As a business person, you no doubt are aware that bankruptcy effects the state of trade. In day to day operations, when providing goods or services to a struggling entity or individual you know, getting money due from your customers can prove to be difficult.
Perhaps you were lucky enough to receive some funds from your customer prior to its filing bankruptcy. Just when you were thanking your lucky stars for the little amount money you were able to receive from your customer prior to its bankruptcy filing, you receive the dreaded demand letter from the bankruptcy trustee in the mail and it hits you in the face like a splash of cold water. You’re being told you have to give it back any money received from 90 days prior to your customer filing bankruptcy. And it's not some sort of bad joke, either.You’ve just been subjected to a preference claim. Preference claims were set up to ensure all creditors situated in a certain class receive equal treatment. That means, the law prevents a debtor paying off one creditor while leaving another high and dry.
The Bankruptcy Code defines a preference claim as the transfer of an interest of the debtor in property, to or for the benefit of a creditor, for pre-existing debt, made within 90 days of the bankruptcy filing, made while the debtor was insolvent and which allows the creditor to receive more than it would have received if the payment had not been made, and the claim was paid through the bankruptcy process.
Still with me? Good, because there's a light at the end of this tunnel.
If any of the elements listed above are missing, the payment you received is not a preference claim. And, there are circumstances when creditors are not required to return payments, even if they do meet the elements listed above. The Bankruptcy Code allows for defenses in which the payment does not have to be returned. The three primary defenses include ordinary course of business, subsequent new value, and contemporaneous exchange for new value. Obviously, there's quite a bit more to it, but we can't give it all away in a blog post.
Want to chat in more detail about a preference claim and possibly defending it? Give us a call. We can help you determine if your preference claim is valid and, if so, if there are any defense available to you as a creditor.