In the past few years alone, our firm’s Bankruptcy and Restructuring practice group has been involved in hundreds of preference actions nationwide and obtained very favorable results for our clients. While prior results do not guarantee a similar outcome, we understand what our clients need, and they feel confident about working with us.
What is a Preference Action?
A preference action is a lawsuit claiming that a bankruptcy debtor paid your company preferentially over other creditors prior to a bankruptcy filing. In this lawsuit, the plaintiff seeks to recover any money paid to your company in the 90 days prior to the debtor’s bankruptcy filing. Fortunately, the Bankruptcy Code provides creditors with certain defenses that can be used to defeat a preference action. You must act promptly to raise these defenses, or a default judgment may be entered against your company.
When is a payment considered to be a “preferential payment”?
A “preference” is defined by Section 547 of the Bankruptcy Code as:
- Payment on an “antecedent” (meaning a previously incurred as opposed to current) debt
- Made while the debtor was insolvent (meaning its assets are less than its liabilities)
- To a non-insider creditor, within 90 days of the filing of the bankruptcy
- Payment that allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding
What do you do if you receive a preference demand letter?
Typically, a preference action is often preceded by a “demand letter” from the debtor or the trustee. The demand letter sets forth the trustee’s claims and demands immediate payment. Often times the trustee is willing to settle the preference action for an extremely reduced amount if the settlement is reached before the lawsuit is filed. When the creditor receives a “preference demand letter,” the creditor should always have experienced bankruptcy counsel review the case to determine whether the creditor has valid defenses. Bankruptcy counsel can often negotiate a more favorable settlement, while avoiding having to spend large sums of money in litigation.
Defending a Preference Action
The three most common defenses under the Bankruptcy Code to preference actions are listed below. All three of these defenses are “affirmative defenses,” meaning that the creditor has the ultimate burden of proof on the issue.
- Ordinary Course of Business Defense
The creditor must show that the preference payments were made in the “ordinary course of business” between the creditor and the debtor. Factors considered include the length of the relationship between the parties, whether the debtor paid more than usual, or if there was any unusual or coercive behavior by the creditor to collect payment.
- Contemporaneous Exchange for New Goods or Services Defense
This applies if the creditor can prove that it provided goods or services at or near the same time as payment, and the payment was of equal value to the goods or services.
- New Value Defense
The creditor only needs to show that goods or services were sold/provided to the debtor after one or more of the preference payments were made. The value of any “new” goods or services can be offset dollar-for-dollar against any preference payments made by the debtor.
Interested in learning more about preference actions? Contact Bernstein-Burkley, P.C., at 412-456-8100 or email@example.com.