The world of bankruptcy proceedings can be confusing to those who are unfamiliar with it on a whole. If you’re a creditor in a bankruptcy filing, then you’re probably finding yourself overwhelmed with paperwork in the mail, from disclosure statements to proof of claim forms to all sorts of bankruptcy-related information. While it’s natural to file a fair amount of that literature into your junk mail pile, one type of document you should take seriously – anything with the words “preference action” on it. As a bankruptcy lawyer with over 20 years of experience in the industry, Stephen Graves of San Antonio’s Graves Law Firm is all too familiar with the concept of preference payments in a bankruptcy.
The 90-day timeframe that precedes any given Chapter 11 bankruptcy filing is known as a preference period. During this time, a debtor is likely to make payments that may or may not fall under its ordinary course of business. Any payments that are made during this 90-day period are subject to extreme scrutiny by the ruling bankruptcy court to ensure that no creditor receives preferential treatment over another. Therefore, if you happen to receive a payment within 90 days of a company’s bankruptcy filing, and the bankruptcy court determines that you should not have received it, then it has every right, under the bankruptcy code, to demand this preference payment back from you.
Sounds unfair? If that’s what you’re thinking, then you’re not alone. Many innocent creditors have been caught off-guard in the past by accepting payments within the 90-day “preference period” and subsequently being forced to give them back. Of course, in some cases, the payments at hand might not have been so kosher. It’s not unthinkable that a company might choose to give some of its “favorite” soon-to-be creditors preferential treatment over the rest. On the other hand, in many situations, a creditor can accept what he thinks is just an ordinary sum of money and end up being compelled to pay it back at a point in which he no longer has it, thereby putting him in an extremely unpleasant predicament.
If you happen to find yourself getting slapped with a preference action over the course of a company’s bankruptcy, then it’s a good idea to consult with an attorney as to how to handle the situation at hand. As frustrating as it might to end up in that position, there are some acceptable defenses for preference actions, and your attorney might be able to fight for your right to hang onto the so-called “unlawful” payment you received. One of the most common defenses for preference payments is the concept of “new value.” If the payment you received within 90 days of the company’s filing was clearly in exchange for something that provided new value, then you might end up being let off the hook on the preference front by satisfying this new value criterion.
The other often-used defense when dealing with preference actions is the “ordinary course of business” argument. If the payment you received is found to have conformed to the standard practices of the company in relation to your business dealings, then you might be able to hold on to your money. Since it is possible to fight a preference action successfully, it’s important that you seek the help of a professional if the preference payment in question constitutes a large sum of money.
Remember, as a creditor in another company’s bankruptcy, you probably have enough troubles to deal with. So if you’re accused of accepting a preference payment, then you don’t have to take it lying down.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
