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Previously, we discussed preferential payments — payments made to an insolvent company within 90 days of the bankruptcy filing. To more equitable or fairly divide the limited assets among the creditors, these payments must be returned to the debtor. Your first question upon receiving a preference demand letter is likely to be: Do I have to give the money back?

Although the Bankruptcy Code gives the power to recover these preferential transfers, your business may have certain defenses to defeat, or at least lessen, your exposure.

These defenses include:
• The debtor was not insolvent when it paid you;
• payments made in the ordinary course of business;
• contemporaneous exchange for new value;
• payments made outside of the 90 day preference period (so long as you are not an insider);
• payments made via C.O.D.

Whether a defense applies is a very fact-specific determination made after detailed review of the account information and history between the debtor and creditor. Unfortunately, it is becoming common for Trustees or debtors in possession to sue everyone receiving payment 90 days prior to the bankruptcy filing, and to sort out the merits of each claim later. In practicality, this often results in unknowing creditors sending back non-preferential payments or creditors deciding it is too much trouble to defend a preference claim and not asserting valid defenses.

This area of law is not only very fact-specific, but very technical and procedural. We strongly advise consulting a bankruptcy attorney to assist in minimizing your risk and maximizing your recovery.

Tags: bankruptcy, bankruptcy filing, bankruptcy protection, Chapter 11, chapter 13, chapter 7, contemporaneous exchange for new value, creditor, creditors, creditors rights, debtor, debtors, defenses, insolvent, ordinary course of business, preference, preference demand letter, preferences, Section 547, Section 547c, trustee

This entry was posted on Friday, May 22nd, 2009 at 1:08 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.