Bankruptcy Court for the Western District of N.C. Notable to the construction industry, there is recent case law from the U.S. An example of such a contemporaneous exchange would be payments received on a C.O.D. In other words, if a creditor provides new goods and/or services and receives payment at substantially the same time, the payment will not receive preference treatment. It excuses any payment or other transfer that the debtor and creditor intend as a contemporaneous exchange for new value, and that is, in fact, a substantially contemporaneous exchange. The contemporaneous exchange defense is codified at Section 547(c)(1) of the Bankruptcy Code. If a creditor is to avoid preferences, a working knowledge of these defenses is imperative.ġ.The Contemporaneous Exchange for New Value Defense Some of the defenses most frequently asserted are (1) the contemporaneous exchange for new value defense, (2) the ordinary course of business defense, and (3) the small transfer defense. These defenses are primarily aimed at encouraging creditors to continue doing business with financially troubled companies.
#Bankruptcy preferential treatment code
The Bankruptcy Code provides a series of defenses that creditors can assert to evade preference treatment. Note that payments to a fully secured creditor fail to meet these criteria, as the secured creditor will not receive any more from the debtor than the value of the collateral, which is what he would receive in bankruptcy.
The elements of a preference claim are typically stated as follows: (1) the debtor transferred property to or for the benefit of the creditor (i.e., made a payment) (2) the transfer was made on account of a debtor’s pre-existing debt to the creditor (3) the debtor was insolvent at the time of the transfer (4) the transfer was made within the 90 days prior to the debtor’s bankruptcy filing, or within one year if the creditor is an insider on account of an old debt and (5) the creditor obtained a larger sum from the transfer than they would have in a Chapter 7 liquidation had the transfer not occurred. There are two main purposes for this policy: to prevent a debtor from favoring any of its general unsecured creditors over the others and to discourage creditors, upon hearing that the debtor is about to file bankruptcy, from storming the courthouse to collect their individual debts. Under this section, a trustee or debtor-in-possession may recover – as “preferences” – any payments or other transfers of assets by a debtor to a creditor within the 90 days prior to the debtor’s bankruptcy filing. Section 547 of the Bankruptcy Code governs preferences. Following, we provide a basic overview of the criteria that give rise to bankruptcy preferences, and also highlight some common defenses available to creditors in preference actions. Creditors should be aware that there are contexts in which payment can be exacted from a debtor without fear that the transfer will be avoidable at some future date. You likely have defenses which may eliminate the need to return the money or at least reduce the amount.įortunately for you, there are defenses that can be raised against these preference claims. The first thing to remember if you receive a letter from the bankruptcy trustee requesting money to be returned to the bankruptcy court is not to panic. To add insult to injury, there is a risk that any recently received payment or settlement might be recaptured by the bankruptcy trustee as a preferential transfer or “preference.”
For suppliers of goods and services, nothing may be more unsettling than discovering that a customer has filed for bankruptcy.
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