Bankruptcy Preference Payment Litigation

When a company that has paid you money it owes you files for bankruptcy, you may become the target of a preference action, sometimes called a preferential payment action. If you have received a demand letter from a bankruptcy trustee, or have been served with a complaint filed in bankruptcy court demanding that you repay monies paid to you by one of your debtors, you should consult with an experienced attorney to determine your rights and obligations.

You should not assume, based on the allegations of a complaint, or of a demand letter from a trustee, that you will have to repay the payments at issue. There are several defenses that you, as a creditor, may be able to use successfully to avoid entirely the repayment of the amount sought or, in some instances, at least reduce the amount of repayment. The success of any of those defenses will depend on the unique facts of your business relationship with the debtor and the skilled application of those facts to the relevant provisions of the Bankruptcy Code. That is one reason that it is critical that you consult with skilled and experienced attorneys who can understand not only that relationship, but also, can marshal the relevant facts in your defense. The lawyers at Pepper Law can assist individuals and businesses with preferential payment claims arising when debtors bankrupt.

Generally speaking, a preferential payment (“preference”) is one made by a debtor in bankruptcy to a creditor in the 90 days before the debtor filed for bankruptcy. (The period may be up to 120 days before the bankruptcy filing for creditors considered to be “insiders”). Further, to qualify as a preference, the payment must have been made on a previously incurred, or “antecedent,” debt of the debtor. There are a couple of more elements that must be proven to prove a preference, but they are almost always easy to prove.

While the Bankruptcy Code provides more, there are three defenses to preference claims and actions that are most likely to be viable on your case. They are: (1) the “ordinary course of business defense”; (2) the “new value defense”; and, (3) the “contemporaneous exchange defense.”

Under the ordinary course of business defense, a creditor is not liable for a preferential payment if it was made either in the ordinary course of business between the creditor and debtor (the “subjective standard”), or in accordance with terms and conditions typical in the same industry as the creditor (the “objective standard”). For the subjective standard, the length of your relationship with the debtor and the terms on which you and the creditor have done business in the past will be critical. For the objective standard, the range of terms used by companies in businesses similar to yours will be critical, and there is a good chance that you would benefit from expert testimony to help establish a defense under this standard.

The new value defense applies where the creditor has provided goods or services to the debtor after the preferential payment was made. Here is an example of how it works. Thirty-five (35) days before filing bankruptcy, the debtor pays $25,000 to creditor for an outstanding invoice. Ten (10) days later, creditor ships $15,000 worth of goods to debtor, or provides $15,000 worth of services to debtor. Under those facts, the creditor will be allowed to offset the $15,000 from the amount of its liability for the preference.

Under the contemporaneous exchange defense, a creditor can avoid the repayment of a preference where it proves that, contemporaneously with the payment made by the debtor, it provided new goods or services to the debtor which were of equal value to the payment. The key to this defense is proving that both the debtor and creditor intended that the exchange be contemporaneous. In the context of this defense, “contemporaneous” does not mean at the exact same time, but means at about the same time. Even where you provided the goods and services on credit, you may be able to use this defense successfully. So, if you are a creditor, do not assume, just because you did not receive cash, waited a few days to cash a check, or agreed that payment was not due until the goods or services were received, that you cannot rely on this defense.

The goal of each attorney at Pepper Law is to obtain the most desirable client result in the most economic and efficient way. At the outset of your preference action, our lawyers will thoroughly evaluate the applicable law and facts in order to apprise you of likely outcomes and the fees associated with the available approaches. In many cases, a Pepper Law attorney will be able to negotiate a suitable settlement with the bankruptcy trustee before it is necessary for you to incur the substantial legal fees that can result from prolonged litigation.

Client Reviews
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Ross Pepper is indeed a "lawyer's lawyer." He quickly gets to the heart of the matter and does not waste time on trifles. His knowledge of the attorneys on the opposing side and the judge hearing our matter gave me comfort. Ron Erickson Chairman and CEO eCharge Corporation
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Mr. Pepper did such a thorough job that I never had to go to trial. He obtained an excellent settlement for me and one that was far more than what was originally offered. Kenneth Casey President KHCV TV Seattle, Washington