was–

(i) given at or after the signing of a Security Agreement that contains a description of such property as collateral;

(ii) given by or on behalf of the secured party under such agreement;

(iii) given to enable the debtor to acquire such property; and

(iv) in fact used by the debtor to acquire such property. And

(B) that is perfected on or before 20 days after the debtor received possession of such property.

See 11 U.S.C. Section 547(c)(3).

All of the elements set forth in Section 547 (c)(3) must be met and proven by the lender in order for this defense to be successful. This Section is sometimes referred to as the “enabling loan” defense because it protects the transfer of a security interest to secure a loan that allows the debtor acquire collateral specifically covered under a security agreement. Because the transfer is not considered to have occurred until the debtor has rights in the collateral, the transfer is always on account of an antecedent debt. This Section protects such transfers.

For example, if a loan is made to the debtor to acquire certain equipment, and secured by way of a security agreement on the equipment, the security interest transfer is not considered preferential if perfected within thirty (30) days after the debtor receives possession of the equipment. Notably however, the loan must “in fact” be used to enable the debtor to purchase the equipment in which the security interest was granted. If not, then the transfer is a preference. The transfer would also be a preference if the secured party fails to perfect its interest within thirty (30) days after the debtor receives the equipment.

Problems can arise for the lender if the debtor places the loan monies in its general account and the monies are commingled with other funds. This creates a tracing problem and opens the lender up to the argument that the specific loan money was not used to purchase the equipment. Lenders can avoid this problem by making the loan check payable to the debtor and the vendor of the collateral.

Another problem for lenders is when they fail to perfect their interest within 30 days and thus assert Section 547(c)(3) in conjunction with the contemporaneous exchange defense. However, many of the Circuit Courts of Appeal have held that Section 547(c)(3) is the only protection for the purchase money security lender and that other defenses under Section 547 do not apply to such lenders.

Thus, a lender dealing with financially tenuous debtors should be careful to ensure its loan is used only for the collateral purchased by the debtor and that its security interest is perfected within 30 days of receipt of the collateral by the debtor. Failure to do this exposes the lender’s security interest to a trustee’s preference action.

Place a Claim with Bernstein Burkley

Best Way to Place a Claim with Bernstein-Burkley, P.C.

When your debtor won’t pay or breaks a deal, you want action fast. Here are the ways you can get that fast action with the Creditors’ Rights Practice at Bernstein-Burkley, P.C. If you “promise” them immediate action in response to their default, you can get it with the Creditors’ Rights Practice at Bernstein-Burkley, P.C.:

  1. Use our claim placement page to immediately send the basic claim information to our team.
  2. Call us right now! Get one of our attorneys on the phone and place the claim. Within minutes we can be calling the debtor. Call:
    • Bob Bernstein
    • Nick Krawec
    • Ray Wendolowski
  3. Email. If you email the basic information or, better yet, scan the documents and include them), we can start contacting your debtor immediately. Place your claims by email to collections@bernsteinlaw.com and it will be in the hands of one of our lawyers fast.

Each of our attorneys has a direct fax number that arrives like email! Click their link above to see their contact information or use the main fax at 412-456-8135. Any problems, call us at 412-456-8100.

Youvegotclaims.com. Our company code is PA3. Get fast action by submitting your claim through this electronic interface.

By mail. The “old fashioned” way of placing claims still works with us. Send by mail (regular or overnight) to us at 601 Grant Street, 9th Floor, Pittsburgh, PA 15219.

Whatever way you place the claim with us, be assured you will receive:

  • A prompt acknowledgment.
  • Fast, personal service.
  • The benefit of our forty years’ experience working with agencies to help their clients.

Part 10: What Does This All Costs?

Part 10: What Does This All Costs?

The creditors’ rights lawyers will generally agree to a contingent collection fee (often paid by the agency). In addition to the contingent fee negotiated by the agency, attorney’s suit fees are for the work in preparing and prosecuting the lawsuit. Sometimes there is an agreement that the suit fee will be contingent on recovery. Sometimes part of the suit fee is paid to the lawyer as a non-contingent partial advance, to help compensate for the work done in connection with the lawsuit. On occasion, the lawyer may want the creditor to advance other fees in extraordinary circumstances (if extensive discovery takes place, if there are many Motion hearings, if there is an extended trial).

A check for the amount of the court costs and any suit fees advanced should be payable to the attorney and sent to the agency for forwarding to the attorney. Some agencies charge an additional suit or administrative fee when suit is authorized. The amount of any fee should be clearly understood before suit is authorized.

Court costs are always recoverable from the debtor as part of a judgment. Attorney’s fees are generally not recoverable unless a matter of agreement between the creditor and the debtor, or authorized by a specific statute.

It should be noted that many companies have agreements with their customers (either in specific contracts or in enforceable terms and conditions) that would support the collection of attorney’s fees and collection expense. If such provisions exist, this information should be made available to the agency when the claim is placed. Even if the fees are later waived, it will give the agency and the attorneys greater leverage in demands and settlement discussions.