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Business bankruptcies have declined in recent years, but companies are facing significant issues in bankruptcy thanks to increased bankruptcy litigation.  According to statistics published by the Administrative Office of U.S. Courts, the number of bankruptcy litigation filings grew last year in 10 districts.  The most notable growth was in Delaware where bankruptcy litigation filings rose 72 percent.

The Bankruptcy Code describes a "preference" as a transfer of an interest of the debtor in property:

  1. to or for the benefit of a creditor;
  2. for or on account of antecedent (pre-existing) debt;
  3. made on or within 90 days of the bankruptcy filing (or within one year for an insider transfer);
  4. made while the debtor was insolvent; and
  5. that allows the creditor to receive more than it would have received in a chapter 7 bankruptcy case, or if the transfer had not been made

The description of a preference is intentionally broad.  If any of these elements are missing, the payment received should not have to be returned.  There is no requirement of intent, and each element must be proven by a preponderance of the evidence.  There is also a presumption of insolvency in the 90 days prior to the bankruptcy filing. 

Like it or not, preference demands are a part of today’s bankruptcy practice.  Fortunately, there are several defenses that can be raised.  These defenses will be examined further in future blogs.