In plain language, a preference action is a lawsuit claiming that a bankruptcy debtor paid your company “preferentially” over other creditors prior to a bankruptcy filing. In a typical lawsuit, the plaintiff seeks to recover any money paid to your company in the 90 days prior to the debtor’s bankruptcy filing. Preference actions are a natural part of bankruptcy law, but with proper knowledge, the right circumstances and experienced, dedicated counsel, a creditor can often avoid having to forfeit the preference payments. You must act promptly to raise these defenses, or a default judgment may be entered against your company.
The key is having a comprehensive understanding of the defenses under the Bankruptcy Code, and utilizing them against preference actions. Often times, Bernstein-Burkley’s experienced team will raise these defenses with the trustee before the trustee files the complaint, and actually avoid the lawsuit altogether. If raised properly, creditors can rely on these defenses to significantly reduce the amount that the creditor must pay the trustee in order to settle the preference action. No matter how the preference defenses are used, the defenses are designed to ensure that viable, ordinary, good faith business transactions are not ultimately reversed by the bankruptcy court.
In the past few years alone, Bernstein-Burkley’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. Our team of experienced and trustworthy attorneys has cultivated a reputation for excellence over the course of five decades in the business community.
What is a payment considered a preferential payment?
A “preference” is defined by Section 547 of the Bankruptcy Code as:
1. Payment on an “antecedent” (meaning a previously incurred as opposed to current) debt;
2. Made while the debtor was insolvent (meaning its assets are less than its liabilities);
3. To a non-insider creditor, within 90 days of the filing of the bankruptcy;
4. That allows the creditor to receive more on its claim than it would have received had the payment not been made and the claim paid through the bankruptcy proceeding.
My company received a preference demand letter in the mail. What does it mean?
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 a reduced amount if the settlement is reached before the lawsuit is filed. If you have received a preference demand letter, it is advised that you reach out to Bernstein-Burkley to review the case to determine whether the creditor has valid defenses. Our experienced team can often negotiate a more favorable settlement by setting forth the available defenses that ultimately allows the creditor to avoid having to expend large sums of money in litigation. If the parties do not reach a settlement, the debtor or bankruptcy trustee will file a complaint with the bankruptcy court to initiate the preference action.
What are the defenses against a preference action?
The three most common defenses under the Bankruptcy Code to preference actions are:
- 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, and not the result of any overt collection activity on the part of the creditor; 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.
- Contemporaneous Exchange for New Goods or Services Defense: if the creditor can prove that it provided goods or services contemporaneously (i.e., at or near the same time) in exchange for payment that was of equal value to the goods or services.
- New Value Defense: the creditor only needs to show that goods or services were sold and/or 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.
If I suspect that a client will be filing for bankruptcy, should I accept payments from them?
Our attorneys at the Bernstein-Burkley get asked this question a lot. The answer, of course, is yes, take the payment! You can almost always negotiate with the trustee and pay a reduced amount in full and complete settlement of the preference claim. Perhaps the defenses illustrated above can be used to reduce your preference exposure entirely, the trustee will decide not to pursue the preference action, and you will get to keep the entire payment.
If you have any questions regarding Bernstein-Burkley’s Bankruptcy & Restructuring services, please contact us at 412-456-8100.