Received a Demand Letter or Lawsuit requesting return of “preference” payments in connection with a bankruptcy case?

Review these potential defenses before responding:

• Who is making the demand? Someone on behalf of Trustee or Debtor in Possession? If not Trustee or Debtor in Possession, there may be no standing for them to pursue you.

• When was the bankruptcy case filed and, if a Trustee has been appointed, when? In general, the statute of limitations for a preference complaint is the later of two years after the bankruptcy petition was filed or one year after the appointment of the first trustee.

• How much is the demand? For business cases, no preference case can be brought unless the aggregate preference amount exceeds $6,225.

• Where are you being sued? A preference action for less than $12,475 for noninsider payments on non-consumer debt must be brought where the defendant resides.

• Did you receive the preference payments within 90 days of the bankruptcy petition? (Count back from the date the check cleared the debtor’s bank).

• Were the payments actually received by you? Sometimes trustees make demands based on check registers or other inaccurate records. For example, a trustee may demand repayment of a check that bounced.

• Who made the payment? A preference must be made with property of the debtor, i.e., the person or entity in bankruptcy. A payment by an affiliate or guarantor or any other non-debtor is not a preference.

• Did you have any collateral at the time of the payments? Fully secured creditors are not liable for return of preferences.

• Was a loan “earmarked” for your payment? If the debtor received the funds to pay you from another creditor, who directed that the payment be made to you, you may have a defense to prevent recovery of the preference.

• Were the transactions Cash on Delivery or paid in advance? Contemporaneous exchanges and prepayments are not preferences.

• Did you supply “new value” after the preference? You are entitled to set off the value of subsequent goods or services you provided against the preference.

• Did you provide financing for the debtor’s purchase of a particular asset? If so, and you perfected a security interest within 30 days, then transfers relating to such an “enabling loan” are not preferences.

• Were the payments in the ordinary course of business? Did the debtor pay within invoice terms or within terms you had established over a period of time? Were payments within the standard range within the debtor’s industry? Were the payments free from signs of financial distress, e.g., bounced check, held check, wire transfer, cashier’s check? Were your collection efforts unusual in any way, e.g. did you send dunning letters or start a lawsuit?  In order to evaluate these defenses, you and your attorney need to review the invoices that were paid by the alleged preferences, a history of the debtor’s transactions with you, and any correspondence between you and the debtor related to payment requirements and terms.

• Are your payments protected by the Perishable Agricultural Commodities Act (PACA) or the Pennsylvania Association for Sustainable Agriculture (PASA)? If you were paid for sales of food or livestock, you may have been paid with trust funds held by the debtor no subject to recovery as a preference.

• Are you a subcontractor or material supplier who received the alleged preferential transfer from a debtor who was the general contractor? If so, you may be protected by the constructive trust created under many state laws for subcontractors, laborers, suppliers and others.

• Were you just a “conduit” for payment to another, receiving no benefit from the payment? If so, then you may have a defense.

• Did you already resolve your bankruptcy claim in connection with an objection to that claim? If so, any preference claim against you may have been waived.

• Were you paid as a “critical vendor” or “essential supplier” after the case began? If so, any preference claim against you may have been waived or approved by the court’s critical vendor or essential supplier order.

• Did you have a contract that was assumed by the debtor? If so, then payments would not be preferential since the counterparty to an assumed contract is entitled to have all contract payments made.