In bankruptcy cases, preference actions are often asserted under Section 547 of the Bankruptcy Code against a creditor to reclaim funds paid to the creditor in the 90 days prior to the bankruptcy. While the most common defenses to a preference action are the ordinary course of business defense, the new value defense, and the contemporaneous exchange for new value defense, there are other less traditional defenses that a knowledgeable creditor should consider to reduce or even eliminate preference liability.
These defenses include the No Improvement in Position Defense, where the court determines whether the creditor has improved its position during the preference period by measuring the extent of the creditor’s debt in excess of the value of the creditor’s collateral at the beginning and end of the preference period. The Inchoate Lien Defense applies if a creditor could have perfected a lien against the debtor when it received a preferential payment, then the payment cannot be clawed back as a preference. The Assumed Contract Defense reflects the idea that if the preferential payment had not been made prior to the bankruptcy, the payment still would have been made during the bankruptcy when the debtor sought to assume the contract. The Mere Conduit Defense applies when a party shows that it received the funds not for its own benefit and that it lacked dominion and control over the funds. Lastly, the De Minimis Payment Defense applies if the value of such transfer or payment is less than $5,000 for a debtor with primarily nonconsumer debts.
These less traditional defenses are not exhaustive, and additional defenses may be available to creditors. Each affirmative defense requires an in-depth analysis of the relevant facts and circumstances. Therefore, a creditor should consult competent counsel to ensure it asserts the best affirmative defense(s) to limit its preference exposure. Read the full article here.