Preference Claims

May 27, 2015

Supreme Court Wellness Decision Resolves Issue of Whether Parties Can Consent to Bankruptcy Court Jurisdiction

The recent Supreme Court case of Wellness International Network, Ltd. v. Sharif, – U.S. ___ , No. 13-935 (May 26, 2015) resolved the issue of whether litigants in the Bankruptcy Court can consent to have the Bankruptcy Court decide matters that otherwise would need to be decided by the U.S. District Court.

The Wellness decision resolved an issue that remained undecided since the Court’s prior ruling in Stern v. Marshall, 564 U.S. _ , 131 S.Ct. 2594 (2011), as to whether litigants can consent to having a Bankruptcy Court decide a matter which otherwise would need to be decided by a U.S. District Court judge. The Stern Court had found that the Bankruptcy Court did not have authority to adjudicate counterclaims based on state law.

The Wellness Court distinguished the Stern decision as involving a case in which the parties did not consent to Bankruptcy Court jurisdiction.

It is important to note that the Court in Wellness found that consent does not have to be express and may be implied, but must still be knowing and voluntary, and that parties need to be notified of the right to refuse non-Article III adjudication. The Court indicated that it is a good practice to obtain express consent.
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February 20, 2009

Ordinary Course Defense to Preference Claim in New York Bankruptcy Court

by Stephen Z. Starr

This is the third in a three part series of postings in which we examine preference claims in detail. In prior posts we discussed what is a preference claim (Help I’ve Been Sued by a Bankruptcy Trustee in New York, What Do I Do Now?) and the new value defense to a preference claim (New Value Defense to Preference Adversary Proceeding Filed in the U.S. Bankruptcy Court for the Southern District of New York). In this post we will look at the ordinary course defense.

The ordinary course defense is intended to permit creditors to continue doing business with financially troubled debtors without fear that a bankruptcy trustee will later be able to recover such payments as preferential.

Elements of the Ordinary Course Defense

The ordinary course defense requires that the creditor/defendant show:

a) payment by the debtor
b) to or for the benefit of the creditor
c) made in accordance with the course of dealings between the parties, or

d) made in accordance with applicable industry practices.

The way this works is as follows – image a company in the business of selling machine parts. The company has a course of dealings with the debtor over a long enough period of time, so that there is an established payment history. The company sells machine parts to the debtor on net 30 day terms. The debtor routinely pays the company’s invoices within 30-40 days.
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February 10, 2009

New Value Defense to Preference Adversary Proceeding Filed in the U.S. Bankruptcy Court for the Southern District of New York

by Stephen Z. Starr

This is the second in a three part series of postings in which we examine preference claims in detail. In a prior post (Help I’ve Been Sued by a Bankruptcy Trustee in New York, What Do I Do Now?) we discussed what are bankruptcy preference claims. In this post we will examine the new value defense to a preference claim. In a subsequent post we will look at the ordinary course defense.

Elements of the New Value Defense

One of the potential defenses that a creditor/defendant can raise to a preference adversary proceeding commenced by a trustee or debtor in possession in the U.S. Bankruptcy Court for the Southern District of New York is the ordinary course defense. The elements of this defense are:

a) after receipt of what would otherwise be a preferential payment;

b) the creditor extended new value to the debtor in the form of additional goods or services;

c) for which the creditor/defendant has not be paid by an unavoidable transfer.
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January 30, 2009

Help I’ve Been Sued by a Bankruptcy Trustee in New York, What Do I Do Now?

by Stephen Z. Starr

We often get calls and e-mails from people who have been sued by a trustee or debtor-in-possession in a chapter 11 case pending in the United States Bankruptcy Court for the Southern District of New York and United States Bankruptcy Court for the District of Delaware.

1. What is a preference claim?

In bankruptcy cases a trustee has the ability to file a lawsuit in the Bankruptcy Court – called an adversary proceeding – seeking to recover certain payments made by the debtor prior to bankruptcy as preferential.

The elements of a preference claim are:

a) a payment by a debtor to a creditor made within 90 days of bankruptcy filing (1 year in the case of payment to “insiders”);
b) for a debt that was owed to the creditor prior to the time the payment was made;
c) made while the debtor was insolvent; and d) that allowed the creditor to receive a greater recovery than if the payment had not been made and the debtor had instead been liquidated in a chapter 7 bankruptcy case and the creditor received payment as allowed by law in a chapter 7 case.

The first thing to understand about a preference claim is that the trustee (or debtor in possession in a chapter 11 case) is not challenging that you, the creditor, actually provided the goods or services for which you were paid. Instead, the preference recovery provisions of the Bankruptcy Code are intended to promote the Bankruptcy Code’s goal of “equality of distribution” among similarly situated creditors. The bankruptcy law, as drafted by Congress, views it as unfair that you had your invoices paid in the 90 days prior to the debtor’s bankruptcy filing while other creditors did not. The preference avoidance provisions of the bankruptcy law allow the payment to you to be potentially recaptured by the trustee (or debtor in possession in a chapter 11 case).
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