Print This Page

Defending Preference Claims

If you have had the misfortune of dealing with a company which files for bankruptcy under either chapter 7 or chapter 11, it is not uncommon for the trustee, debtor in possession, or creditors committee to seek recovery of preferential payments. A payment you receive from a company which ends up in bankruptcy might be considered a preference if your company received it within 90 days of the date that the debtor’s bankruptcy case started. However, you can successfully defend a preference claim. Lakelaw has successfully defended even multi-million dollar preference claims in the largest of chapter 11 bankruptcy cases. So if you get sued for recovery of a preferential transfer – sometimes called a “voidable preference” – call Jonathan Brand or David Leibowitz at Lakelaw. We know what to do to protect you and to defend your interests.

What is a Preference?

A preference or preferential payment is a payment which was made by a debtor to a creditor within 90 days of the date of its bankruptcy (or within one year if made to an insider) which allows the creditor to receive more than other creditors.

Is it bad to receive a preference?

From the creditor’s standpoint, it is always better to be paid than not to be paid.

Can I be sued for receiving a preference?

Yes, a trustee, a debtor in chapter 11, a creditors’ committee or a liquidating trustee might sue a creditor which received a preferential transfer?

If I am sued for a preference, do I have any defenses?

Yes, you can defend a claim against you to recover a preference. Frequently you will be able to avoid suit altogether. Frequently, you will be able to pay less than the full amount claimed.

What are some of the defenses against a preference?

Preference claims must be brought within 2 years of the date of the bankruptcy or one year from the date of the appointment of the first trustee whichever is later. A preference can’t be recovered if it was paid in the ordinary course of business. This is question of fact. A preference can’t be recovered if the creditor gave new value in exchange for the payment. And a preference can’t be recovered if there is an exchange of value at the same the payment is made. These defenses are commonly referred to as “the ordinary course of business” defense, “the new value” defense and “the contemporaneous exchange” defense.

I’ve been sued for a preference. Do I need a lawyer?

Unless you are reasonably sophisticated about bankruptcy and the laws involving preference, you will do better to get a lawyer. What you should not do is to ignore the case altogether.

Can I be sued in Delaware for a preference? I’m in Illinois and the debtor was in some other state!

You can be sued in the court where the case was filed unless the claim is very small. But we can deal with a preference claim anywhere in the country.

Who is ASK and why are they suing me for a preference claim in bankruptcy?

ASK is a law firm specializing in suing companies on preference claims. We have had professional dealings with them and have effectively defended claims which they bring.

Case Study

We represent one of the nation’s largest meat traders. Frequently, companies which bought product from our client end up in bankruptcy. Trustees or creditors committee have made demands against our client for millions of dollars. To date, we have always been able to establish that payments our client received within 90 days of the filing of the bankruptcy were in the ordinary course of business. So we have successfully defended against all claims for preference. We hope to keep up this record of success for many years to come. And we hope that our client’s customers stay out of bankruptcy court too!