DIVERSITY NEWS
BY JENNIFER HOOVER
AN OUNCE OF PREVENTION IS WORTH A POUND OF CU RE
A PREFERENCE PRIMER: WHAT YOU NEED TO KNOW TO PROTECT YOUR BUSINESS
44
BANKRUPTCY IS A PART OF THE EVERYDAY VERNACULAR FOR COMPANIES ACROSS THE UNITED STATES. Although bankruptcies have slowly trended downward over the past few years, they remain a viable restructuring option for many distressed companies. Even if your company has escaped the distressed fi nancial situation that may lead to a bankruptcy fi ling, your company has undoubtedly been aff ected by the bankruptcy fi ling of another. For suppliers of a bankrupt debtor, who often have had long and loyal relationships with the debtor, bankruptcies surely upset the traditional relationships that a supplier and the bankrupt debtor had prior to the bankruptcy fi ling. Typically, the supplier is left with a large receivable that likely will remain unpaid (or will be paid back at a fraction of what was owed) and faced with the risk of throwing addi- tional good money after bad by continuing its relationship with the debtor. It is often the case that these same suppliers, who supported the debtor through its bankruptcy case, will fi nd themselves a defendant in what is commonly called a “preference action”—a suit brought under Section 547 of the Bankruptcy Code1
—leaving the supplier to ponder how it
could be left “high and dry” on its pre-petition claim against the debtor and still be subject to a lawsuit for payments received within 90 days of the petition date.2
Preference
actions are frustrating, inconvenient, and can be, based upon the amounts involved, detrimental to your own company. T is article serves as a refresher on the purpose of prefer- ence actions, the elements of a prima facie preference action, and the various defenses that your company may have to a preference action. While not all companies are alike, and you should contact a bankruptcy professional to discuss this fur- ther, this article will briefl y discuss some strategies to protect yourself against future preference actions with your existing business relationships. T ere are two goals of the United States Bankruptcy Code. T e fi rst is to provide a debtor with a “fresh start.” T e
DIVERSITY & THE BAR® JULY/AUGUST 2013
second is to ensure that similarly situated creditors are treated fairly and equally in a transparent process. Preference actions are tied to the second of these goals. T e 90-day period prior to a bankruptcy is deemed by the Bankruptcy Code to be a per se insolvent time for the debtor. T e Bankruptcy Code creates a bright line rule allowing a debtor to recover from its creditors payments it made to those creditors in the 90-day period, assuming they meet all the elements of the cause of action.3
T e purpose of these actions is to recover all the
monies that were paid out to creditors that took advantage of the debtor’s slide into bankruptcy and received payments that were non-ordinary in order to maximize their personal recoveries and to distribute those funds fairly and equally among all similarly situated creditors. Generally, the debtor (or trustee) needs to prove the fol-
lowing in its case in chief: • T e payment must be to or for the benefi t of a creditor
and made on account of an antecedent debt owed by the debtor before such transfer was made;
• T e payment must be made when the debtor was insolvent; • T e payment must be made on or within 90 days before the date of the bankruptcy fi ling for most creditors; and
• T e payment must enable the creditor to receive more than it would have received if the case were a bankruptcy case under Chapter 7 of the Bankruptcy Code (a liquida- tion), the transfer had not been made, and such credi- tor received payment to the extent of Chapter 7 of the Bankruptcy Code. T ere is a host of case law surrounding the above
elements of Section 547 of the Bankruptcy Code, and a debtor’s failure to prove each of these elements can serve as a viable defense to a preference action. While that discussion falls outside the scope of this article, there are affi rmative defenses to preference actions that are discussed below. T e Bankruptcy Code provides a creditor-defendant with various affi rmative defenses to a preference action. T e
MCCA.COM
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52