Under Section 547(c)(4) of the Bankruptcy Code, potential exposure to a claim seeking the recovery and avoidance of a preferential transfer can be reduced by the amount of “new value” provided by the defendant to the debtor subsequent to receipt of the preferential transfer. These defenses are briefly discussed below. The most frequently invoked defenses are: (i) the subsequent new value defense (ii) the ordinary course of business defense and (iii) the contemporaneous exchange of new value defense. Second, what are the defenses to a preference claim?Įven if the debtor or trustee can establish that the debtor made a preferential transfer, there are several affirmative defenses available under Section 547(c).
Stated differently, to show that a creditor received “preferential” treatment, the plaintiff must establish that the transfer was greater than the amount the defendant would have received had the debtor liquidated its assets under a bankruptcy brought under chapter 7 of the Bankruptcy Code. Keep in mind that for preference claims against “insiders” of the debtor, the preference period extends back one year before the petition date.įinally, the plaintiff must show that the creditor received more than it would have received had the payment not been made, but instead the defendant received a distribution in a chapter 7 liquidation on account of such claim. In other words, a transfer that is a “prepayment” does not qualify as a preferential transfer under Section 547. To establish that a defendant received a preferential transfer under Section 547(b) of the Bankruptcy Code, plaintiff must prove that the transfer was received by a creditor on account of an “antecedent debt”, and that the preferential payments must be made (i) while the debtor was “insolvent”, (ii) within 90 days before the debtor filed for bankruptcy, and (iii) the transfer provide the creditor with more sums than it would have received if the debtor had liquidated under a chapter 7 liquidation.Īn antecedent debt is created when a creditor receives a right to payment from the debtor for goods or services.
#Bankruptcy preferential treatment code
This article provides a brief summary of the elements of a preference claim, and defenses that can be asserted in response thereto.Įlements of a Preference Claim Under Section 547(b) of the Bankruptcy Code Simply put, Section 547 was enacted to prevent a debtor from picking and choosing its favorite creditors, while leaving pennies on the dollar for the rest of the debtor’s creditors.įortunately, there are several defenses that can be raised in response to a preference demand. Under Section 550 of the Bankruptcy Code, a debtor may recover, for the benefit of the estate, the amount of the avoided transfer. made in the ninety days prior to its bankruptcy filing. Under Section 547(b) of the Bankruptcy Code, a debtor may avoid a transfer it paid to creditors, trade vendors, etc. After the filing of the bankruptcy action, you then receive a letter from counsel demanding that your business return all of the money the debtor paid to you in the 90 days before it filed for bankruptcy. Shortly thereafter, that company then files for bankruptcy, and owes your business substantial sums of money. Your business provided goods or services to another company.
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