“Bankruptcy Preferences: Claims and Defenses (Part II)”

In my prior article I briefly reviewed the preference laws under the Bankruptcy Code, the elements that have to be proven and the rationale behind such statutes.  To reiterate, a preference, by definition,  is a payment or transfer that is made by the debtor to a creditor; on account of an antecedent (old) debt;  that is made on or within 90 days prior to the filing of a bankruptcy case (or made within 1 year before filing if the payment is to an insider – typically a close relative); made while the debtor was insolvent (liabilities exceed assets);  that enables such creditor to receive more than they would have received had such transfer not been made and they received a distribution under  the provisions of Chapter 7 of the Bankruptcy Code (the” greater distribution test”).  (In virtually every case, unless you have a 100% distribution, this last element is almost a given).

There are a variety of statutory defenses that may apply to a recipient of an alleged preferential transfer that could eliminate or substantially reduce potential liability.  These include asserting (and proving) that the payments at issue are less than $600; that the transfer was intended by both parties to be a contemporaneous exchange for new value (and in fact was so); that the payments were made in the  ordinary course of business of the parties; that the transaction was one by which the creditor took a security interest that enabled the debtor to acquire new property; or the creditor who received such payment gave new unsecured value to the debtor after such transfer(s)were made.  (There are other statutory defenses as well that could apply, but the above are the ones most typically asserted).  As you can see, these defenses are very technical and can be quite fact intensive.  Thus, you need a good attorney, like the professionals at Daman, Ver Merris, Boyko & Witte, PLC, to represent your interests.

There are also other defenses that are not statutory, by nature, but have evolved under case law.  For example, the “earmarking”  defense may be available to a creditor who was paid from funds that were specifically loaned or given to the debtor that were to be dedicated or “earmarked’ for the sole purpose of paying a specific debt and would not otherwise have been given or  loaned had this specific debt not been paid.  Likewise, if you are paid funds by a contractor/debtor, that were due to you as a subcontractor, laborer, or supplier, on a specific job,  these funds are held in trust by the contractor for the owner under the provisions of the Michigan Builders Trust Fund Act,  and thus are not the debtors property to begin with.

If you were a former employee of the debtor and were paid on past due wages, you may have what is called a wage priority claim that would give you priority in payment over general unsecured creditors and thus the Trustee may not be able to prove the last element (the greater distribution test) of  the preference statute.  Further, if you are a supplier of goods to a debtor and have a right to get your goods back (called “reclamation”) as to the goods you delivered to the debtor in the 20 days pre-petition, you may have a claim that gives you priority in payment that will help reduce or eliminate liability to a Trustee on a preference claim.  There could also be issues as to whether the payments in question were in fact made in the 90 days pre-petition, which may turn on examination of the payment date versus the date the check cleared the debtor’s bank.

Keep in mind that many of these defenses are very fact specific and may not apply in every case. Also, the object (other than to help assure “equality of distribution” among creditors) is to get more money into the bankruptcy estate, to not only help cover administrative expenses, but to facilitate a distribution of the available funds in the manner provided under the distribution provisions of the Bankruptcy Code.  If a judgment is entered, the Trustee will usually take further collection action as provided under the laws of the state in which the creditor resides, to collect on such judgment. Also, to encourage payment and  limit creditor claims if the money is not returned, many preferential transfer complaints also have another count whereby the Trustee requests that any further claim of the creditor be disallowed unless the creditor returns the alleged preferential transfers.   

Most preferential transfer claims/actions wind up being settled.  From the Trustee’s standpoint, the more time he has to put into a matter the less the creditors get.  From the creditors’ standpoint, they feel they are already fighting over a dead horse and so they want these claims eliminated, at the least possible cost. However, in order to accomplish such goals and to help make the matter “go away” one must be familiar with such claims and the viable defenses you might be able to assert to reduce or eliminate possible liability. We negotiate settlements of these type of claims on a regular basis.

To that end, when you receive the “nasty gram,” please contact the professional at Damon, Ver Merris, Boyko & Witte, PLC.  We will help you navigate through the preference minefield, assist with damage control, and try to reach the best possible settlement if the available defenses will not totally eliminate liability.  We are here to keep your losses to a minimum while putting your mind at ease. Call us today at (616) 975-9951, to set up a consultation.  – Larry A. Ver Merris  /  February 26, 2018

While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.