Legal Blog

Bankruptcy Preference Actions: A Bad Offense is a Good Defense

My prior bankruptcy preference blogs have discussed the defenses that are available to fight a bankruptcy preference claim, assuming that the bankrupt company has a claim that is “avoidable” in the first place.  In order for a bankrupt company or trustee to even have a claim, the transfer sought to be recovered must satisfy several requirements.  This article will discuss those requirements. First, the transfer must be of money that the bankrupt company owned or had an interest in.  If you receive a repayment demand, you should therefore verify whether the payment that you received came from the bankrupt company. Second, the transfer has to be for a debt already owed by the bankrupt company to your company before the transfer was made.  For example, a deposit on a lease would not satisfy this element because the debt that the deposit was paid for was not already owed. Third, the transfer must be made when the debtor was insolvent.  Insolvent basically means assets less liabilities are less than zero.  Although you may not have ready access to a bankrupt company’s financial information, there are several sources from which that information can be obtained. Fourth, the transfer must be made within ninety days before the bankruptcy case was filed.  To measure the ninety days, the transfer is deemed to be made on the date that the transfer clears the bank account of the bankrupt company.  It could therefore be possible that you received a check prior to the ninety-day period but that the check did not clear until during the ninety-day period. Fifth, the payment must enable the creditor to receive more than the creditor would have received if all of the bankrupt company’s assets were liquidated and the proceeds distributed to all of the creditors in order of legal priority.  A technical, factual and legal analysis is necessary to determine whether or not this requirement is met. Sixth, there are time limits for a bankrupt company or trustee to bring a preference action.  Basically, an action must be brought by the later of two years after the bankruptcy case began or one year after the first trustee in the case was appointed.  If the preference action is filed after the time limit, then it is too late and can be dismissed. So, although the focus of handling a bankruptcy preference action is to determine what defenses are available, there should always be an investigation to verify whether all of the requirements for a transfer to be avoided in the first place have been satisfied.  If any one of the requirements is not satisfied, the bankrupt company or trustee will not even be able to mount an offense, which will be a very good defense for you.  

If you have any questions regarding a preference demand or preferential avoidance action please contact Glenn D. Solomon Esq. at: gsolomon@offitkurman.com  | 443.738.1522

Business Lawyer Glenn D. Solomon

Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has represented clients in preference actions all across the United States. Mr. Solomon has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, advising companies in financial distress and bankruptcy preference avoidance actions.

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  Glenn D. Solomon is a principal at the law firm of Offit Kurman and has represented clients in bankruptcy preference actions for thirty years.  He can be reached at gsolomon@offitkurman.com or at (443) 738-1522. 4825-0959-8496, v.  1