Part 2: Preference Actions, Prove It, Mr. T
Robert S. Bernstein, Esquire
The “double whammy” just hit you. One of your customers filed bankruptcy, causing you to look at a significant write-off, and now you just received a letter from Mr. Bankruptcy Trustee (“Mr. T”) requesting that you immediately return the customer’s last payment or Mr. T will file a Complaint to avoid the payment and seeking to have you remit it back to Mr. T’s estate. On its face, Mr. T’s letter sounds compelling. But wait a minute! Just exactly what is a preference payment and who has to prove what?
The burden of establishing that a payment is a preference initially falls on Mr. T. In order to avoid any payment or other transfer of interest of the bankrupt customer, Mr. T must show that the payment was: (1) to or for the benefit of you the creditor, (2) for or on account for an antecedent debt owed by the customer before the payment was made, (3) made while the customer was insolvent, (4) made on or within 90 days before the date of the Bankruptcy Petition, and (5) that such payment enabled you to receive more than you would receive if there was a liquidation of the customer’s bankruptcy estate under Chapter 7 of Bankruptcy Code. See 11 U.S.C. Section 547(b).
All of these elements must be proven in order for Mr. T to establish a preference. Some of the elements are not difficult to prove. For example, Section 547(f) of the Code presumes that the bankrupt customer (“Debtor”) was insolvent on and during the 90 days preceding the date of filing the Petition for Bankruptcy. The analysis of receiving more than you would under a Chapter 7 liquidation can be more tricky, especially if the customer’s case is a Chapter 11 reorganization in which case the customer is usually acting as Mr. T. Consider writing Mr. T requesting that he explain in detail what proof he has or bring to his attention what elements he will have difficulty proving. But do not cave in and pay his preference claim. Even if he thinks he can establish a preference claim, you may have defenses. These defenses will be addressed in the forthcoming articles in this series, and you might consider raising them in a letter to Mr. T.