Bankruptcy is boon to debtors in trouble, and a pain for creditors of those debtors.\u00a0 You provide goods or services to a company only to find that their receivable is noncollectable once that company enters bankruptcy, and if you\u2019re lucky if you receive cents on the dollar on the amount owed.\u00a0 However, preference payments can sting even worse.\u00a0 This blog entry gives an overview of preference payments and the common defenses.<\/p>\n
Section 547 of the Bankruptcy Code allows a bankruptcy trustee (or a debtor-in-possession under Chapter 11) to \u201crecapture,\u201d or invalidate, payments made by the debtor for the benefit of a creditor during the 90 day period prior to the date the bankruptcy petition was filed (the \u201cpreference period”), regardless of whether the debtor received anything in return for the payment.\u00a0 This is called a \u201cpreference payment<\/b>,\u201d so named because one of the goals of bankruptcy is to promote equality of distribution of assets to similarly-situated creditors, and to prevent a debtor from paying off its preferred creditors before filing for bankruptcy leaving basically nothing for the other creditors. There are certain requirements for a preference payment, e.g., that the payment was for an \u201cantecedent\u201d debt (the payment to the creditor followed provision of the goods and services to the debtor), and that the payment was made when the debtor was insolvent (there is a presumption of insolvency during the 90-day preference period).<\/p>\n
Once a bankruptcy is filed, the trustee will often look at payments made by the debtor during the preference period, and will send demand letters (or complaints) seeking repayment of the alleged preference payments from creditors. These are the letters and court actions that vex many companies.\u00a0 In some cases, repaying the alleged preference payment is more economical to a company than fighting it out with the trustee, resulting in attorneys\u2019 fees and distractions for internal personnel.\u00a0 However, companies can, and often do, fight back against preference payment recapture demands<\/span>.\u00a0 The Bankruptcy Code includes a number of defenses to a trustee\u2019s attempted recapture of preference payments.\u00a0 The three most common of these are:<\/p>\n One other important defense to consider is that it\u2019s only a preference payment if made in the preference period.\u00a0 For any payments made close to the 90-day mark, it may be worth a careful review of when the payment was received. In a number of courts, a \u201cdate of delivery\u201d rule is used when determining the date of a payment for preference purposes. \u00a0Also note that for insiders of the debtor, the preference period is 1 year.<\/p>\n Two closing thoughts.\u00a0 The possibility of recapture of preference payments shouldn’t automatically preclude you from doing business with companies which may not be fully financially stable \u2013 it\u2019s often better to have the money and have to potentially return it than to never have it at all.\u00a0 Finally, there are a lot of additional nuances to dealing with preference payment claims and litigation \u2013 consider talking with bankruptcy counsel to ensure you know your rights and defenses.<\/p>\n","protected":false},"excerpt":{"rendered":" Bankruptcy is boon to debtors in trouble, and a pain for creditors of those debtors.\u00a0 You provide goods or services to a company only to find that their receivable is noncollectable once that company enters bankruptcy, and if you\u2019re lucky … Continue reading \n
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