Shumaker Manufacturing

A Legal & Industry Review


Bankruptcy Law Update: Preferences and Selected Bankruptcy Issues

Preference Claims:

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.

Timing of the lawsuit:  A lawsuit to recover a preference claim can be brought as late as two years after the bankruptcy filing, and even possibly as late as three years if a trustee is appointed within the two years.

Retention of documents:  Upon learning of a customer’s bankruptcy, immediately move to protect the documents needed to present the preference defenses:  invoices, remittance advices, bills of lading, proofs of delivery, correspondence, and emails for one to two years before the bankruptcy filing.  Failure to preserve electronic communications and other evidence could cause the court to make an adverse presumption regarding their contents, which might hamper or preclude the ordinary course of business or other defenses.

Timing of payments:  For purposes of determining whether a payment is a preference, a transfer in the form of a check is made when the check is paid by the customer’s bank, not when the check is received.  Thus, a check may be received by a creditor outside the 90-day period but be paid by the debtor’s bank within the 90-day period, and would thus be potentially recoverable as a preference.  However, for the purpose of applying the various defenses to the preference claim, the relevant date is when the creditor received the payment.

Defenses:  If a payment meets the five criteria set out above for determining whether it is a preference, then the creditor looks to see if one of several defenses will allow the creditor to avoid liability for the preference: Continue reading


Recent Article on the Nuts and Bolts of Section 503(b)(9) Claims in Chapter 11 Cases

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The so-called 20-day administrative priority claim (set forth in Section 503(b)(9) of the Bankruptcy Code) is perhaps the best remedy available to vendor creditors in Chapter 11 cases.

In 2005, Congress amended the U.S. Bankruptcy Code and added Chapter 15 (cross-border insolvency), and the game-changing Section 503(b)(9) claim, which functionally eclipsed the reclamation claim. At its essence, Section 503(b)(9) claims allow vendors to convert a portion of their pre-petition claims (arising from goods delivered within 20 days prior to filing) from near valueless general unsecured claims to administrative priority claims, which are generally paid in Chapter 11 cases. Section 503(b)(9) claims have had a major impact on Chapter 11 cases because they add a significant financial obligation that must be paid. Naturally, Chapter 11 debtors and their lenders have challenged such claims to minimize the financial impact of Section 503(b)(9). Since 2005, there have been a number of reported and unreported cases that provide guidance on successfully utilizing the remedy.

Below is an excellent article by my partner David Grogan on the nuts and bolts of Section 503(b)(9) claims in Chapter 11 cases.

We hope you find this useful and informative. Please contact us if you have any questions about this, or any other matter.

The Chapter 11 Vendor Game Changer: Section 503(b)(9) Claims