BANKRUPTCY PREFERENCE CONSIDERATIONS

1. OVERVIEW OF PREFERENCES
   1. PREFERENCES DEFINED
   DEFENSES
   1. ORDINARY COURSE OF BUSINESS
   2. CONTEMPORANEOUS EXCHANGE FOR NEW VALUE
   3. SUBSEQUENT NEW VALUE DEFENSE
   4. ALL OTHER STATUTORY DEFENSES
   5. OTHER NON-TRADITIONAL DEFENSES
   2. HOW TO AVOID PREFERENCES
   1. CONSISTENT POLICIES AND ACCURATE RECORD KEEPING
   2. GO COD OR COO
   3. THIRD-PARTY GUARANTIES
   4. ASSIGNMENT OF CONTRACT PROCEEDS
   5. RECLAMATION

   Abstract

   Any company extending unsecured credit to its customers is likely, at some point in its business life, to face preference demands and lawsuits under the Bankruptcy Code. Preference claims customarily arrive as a demand to repay amounts the creditor received from its customer in the ninety (90) days before the customer's bankruptcy case and are sometimes followed by a lawsuit in a bankruptcy court called an adversary proceeding.

   To many creditors, preference claims come as a surprise. The notion of debtors suing creditors to recover payments made on bona fide debts seems both unfair and unreasonable. The primary underlying principle supporting the return of preferential payments is the fair and equal treatment of all unsecured creditors. According to that principle, creditors of equal priority should receive pro rata shares of the debtor's property. See Begier v. IRS, 496 U.S. 53,58 (1990). A second underlying principle is discouraging creditors from racing to the courthouse to dismember the debtor during its slide into bankruptcy.

   Preferential transfers under federal bankruptcy law are generally defined in 1 1 USC 3 547(b). In order to successfully prosecute a cause of action to avoid a preferential transfer, a debtor (or bankruptcy trustee) must clear five hurdles.

   
   
   

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