Preferential debt payments are typically made by the debtor to a creditor within the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an “insider”, such as a family member or related company). A preference payment gives the creditor more than the creditor would receive in the debtor’s bankruptcy case. These types of payments can violate the Bankruptcy Code. Often, the trustee or debtor will sue a creditor that has received such a payment in a preference action.
When a customer of your business files for bankruptcy, you may be concerned that you will not receive payments for any outstanding debts. However, many businesses may not realize that there may be another problem; a customer’s bankruptcy filing can lead to the bankruptcy court seeking repayment from the of any payments that the bankrupt business made to it within the 90 days preceding the bankruptcy filing. Bankruptcy laws do not allow one debtor to be favored over another. For this reason, Section 547 of the Bankruptcy Code defines certain transactions preceding the bankruptcy filing as impermissible preference payments, and Section 550 provides for the recovery of those payments. If your business received payments from a debtor who subsequently filed bankruptcy within three months after you received payments, you may find your business as a defendant in a preference action. A preference action is an action brought by the bankruptcy trustee seeking a return of the payments that the debtor made to you. Usually, prior to the bankruptcy trustee filing suit, they will notify the business who received the payment and may be willing to work out a compromise and settle the claim for a lesser amount. At this juncture you should obtain experienced bankruptcy counsel to help you understand the preference claim, to work out the best settlement of the claim, or to prepare defenses to the potential preference action that may be filed against you if no agreement can be reached.
Just because a bankruptcy trustee has filed, or threatened to file, a preference action against your business does not mean that you have no defense. There are a number of defenses to alleged preference payments, and our attorneys are well-versed in their nuances and determining whether they can be applied.
A common defense to a preference action is that the payment was made in the ordinary course of business. In order for a creditor business to establish this defense and prevent repayment of amounts recently received from the debtor, the creditor must establish that the transaction arose in the debtor’s ordinary course of business. The debt must directly relate to the debtor’s business. The creditor must also demonstrate that the transaction was within the established course of dealing between the debtor and creditor, or that the transaction was ordinary in the industry in which the debtor operates.
There are also numerous other defenses that our attorneys can review with you, such as that the payment was part of a substantially “contemporaneous” exchange, if the creditor gave new value to the debtor, or the payment was de minimis.
Dworken & Bernstein’s attorneys have track records of representing businesses in preference claims, and can advise on negotiating these claims, as well as potential defenses that may allow a creditor to keep the payments they have received.