By: Harry Greenfield
September 28, 2023
As we said last time, the Bankruptcy Code provides defenses to preference actions. The three most common are: 1) the “ordinary course of business” defense; 2) the “contemporaneous exchange for new goods or services” defense; and 3) the “new value” defense. All three of these defenses are “affirmative defenses,” meaning that the creditor has the ultimate burden of proof on the issue.
To prove the “ordinary course of business” defense the transferer must show that the preference payments were made in the “ordinary course of business” between the transferee and the debtor. Typically, this is done by showing that the preference payments were: 1) not the result of any overt collection activity on the part of the transferee; and 2) were made in a similar amount of time and under similar terms and conditions as previous, non-preference period payments made by the debtor to the creditor. In the asset protection planning context, it is unlikely there is a good argument that the transfer was in the ordinary course of business, but it is possible in the right circumstances. An example of those circumstances might be payments to taxing agencies or payments to a secured creditor. Any transfer proven to be made in the ordinary course of business are not avoidable as preferences and therefore need not be repaid.
To prove the “new value” defense, the creditor needs to show that value was provided to the debtor after one or more of the preferential transfers were made. The value of any “new” goods or services can be offset dollar-for-dollar against any preference payments made by the debtor.
To prove the “contemporaneous exchange” defense, a creditor needs to show that they provided new goods or services (or payment) contemporaneously with (i.e., at or near the same time) a transfer and that the parties intended the transaction to be a “contemporaneous exchange.” Examples of contemporaneous exchanges are CIA or COD shipments.
Potential preferential payments made for the benefit of an insider; the lookback period is one year. So, when providing asset protection help to your clients, keep those dates in mind. Make sure there will be adequate time between the transfer and any potential recovery attempt. For fraudulent conveyances, the look back period can be anywhere between 1 year and 10 years depending on circumstances and how any action to recover the transfer is plead.
We have more to say about Asset Protection Planning in our next post or podcast. Stay tuned…