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The Bankruptcy Code vests the trustee with far-reaching powers to avoid payments to suppliers that are received 90 days prior to a customer’s bankruptcy filing.
The purpose of the preference provision is two-fold. First, creditors are discouraged from racing to the courthouse to dismember a debtor, thereby hastening its slide into bankruptcy. Second, debtors are deterred from preferring certain creditors by the requirement that any creditor that receives a greater payment than similarly situated creditors disgorges the preference so that like creditors receive an equal distribution of the debtor’s assets. Not all transfers made within the preference period may be recaptured.
One of the most effective and commonly used preference defenses used by a vendor is the subsequent new value or subsequent advance rule, which excludes from recapture those payments to a vendor who subsequently extends goods or services (or credit for those goods or services) to the debtor. Another is the Ordinary course of business defense, in which the supplier presents evidence that payments were made in a continuing pattern prior to and during the preference period.
Among other changes, the Small Business Reorganization Act (SBRA) has made some changes to the preference defenses. Under the SBRA, the trustee now must investigate the supplier’s defenses before making the preference demand or filing suit.
Join this session with creditors’ rights and bankruptcy attorney, Scott Blakeley to learn more about it.
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