Preferential Transfer Actions in Orange County

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: