QUESTIONS & ANSWERS
Bankruptcy Litigation FAQs
What is a preference?
The Bankruptcy Code gives a trustee (or the debtor
in a Chapter 11) the ability to recover money paid to some
creditors for redistribution in accordance with Bankruptcy
Code. In generally, a payment from the debtor made within 90
days before the bankruptcy was filed can be recovered by the
trustee if the debtor was insolvent when the payment was
made and the payment provided the creditor with more than
would have been received in a Chapter 7 case. If the
creditor was closely connected to the debtor or its owners,
then the reach-back period may be one year before the
bankruptcy was filed.
Preference actions often seem unfair to creditors who had to
wait for payment from the debtor, were finally paid, and
then are sued by a trustee who wants to recover the payment.
The policy that Congress intended in allowing a trustee to
recover a preference is to put the recipient of a
preferential payment in the same position as a creditor in
the bankruptcy, resulting in an equality of distribution.
Are there defenses to a
preference lawsuit?
The Bankruptcy Code includes several defenses. If
the payment was in the ordinary course of business, it may
to be recoverable. If you gave something of value at the
time of the payment, or after the payment, the value that
you gave will serve to reduce the preference. If you had a
lien on property when the payment was made, this may serve
to defeat the preference claim brought by the trustee. In
most cases, trustees will settle preferences for less than
face value. It is important to consult with an experienced
bankruptcy attorney to assist you in minimizing the effects
of a preference claim brought by a trustee.
What is a fraudulent transfer?
The Bankruptcy Code recognizes two types of
“fraudulent transfers”. The first involves a transfer made
by the debtor with the actual intent to avoid creditors. The
second involves a transfer made by an insolvent debtor for
which less than “reasonably equivalent value” is received.
If you are sued by a trustee for receipt of a fraudulent
transfer, it does not necessarily mean that the trustee is
accusing you of fraud. It is enough that you received more
than you gave back to the debtor.
Defenses to a fraudulent transfer action generally turn on
arguments as to valuation. An experienced bankruptcy
attorney can assist you in presenting your case to defend
the claims.
What is an avoidance action?
Both preference actions and fraudulent transfer
actions are “avoidance” actions. The term “avoidance” is
sometimes used to refer to a lawsuit asking the bankruptcy
to invalidate a transfer or lien. If a transfer is avoided,
the property transferred must be returned. If a lien is
avoided, a creditor may lose its rights in collateral. The
Bankruptcy Code and other applicable law sometimes provide
several bases for avoiding transfers and liens.
