Preference Actions

Here at Shenwick and Associates, we have noticed an uptick in preference actions. For those of you who are not familiar with bankruptcy jargon, a preference action is an adversary proceeding (litigation) commenced by a Chapter 7 bankruptcy trustee or a Chapter 11 debtor seeking the return of monies that were paid by the company to a creditor, generally within 90 days of the bankruptcy filing. If the creditor is an "insider" (i.e. a relative, or, in the case of a company, a director or officer), the look back period (also known as the "preference period") for a preference action is one year.

Many clients ask what strategies are available to avoid preference actions. Some potential strategies are as follows:

1. If a customer or client owes money, and those monies are past due, attempt to have the bill paid by a third party.

2.Attempt to have a third-party guarantee payment of the debt.

3. The ordinary course of business defense -- the more ordinary the payment, the less likely the payment will be considered a preferential transfer. Additionally, if the terms of an invoice are net 30 days, and the invoices are 90 or 120 days past due, have the customer or client pay more recent invoices and avoid payment of the 90 or 120 day invoice.

4. The small payments exception-Under §§ 547(c)(8) and (c)(9) of the Bankruptcy Code, which were added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Trustees may not avoid a transfer: (1) in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or (2) in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,850 (as of April 1, 2010).

5. Attempt to shed your insider status prior to receiving payment if you will be deemed an "insider" under § 101(31) of the Bankruptcy Code.

6. Remember that if you ship goods to a debtor during the preference period and are not paid for those goods, those goods are deemed new value and decrease the amount of the preferential payments.

If you have questions regarding preference or fraudulent conveyance actions, please do not hesitate to contact Jim Shenwick.