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How to Deal with a Preference Lawsuit

by | Sep 29, 2021 | Bankruptcy, Bankruptcy, Debt, Business, Debt, Litigation

If your company has been served with a lawsuit asserting preference claims, you will need to file an answer or other responsive pleading on or before the deadline asserted in the summons. To properly evaluate defenses, you will need to locate and identify the checks, wire transfer receipts, or other forms of payment and corresponding invoices to verify if the information asserted in the complaint is accurate and to verify if the transfers did occur within the preference period- which is typically (90) days before the debtor filed for bankruptcy relief.

Defenses to Preference Litigation

There are several defenses available to companies subject to preference litigation. One of the most popular defenses is the ordinary course of business defense. This defense protects transfers made by the debtor in payment of debts incurred in its ordinary course of business, or financial affairs and which were made according to ordinary business terms (11 U.S.C. § 547(c)(2)(B). To evaluate this defense, a comparison is made of average of the days to pay and days late of payments made during the preference period to the average of those days to pay in the pre-preference period (usually a year or two look-back period). If there is a substantial deviation in days to pay or days late on any of the preference period transfers, then those will likely not be covered under the ordinary course of business defense.

If the transfers were COD or similar transfers, then a complete defense on the transfers exists to the extent that any transfers were intended by the debtor and defendant to be contemporaneous exchanges for new value given to the debtor, and were in fact substantially contemporaneous exchanges with the meaning of 11 U.S.C. §547(c)(1). Another popular defense referred to as the “subsequent new value” defense provides protection for transfers to the extent that after such preferential transfers were made, the defendant gave new value to or for the benefit of the debtor that was unsecured as of the date of the petition. 11 U.S.C. § 547(c)(4). In other words, if your company has unpaid invoices after the alleged preferential transfers, those unpaid transfers or unpaid new value can be utilized to reduce preference liability. Other defenses exist including if the alleged transfers were made pursuant to a contract that was subsequently assumed in the bankruptcy case.

Settlements and Financial Hardship

After evaluating defenses and establishing what exposure the company may have at trial, it is important for the company to assess what it can offer to pay as a settlement. If the company has financial distress, typically proof of financial hardship must be provided. In addition to cash as settlement, preference settlements may include waivers of the right to receive a distribution on proofs of claim filed in the case, or a waiver of the right to file a replacement claim for the preference settlement funds paid out in the case. Most preference cases settle as trial costs are usually prohibitive for all parties.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.