Introductory Concepts

In this Introduction to the VIDEO series, we will discuss the  the basics of bankruptcy preference actions.  This section also outlines the remaining 6 parts of the VIDEO series and what you can expect to learn in each part.

In this presentation, we talk about the basics:

  • the rules that apply to the vast majority of preference claims
  • 3 of the most common defenses
  • the books and records that you may need to defend a preference claim

In order to present the basics in a clear and concise manner, we have avoided constantly mentioning that there are exceptions or limitations. However, bankruptcy preference law can be very complex. Some situations are beyond the basics we address here and your situation may be one of those complex situations.

We use certain fundamental terminology in this presentation.

  • Preference Claims” are demands and legal proceedings for the return of certain payments made by a bankrupt company prior to its bankruptcy filing.
  • Preference Claims usually are for payments for goods or services that the bankrupt company received as a “Customer”.
  • The bankruptcy court will appoint a lawyer or law firm to pursue Preference Claims. We will call it the “Customer’s Bankruptcy Representative”.
  • In most cases, Preference Claims are made against a person who provided goods or services. We will call it the “Supplier”.

We have divided the presentation into 6 parts.

• In Part 1, we review:

  • The key players and concepts with regard to bankruptcy preferences
  • The timeline for a preference claim
  • How to identify a payment that may be subject to a preference claim
  • The “Zone of Information” that applies to the identification of potential preference payments

• In Part 2, we review the first of the most common defenses – the contemporaneous exchange defense.

  • The “Zone of Information” that applies to this defense
  • The basic elements of the defense
  • A simple example of the application of the defense

• In Part 3, we review the second of the most common preference claim defenses – the “ordinary course of business” defense.

  • The “Zone of Information” that applies to this defense
  • The basic elements of the defense
  • A simple example of the application of the defense

• In Part 4, we review the third of the most common preference claim defenses – the “subsequent new value” defense.

  • The “Zone of Information” that applies to this defense
  • The basic elements of the defense
  • A simple example of the application of the defense

In Part 5, we review the mixing and matching of defenses in the case of multiple payments in the preference period.

In Part 6, we discuss the importance of books and records in defending a bankruptcy preference claim. The time between a bankruptcy filing and a preference claim can be many months or even years In the Sixth and final part, we discuss in more depth the books and records that you may need in defending a preference claim. These documents generally fall in four categories.

1. Contract documents

  • e.g. Contracts, purchase orders, releases

2. Accounting Records

  • e.g. AR Ledger, Cash Receipts Journal, Bank Statements, Invoices

3. Shipping Records

  • e.g. Packing Slips, Advanced Ship Notifications (ASNs), EDI Records, delivery receipts

4. Correspondence File

  • e.g. Emails, letters and memos