At first glance, the preferential transfer laws under Section 547 of the Bankruptcy Code seem patently unfair to creditors doing business (oftentimes unknowingly) with a financially struggling business. How could a creditor or vendor possibly know the ongoing day-to-day financial condition of each of it’s customers to avoid such preferential transfer action allegations?
Unfortunately no amount of diligence can completely insulate a creditor from such a situation – it’s simply part of doing business in a changing economy. If you have received a preferential transfer lawsuit or a demand letter from a bankruptcy trustee, it is critical you speak to a bankruptcy litigator and preferential transfer attorney as soon as possible. There are many important defenses that can be raised on your behalf.
Preferential Transfer Defined
To better understand preferential transfers it is useful to outline the elements of a preference claim under 11 USC § 547. To paraphrase the code, in order to prove a preferential transfer, the Chapter 7 trustee (in most cases) must prove that payments were received on an “antecedent debt,” and that the payments were made while the debtor was insolvent, paid within 90 days prior to the filing of the debtor’s bankruptcy petition, and payments provide the recipient creditor with a greater amount than that creditor would have received if the distribution was made by the Chapter 7 liquidating trustee through administration of the estate.
Essentially, what the Chapter 7 trustee would seek to do is pull back the payment made to a preferred creditor (through a preferential transfer lawsuit), and add that amount to the total estate or “pot” to be divided up on a pro-rata basis between all creditors. So the same creditor that had money taken away, would also be allowed to receive subsequent distributions from the trustee, albeit in a smaller amount.
Antecedent debt is a term used in the preferential transfer code which means a debt owed previously such as an open book account or running balance that is due. It does not include prepayments or exchange for current goods or services (such as utility bills, etc.), it refers to a prior revolving balance such as from a finance situation.
Defenses to Preferential Transfer Actions
Even if the plaintiff or trustee can clearly establish the debtor made a preferential payment or preferential transfer, there are several defenses a creditor can use to avoid having to repay that money that had been earned under 11 USC § 547(c). The most common defenses are:
11 USC § 547(c)(2) – Payment Made in the “Ordinary Course of Business”
A payment made by a debtor in his or her “ordinary course of business” is outside the scope of recovery of a preferential transfer action. This defense is the most common, and frankly, the most effective in a preferential transfer lawsuit as it now only requires the debtor and creditor to show the payment was part of a recurring customary credit arrangement between the parties. This defense is quite fact sensitive and requires a skilled bankruptcy litigator to raise properly.
11 USC § 547(c)(4) – Payment Made for “New Value”
This defense is fairly straightforward, if the debtor received new value, such as contemporaneous or subsequent services or new goods in exchange for the payment, the defense is established. This defense can also be raised as a partial defense to a preference action if a payment was made for part new value and partially for a previous outstanding balance owed. Again, raising the “new value” defense can be completely effective, but must be done carefully by a skilled bankruptcy litigator.
OC Preferential Transfer Action Attorneys
As you can see, preferential transfer action law can be quite fact sensitive and complex. In any preferential transfer action it is essential to have a knowledgeable and experienced bankruptcy litigator representing you. The bankruptcy litigators at McFarlin LLP will analyze your situation at no initial charge and give you and honest assessment of the situation. In most instances, creditors have valid defenses. Call us today for your free consultation at: (888) 728-0044.