Preference Defense: Is it Worth the Fight?

After a business debtor files a bankruptcy case, its trade creditors are often sued for receiving preferential payments under sections 547 and 550 of the Bankruptcy Code.  These creditors didn’t do anything wrong, they just happened to accept a payment from the debtor within the 90-day period preceding the bankruptcy case for a pre-existing debt.  Often, these businesses will simply return those payments rather than pay to fight to keep them.  In fact, they may have very good defenses to these claw back claims.  In practice, even an imperfect defense is a good defense because of the nature of preference cases.

 

A preference case must be brought by way of adversary proceeding, that is a separate case, related to the bankruptcy case of the debtor which allegedly made the preferential payment.  A capable Pittsburgh bankruptcy lawyer defending a preference case will review all relevant defenses to assist in determining whether which preference defenses fit the facts of the case.

 

If you need to defend against a preference claim in bankruptcy, you may be able to attack the claim on its elements by arguing that (i) the transfer was not an interest in property of the debtor; (ii) that it was not made to or for your benefit; (iii) that the payment was not made for or on account of an antecedent debt which the debtor owed you before it made the transfer; (iv) that the debtor was not insolvent at the time it made the transfer; (v) that the debtor did not make the transfer within the 90-day period preceding the bankruptcy case (or the one-year period for payments to insiders of the debtor); or (vi) that the transfer did not enable you to receive more than you would have received in a hypothetical chapter 7 case.

 

Section 547 of the Code contains its own list of possible defenses to a preference claim.  Those statutory defenses provide safe harbors for certain would-be preference claims.  Those include circumstances where the creditor who received the payment at issue provided a contemporaneous exchange for the payment which enabled the debtor to receive new value.  Additionally, payments in the ordinary course of business, made according to ordinary business terms are shielded.  Also, certain circumstances involving security interests give rise to a preference defense.

 

Moreover, case law has given rise to other defenses to preference claims.  If the recipient of the payment acted as a passive conduit for funds which flowed through it to a third party, it may have a defense to a preference claim.  See Golden v. The Guardian (In re Lenox Healthcare, Inc.), 343 B.R. 96, 103 (Bankr. D. Del. 2006).  Likewise, if the debtor assumes an executory contract or unexpired lease pursuant to which a preferential transfer is made, a preference defendant may be able to defend on the basis that the debtor would have necessarily have had to cure that contract or lease in any event.  See Kimmelman v. The Port Authority of New York and New Jersey (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311 (3d Cir. 2003).

 

If your business has received a demand for payment from a bankruptcy trustee or a preference complaint, you should promptly contact a Pittsburgh Bankruptcy Lawyer.

 

(412) 925-8194

 

We are a debt relief agency.  We help people file for relief under the United States Bankruptcy Code.

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