Preference Defense

Richmond, Virginia.  In any large bankruptcy case, there is a strong possibility that creditors will be sued by the debtor’s estate to avoid preferential transfers.  The preference period is defined as the 90 days prior to a bankruptcy filing.

The Bankruptcy Code permits a trustee (or a debtor in possession) to recover from creditors payments made shortly before the bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process. The preference statutes are simply an attempt to achieve equity between creditors. 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.