Preference Avoidance

In corporate bankruptcy cases, it is relatively common for a payment made by a debtor to a creditor within a 90 day window of filing bankruptcy to raise questions.  Questionable transactions of this type can be deemed as preferential transfers of assets or fraudulent transfers of assets. In some circumstances, such as when a family member, business partner or business affiliate receives the payment, the timeframe in which the payments can be scrutinized can be lengthened by up to 12 months prior to the filing bankruptcy.

In order that maximum amount of assets are available for distribution to creditors, the creditors committee or bankruptcy trustee may bring a preference avoidance action. The reason for this to attempt to establish that transactions made to certain parties were preferential in nature. It can ultimately be ruled that these payments be returned so that the assets can be redistributed equitably and fairly to any and all creditors.

Any and all payments made by a debtor to a creditor within 90 days of filing bankruptcy may be a preferential or fraudulent transfer of assets. It may be examined by the trustee or by a creditors’ committee. If the debtor-creditor relationship is that of a business partner, business affiliate, or subsidiary, the time in which payments can be examined may be as much as one year.

In order to make additional assets available for distribution, the debtor, a creditors’ committee or the bankruptcy trustee may bring a preference (or) avoidance action to establish that payments were preferential and demand that a payment or payments be returned to be redistributed among all creditors. This is an action which evokes disbelief from those entities who simply provided a service, were properly paid for it, may have later spent the money on other legitimate matters and are now being asked to return some or all of that payment.

Often the amount demanded is far greater than the amount, if any, actually owed.

Defending Preference Avoidance Actions

In a corporate bankruptcy case there are a number of legitimate defenses against a preference action. Some common defenses include: determining that the goods or services were delivered and money was received at approximately the same time. Also, showing that the goods were provided after an alleged preferential payment is another defense. Lastly, reiterating that the transaction occurred during the normal course of business and according to ordinary business terms is another common defense.

A proper review by Delaware counsel will involve conducting an analysis of all transactions preceding and following the 90 days as well as five other defenses which are available to a creditor.

The Bailey Law Firm has a long and very successful track record of getting such claims against creditors dismissed or greatly reduced. Attorney James F. Bailey has been very successful in winning judgments in the mediation hearings that are often ordered by the Bankruptcy Court along with having claims settled at a greatly reduced amount.

James Bailey can easily assist you regarding:

• Defense of adversary proceedings
• Fraudulent conveyances
• Rejection of leases
• Defending preference actions
• Claims against debtors
• Executory contracts

Out-of-State Creditors’ Rights Protection

The Bailey Law Firm and James Bailey also frequently act as local counsel for attorneys with matters before the U.S. Bankruptcy Court in Wilmington, Delaware. A local attorney is often better equipped to handle bankruptcy issues in Delaware. We keep out-of-state counsel and clients informed of the progress of the case and advise out-of-state counsel clients on ways to protect their rights during a Delaware bankruptcy. We know the judges, local procedure, the ways of other local Delaware bankruptcy attorneys.

To schedule a free initial consultation —Contact attorney James F. Bailey via e-mail or call the firm’s Wilmington offices directly at (302) 658-5686.