Circuit City Preference Claims and Possible Defenses

Richmond, Virginia.  In any large bankruptcy case, creditors and vendors are often sued by the debtor’s estate to avoid preferential transfers.  Counsel for Circuit City has already begun to bring preference claims against vendors to avoid such transfers.  The following preference cases have been initiated in the Circuit City case:

Circuit City Stores, Inc. v. Active Media Services, Inc., Case No. 09-03232
Circuit City Stores, Inc. v. Apex Digital, Inc. et al., Case No. 10-03069
Circuit City Stores, Inc. v. Creative Labs, Inc., Case No. 09-03225
Circuit City Stores, Inc. v. Mitsubishi Electronics America, Inc. et al, Case No. 10-03068
Circuit City Stores, Inc. v. Onkyo USA Corp. et al., Case No. 10-03071
Circuit City Stores, Inc. v. PNY Technologies Inc., Case No. 10-03056
Circuit City Stores, Inc. v. Sharp Electronics Corporation, Case No. 09-03224 
Circuit City Stores, Inc. v. United States Debt Recovery and Signature Home Furnishings Co. Inc., Case No. 10-03055

The Bankruptcy Code permits a debtor in possession to recover from a creditor payments made in the 90 days before the bankruptcy filing where the payments gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process.  The preference statutes are an attempt to achieve equity between creditors. Nonetheless, creditors are almost always better off attempting to get payment of their claims from their debtors and dealing with any efforts to recover the money when, and if, such attempts are made in bankruptcy.

Bankruptcy Code §547 defines a preference as

  1. Payment on an antecedent (as opposed to current) debt;
  2. Made while the debtor was insolvent;
  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, had the payment not been made and the claim paid through the bankruptcy proceeding.

Defenses to the recovery of a preference are found in 11 U.S.C. 547(c).  They include:

  1. contemporaneous exchanges;
  2. amounts of subsequent credit extended and unpaid;
  3. payments made in the ordinary course of the business of the debtor and the creditor on ordinary business terms;  and
  4. security interests that secure debts that bring new value to the debtor.

These defenses need to be raised in an answer to a preference complaint. The burden of proof lies with the creditor to establish that despite the elements of a preference; the transfer is protected by one or more of these defenses.

The law firm of Ronald Page, PLC has extensive experience defending creditors in preference actions before the Bankruptcy Court.  Please contact our office to contact Ronald Page, a Richmond Virginia Bankruptcy Attorney.