Over one thousand creditors were “preferred” as Rite Aid ran up to its first bankruptcy filing in 2023. That is what the trustee appointed to liquidate Rite Aid’s assets is alleging in a tidal wave of lawsuits recently filed in the United States Bankruptcy Court for the District of New Jersey.

For most creditors, it makes no sense to be subjected to litigation for the return of money for goods or services delivered before October 15, 2023, when Rite Aid filed its first bankruptcy case. However, the Federal Bankruptcy Code allows a debtor to recover, as preferences, transfers received within ninety days of a bankruptcy filing – 11 U.S.C. 547.

While the prospect of returning hard-earned “preferences” with little recovery is offensive, creditors have many tools to defend against preference actions. So do not open your checkbooks too fast. There are many defenses to avoid, or at least substantially reduce preference exposure.

What is a Preference?

A preference is a payment/transfer received from a debtor within 90 days of the bankruptcy filing. Bankruptcy Code section 547(b) allows a bankruptcy trustee or debtor-in-possession to avoid these payments if the transfers were made to or for the benefit of a creditor on account of an antecedent debt. The policy behind preferences was to level the playing field for all creditors by not allowing a creditor to receive more than it would have within the debtor’s bankruptcy case.

There are several defenses to these odious claims, including:

• Transfers were made within the ordinary course of business;
• Subsequent new value provided after the transfers;
• Payments made outside of the 90-day preference period;
• Payments not made on account of antecedent debt (payment in advance, COD).

Gather Information

To determine whether you have any defenses, it is critical to analyze the payment history for at least the one year preceding the bankruptcy filing. This information includes:

1. All correspondence, contracts, emails and other communications with the debtor;
2. A copy of all invoices, showing invoice date, terms, and amount;
3. A copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your bank account;
4. Number of days elapsed between date of invoice and date payment was received; and
5. Personnel involved with the debtor’s account so they can advise how payments were made, applied and any unique issues with the debtor.

It is critical to properly analyze this information and formulate your defense and reduce or even eliminate preference exposure.