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ST. MARY’S HOSPITAL GOES FOR THE GOLD Passaic Hospital Unleashes Slew of Creditor Suits


November 7, 2011
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By Joel R. Glucksman | In March, 2009, St. Mary’s Hospital in Passaic filed Chapter 11 bankruptcy. In February 2010, the bankruptcy court confirmed St. Mary’s plan of reorganization, and the hospital emerged from bankruptcy. Its confirmed plan gave general unsecured creditors a recovery estimated by the St. Mary’s First Amended Disclosure Statement to be less than 5%.

This month, the trust established by St. Mary’s reorganization plan filed over a hundred lawsuits, largely against these same creditors, seeking to recover so-called “preferential transfers.” What is going on here?”

Preferential transfers” are payments within ninety days before bankruptcy that allow the payee to do better than other creditors. The U.S. Bankruptcy Code makes “preferences” unlawful and requires that payee return them. In the end stages of business bankruptcies, the bankrupt’s checkbook will be scoured and suit filed against anyone who received a payment within the ninety day period.

Preference lawsuits are typically treacherous for creditors. They are upsetting, since creditors are already owed money by the bankrupt and now are being sued to cough up even more. Also, the Bankruptcy Code lets such lawsuits be served by regular mail; they are therefore often overlooked. Worse, unlike civil suits, preference answers must be filed within thirty-five days of when the court issues the summons — not from when the creditor is served. It is therefore often only when a default judgment is entered that the creditor focuses on the threat.

There are defenses that can be raised. They require more explanation than can be given here, but creditors can often insulate from liability payments made as contemporaneous exchanges, or made in the ordinary course of business, or that were followed by the creditor providing new value to the bankrupt. These defenses are “fact based” and need to be discussed with experienced bankruptcy counsel.

If you would like to discuss this Legal Update, please contact Mr. Glucksman:

Joel R. Glucksman,
Chair, Bankruptcy and Creditors Rights Group:
(201) 623-1204 (201) 623-1204 or
jglucksman@scarincihollenbeck.com

This Scarinci Hollenbeck Legal Update has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without ­professional counsel.