In 2005, the Bankruptcy Code was amended to limit by dollar amount the transfers that could be avoided in a commercial case. This commonly is called the “Small Commercial Preference Defense.” Originally, a transfer could not be avoided if the amount paid or other value transferred was less than $5,000. That amount was increased to $5,475 for adversary proceedings** commenced on or after April 1, 2007 and on or before March 31, 2010, $5,850 for an adversary proceeding** commended on or after April 1, 2010 and on or before March 31, 2013 and $6,225 for an adversary proceeding** commended on or after April 1, 2013 and on or before March 31, 2016. It will be increased (or decreased) again on April 1, 2016 in an amount tied to the change in the Consumer Price Index over the preceding 3 year period. [** IMPORTANT: There is an unresolved question as to whether the time of filing the preference action or the timing of the filing of the bankruptcy case determines what threshold amount applies. ]
Aggregating of Separate Payments to Reach the Dollar Threshold
The clear direction of the Bankruptcy Courts is to let two or more small payments be aggregated to meet the threshold. Simply, this means that the bankruptcy trustee (or other designated preference recovery Grinch) most likely will be allowed to add together all payments in the preference period to a single creditor to reach the applicable $5,475, $5,850 or $6,225 limit.
So, if against outstanding invoices you got paid $3,500 in one payment and $3,500 in another payment, both within 90 days before the bankruptcy filing, the transfer is $7,000. The Small Commercial Preference Defense is NOT available. [See discussion below if the one of the elements of an avoidable transfer is not met - i.e. the preference claimant fails to meet its burden of proof as to one of the transfers..]
The bankruptcy courts are narrowing the benefit of the Small Commercial Preference Defense in other ways as well.
Inclusion of Payments Subject to Defenses in Aggregating
Consider the following refinement of the above example where you received $3,500 in each of 2 installments. If it turns out that the first $3,500 payment in the above example was not a preference because it was in the “Ordinary Course of Business” you might think that you are home free. The only preference payment was the second $3,500 payment and that is less than the $5,475, $5,850 or $6,225 threshold. Would you be right?
Well, at least one Bankruptcy Court has held that you can not “stack defenses”. That court would say that the second $3,500 payment was recoverable as a preference. Once the $5,475, $5,850 or $6,225 transfer threshold is met you can be forced to repay a voidable preference claim for an amount less than the threshold. So the bankruptcy trustee loses on the first $3,500 installment payment. He says “So sorry lost that one – pay me the other $3,500.” There is obviously an incentive for a bankruptcy trustee to go after a payment even though it is subject to a defense if there is another small payment that, when added to the obvious “loser”, will exceed the threshold.
But don’t give up on your argument. It still has some appeal. When you are talking about such relatively small amounts making this argument to the bankruptcy trustee might just knock off some from what you have to give back.
The Failure of the Preference Claimant to Prove a Pre-Condition to a Claim
Also, if your defense on the first $3,500 is the Contemporaneous Exchange Defense, your argument that the threshold was not met gets some traction. Why? Because the Contemporaneous Exchange Defense raises the possibility that the bankruptcy preference claimant did not prove its case to ever put the first $3,500 in the preference bucket.
The bankruptcy preference claimant has the burden of proof that a payment was made on account of a pre-existing debt (an “antecedent debt”). Until that burden is met, you don’t have to prove any defenses. So the argument is simply that you should have no burden to establish a defense to a payment that was never shown to be a preference to begin with. So if you and the bankrupt customer agreed that payment would be made at the same time you delivered the goods, you can argue that the trustee never proved that the payment was to satisfy a pre-existing debt and thus not a “transfer” that should be considered.
The Bankruptcy Preference Claimant’s Make it Bad, Make it Better Tactic
The entire discussion above also illustrates the typical back and forth negotiations that occur so often in connection with bankruptcy preference claims. It is simply a fact of life that many times a “make it bad, make it better” tactic is used in making preference claims. It is your counsel’s job to push back and weed out what plainly is not recoverable so that the only sums that are compromised are those that are truly in the gray area of bankruptcy preference law.