Health Diagnostic Laboratory Set to Begin Preference Litigation

Richmond, Virginia.  May 4, 2016.  Health Diagnostic Laboratory, Inc. (“HDL”) is preparing to bring preference claims which will be made against HDL’s vendors to recover payments made in the 90 days before it filed bankruptcy on June 7, 2015.  This is common practice in a large liquidating bankruptcy case, as creditors and vendors are often sued by debtors to avoid preferential payments.  HDL filed its Motion to Establish Procedures Governing Avoidance Action Adversary Proceedings on May 4, 2016 (the “Motion”).  The Motion sets out the procedures to govern the preference claims, including mandatory mediation.

The Bankruptcy Code permits a debtor 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 for the Eastern District of Virginia, Richmond Division.  Please contact our office to contact Ronald Page, a Richmond Virginia Bankruptcy Attorney.