Three lesser known defenses to bankruptcy preference claims are: the earmarking defense, the conduit defense and the agency defense. The defenses have different and distinct elements. Recognizing the potential availability of one of these defenses requires a clear understanding of these elements and the situations these elements might exist.
Last updated March 20, 2012. The timing of preference claims is affected by 3 major factors: the statute of limitations; the desire of the debtor to re-establish goodwill (and trade credit) with the supply base; and the discontinuation of the debtor’s business operations. The statute of limitations is addressed in a separate article that can be read by clicking this link. This article addresses the second and third factors. These two factors most frequently influence the decision on timing of bringing bankruptcy preference actions where the debtor is a debtor-in-possession.
[Last updated: April 5, 2013] At the same time as Congress established a jurisdictional threshold requirement for bringing a preference claim, it also restricted the location of the court – i.e. venue – for a proceeding on a commercial debt against a non-insider. This small claim venue limitation is contained in Subsection 1409(b) of Title 28 – Judiciary and Judicial Procedure.
Guiliano v. Almond Investment Company (In re Fluid Routing Solutions Intermediate Holding Corp), Adv. Proc. No. 11-50393 (Bankr. D. Del. March 14, 2012) – Opinion Granting Defendants Motion for Summary Judgment in the District of Delaware by U.S. Bankruptcy Judge Christopher S. Sontchi – District of Delaware Bankruptcy Judge Christopher S. Sontchi grants the defendant’s motion for summary judgment rejecting the trustee’s claim that the defendant’s refusal to sign a critical vendor agreement implicated a “nefarious intent to avoid preference liability”.
06/02/2011 – Memorandum Opinion re Defendant’s Motion to Dismiss filed in the Kimball Hill, Inc. Bankruptcy – Adv. Proc. No.: 10-00824 – Defendant Wisenbaker Builder Services, Inc. et al. Denied the Defendants’ Request to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1) for the Litigation Trust’s Lack of Standing; Granted Defendants’ Request to Dismiss the Preference Count Pursuant to Fed. R. Civ. P. 12(b)(6) for Failure to State a Claim Pursuant to Rule 8(a).
The January 5, 2011 Delaware Bankruptcy Court decision in Burtch v. Huston, Adv. No. 09-50469 (In re USDigital, Inc. Del. Case No. 09-10374) provides welcome relief for avoidable transfer defendants facing claims under Bankruptcy Code Sections 544, 547 and 548. Judge Christopher S. Sontchi applied the recent Supreme Court decision in Ashcroft v. Iqbal and dismissed counts brought under each of those sections, holding that: “The Trustee has failed to set out sufficient factual matter to show that the claim is facially plausible. Conclusory or bare-bones allegations no longer suffice to survive a motion to dismiss.”
In dismissing the Section 547 bankruptcy preference count, Judge Sontchi found the “Trustee has failed to assert a facially plausible claim.” The complaint was found to be lacking of any factual allegation to support a conclusion that the transfers by the debtor occurred on account of an antecedent debt.
With respect to the fraudulent transfer claims made under Sections 544 and 548, the deficiency in pleading was as to the failure of any factual allegations to support a claim that the debtor did not receive “reasonably equivalent value” for the transfers to the defendant.
To see a “bookmarked” version of the opinion, click this link. Click the bookmark icon in the PDF viewer to see the bookmarks. Click on the bookmarks to jump to the relevant portion of the opinion.
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. ]
One of the less frequently seen defenses to a bankruptcy preference is based on Section 365 of the Bankruptcy Code. We believe that there are many more opportunities to use the defense for suppliers who are aware of it and understand it.
Last updated June 11, 2013 [Updates Highlighted]. The timing of preference claims is affected by 3 major factors: the statute of limitations; the desire of the debtor to re-establish goodwill (and trade credit) with the supply base; and the discontinuation of the debtor’s business operations. This article addresses the statute of limitations. The two other major factors are addressed in a separate article that can be read by clicking this link.
We have developed extensive materials addressing many of the most common issues that arise in connection with the defense of a bankruptcy preference claim. These materials are outlined below. Clicking on any of these outline items will take you to the identified material.