Elements: A preference is a transfer of property of a bankruptcy debtor that (1) was to or for the benefit of a creditor; (2) was on account of an antecedent debt; (3) was made while the debtor was insolvent; (4) was made within 90 days of the filing of the bankruptcy petition; and (5) allowed the creditor to receive more than the creditor would receive if the payment had not been made but the creditor receives what it would receive in a liquidation of the debtor. These elements are almost always (but not absolutely always) met, but there are several defenses available: subsequent new value, ordinary course of business (either between the parties or in the industry), contemporaneous exchange for new value, and others.
Important consideration!: The most important rule to remember is to never, ever pay a preference demand without first performing a detailed analysis of the defenses. The application of each defense is highly technical, and the interplay of the defenses is complicated. This analysis needs to be done by bankruptcy counsel. Bankruptcy debtors or trustees, when making demand for payment of a preference, frequently offer a discount of around 20% to settle. Never accept this offer. These claims can often be resolved for no payment or for a payment under 10% of the demand amount, but the analysis and outcome of each situation is highly fact specific.
Follow the link to read more of the article, “Bankruptcy Law Update: Preferences and Selected Bankruptcy Issues“, authored by David Grogan, partner at Shumaker, Loop & Kendrick, LLP.