Recently, I wrote an article about what it feels like when you get sued, and what to do about it. This one is similar, and it’s potentially significantly uglier. But if I don’t tell you about it, who will?
In early 2001, my telecommunications company was suffering a massive slowdown as the dot-com bubble in the US had burst. Tech companies, who were some of our largest customers, watched their stock prices stall, and then drop like rocks. Unsure what to do, they stopped in their tracks. No more investing, no more spending on capital equipment.
OUCH! Our revenues would decline that year from $26 million to $20 million – over 20%! But that’s another story for another time.
Anyway, in about April or May of that year, we were elated and breathed a sigh of relief when we got a $1.1 million order for a complete new phone system, unified messaging, and 500-seat call center for a travel company based in Miami – American Classic Voyages. They were operating riverboat cruises on the Mississippi River, among other things. Cool company, and they were positioning to expand.
We got busy with engineering, system design, working with their people to understand their needs – all the usual stuff. Later that summer, we procured the systems, software, and supplies, and did the implementation. It went well. They were happy with our work and we were paid in full in August! All seemed great, and we were thankful for the business.
Then on September 11, 2001, a bunch of crazy terrorists flew jet liners into the World Trade Center in New York, changing everything forever. One casualty of that horrific act was the travel industry, which came to a near stop. People were scared and didn’t want to go anywhere.
In October, I felt sad to hear the news that American Classic Voyages, our customer with so much hope and strategy for expansion, had filed for bankruptcy. We had become friends with these good people, and it was a sad event, to say the least. “Whew,” I thought to myself, “at least we got paid before they filed!”
I shouldn’t have breathed that sigh of relief so soon, I was about to learn.
About a month later, say early November, I got the letter. From the US Bankruptcy Court in State of Delaware. I was being sued!
“Dear Mr. Day, please return the $1.1 million you received from American Classic Voyages in the month of August.” And I forget what else it said. WHAT?? I had done nothing wrong! We had been paid in August, before the bankruptcy filing! How was this happening??
Keep in mind, we were having a terrible year, declining revenues, and we were losing money for the first time ever. AND, I had already paid my suppliers, employees, vendors, and sales commissions on this deal. I didn’t have $1.1 million of cash sitting around! What was I going to do? Sue my suppliers? Try to borrow more money while my company was losing money? File for bankruptcy myself?
Here’s why they came after me and unless you’ve seen this before or your dad or mom’s an attorney, you’re not going to believe this.
US Bankruptcy statutes have a rule about “preferential payment”, which gives the court the ability to pursue ALL monies paid by the company who has just filed bankruptcy to all parties in the 90-day period BEFORE the company filed for bankruptcy! Something like, “well, you may have had knowledge, or been tipped off, that the bankruptcy was coming, and therefore may have enlisted some help from someone inside the company to get paid, so we want all that money back. Maybe you’ve received a ‘preferential payment’. ” Kind of like – you’re guilty until proven innocent, and even if you ARE innocent, you’re just out of luck. We’re taking your money.
Never mind that nobody could have seen the catalyst for ACV’s bankruptcy coming – the 9/11 terrorist attacks!
So, we hired our Delaware attorney, pled our case, told him we didn’t have the money, sent them the financial statements showing that they could actually bankrupt our company too if they pushed it, and we ended up settling out of court, as 95% of lawsuits do. It cost me $30,000 in attorney’s fees, and $50,000 to send to the court. I felt a bittersweet relief writing that $80,000 check, instead of $1.1 million and bankrupting my own company in the process.
So what’s to learn from all this?
- You can do everything right, and still get tripped up. It’s unfair and it sucks. But that’s how it goes sometimes. Get over it. You signed up for this when you started your business.
- Be suspicious and do good credit checks, including asking for business and banking references, when you have a new client with a huge order.
- Get large deposits on large contracts. He who has the cash is in a better bargaining position.
- Keep all your communications, contracts, change orders, and voice messages well-recorded and preserved.
- Try to establish a baseline of smaller transactions leading up to large deals if you can. This was one of the things the court requested, and we didn’t have it.
- Hire the best attorney you can, and keep your head in the strategic part. I also published a post about this called Hire a Pro, but Run the Show.
- Try not to worry too much, and stay strategic. It was tough, but I’m still here. You will be too!
As you know, business isn’t all fun, games, and luxury cars. It’s hard work and sometimes even that’s not enough. These are the risks you take when you go into business for yourself. Bad things happen but you’ll get through them.
I hope you found this useful, if even only just to raise your awareness that it could happen. Questions, comments, additions? Please comment on the site, or share with someone you know! I always appreciate it.
Until next time, make it a great day!