Defending Preference Actions

Under Section 547(b) of the Bankruptcy Code, debtors and trustees are granted the ability to recover preferential transfers made to creditors that were:

  1. To or for the benefit of a creditor;
  2. For or on account of an antecedent debt;
  3. Made while the debtor was insolvent;
  4. Made of or within 90 days immediately preceding the bankruptcy petition date; and
  5. That enabled the creditor to receive a greater percentage of its claim than it would otherwise receive in a liquidation under Chapter 7 of the Bankruptcy Code.

11 U.S.C. § 547(b). Under Section 547, the debtor or trustee can “reach back” and pull any transfers made up to ninety days before the petition date back into the bankruptcy estate.  This preference avoidance power is intended to maximize the funds available to pay creditors and furthers the Bankruptcy Code’s policy of equitable distribution of the debtor’s estate among creditors.  But for those that are the targets of a preference action, the lawsuits are difficult to comprehend and frequently just exacerbate the burden already imposed by the bankruptcy filing of a vendor or business partner.  Fortunately, the Bankruptcy Code does provide certain defenses to defeat preference actions.  These defenses further the policy of not punishing parties from doing business with financially distressed customers.

Section 547(c) of the Code provides numerous defenses which will prevent a debtor or trustee from avoiding an otherwise preferential transfer.  Of these, the best known are the contemporaneous exchange, ordinary course of business, and the new value defenses.  11 U.S.C. §§547(c)(1), (2), (4).  Once the five elements of Section 547(b) are proven, the debtor or trustee has established a prima facie case.  The burden of proof then shifts to the defendant-creditor to provide a defense to the preferential transfer.  Under Section 547(g), the transferee has the burden of providing the nonavoidability of a transfer under Section 547(c).

While a resolution of the preference matter may occur prior to the filing of a complaint, once an adversary proceeding is commenced the defendant/recipient of the preferential payment must prepare to negotiate a settlement and/or respond to the complaint.  Members of Sheehan Phinney’s Bankruptcy and Insolvency Practice Group are experienced in assisting clients in defending and resolving preference litigation in bankruptcy courts throughout the country, including New Hampshire, Massachusetts, Maine, New York and Delaware.

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