This past week, Chapter 11 debtor Sears Holdings Corporation (“Sears”) filed hundreds of preference complaints to recover money from paid pre-petition creditors.

For most creditors, it must seem odd to be receiving a complaint to return money for goods or services sold prior to October 15, 2018 (the date when Sears filed for bankruptcy protection). However, the practice of recovering “preferences” in bankruptcy is allowed by federal statute – 11 U.S.C. 547. Before you go a writing a check to Sears, know what defenses you have against this statutory claim.

What is “Preference”?

A “preference” is a payment received from a debtor, made 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 to, or for, the benefit of a creditor on account of an antecedent debt while the debtor was insolvent. When Congress enacted the Bankruptcy Code, “preferences” were meant to level the playing field for all creditors by preventing a creditor from receiving more money than it would have within the debtor’s bankruptcy case.

The Bankruptcy Code provides the trustee or debtor-in-possession the power to recover these transfers. However, you may have certain defenses, including: payments made within the ordinary course of business; new value provided for the debt; payments made outside of the 90-day preference period; settlements during the bankruptcy case; and/or payments made via C.O.D.

Gather Information From Your Client

To determine if you have any defenses, it is critical that you analyze the full payment history at least one year before the bankruptcy filing. This information includes:

1. All correspondence, contracts, emails, and the like with the debtor

2. A copy of all invoices showing invoice date, terms, and amount of each invoice;

3. A copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your client’s bank account;

4. The number of days elapsed between the invoice date and the 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 a corresponding response to reduce or even eliminate preference exposure.