Preference ClaimsPosted: October 24, 2011
I have a corporate client who once was the subject of a preference claim, which is a claim a bankruptcy trustee makes to get money back into the bankruptcy estate. My guy sold goods to his client, who paid him for the goods. Subsequently, his client declared bankruptcy. The trustee wanted that money back. My guy says, “Hey, that’s not fair. It sold it to him fair and square.”
The federal bankruptcy laws allow preference claims to promote fairness. Say you sell $5,000 worth of goods to a customer, and I provide $5,000 in legal work to the same customer. The customer suddenly realizes that he’s running out of money and likes you better than me. So, he takes his remaining $5,000 and gives it all to you. Unfair. A bankruptcy attorney’s going to request that you give the money back so we get fairness.
The burden of proof is on the trustee. He must prove six elements by a preponderance of the evidence. If he does, the creditor has three affirmative defenses but also now has the burden of proof. The most common affirmative defense is the “ordinary course of business” defense. The creditor must prove one of two elements: The payment was made in the ordinary course of business or financial affairs of the debtor and the transferee, or the payment was made according to ordinary business terms.
Those elements are pretty vague. So, you’ll need an expert, and they ain’t cheap. Defending preference claims is expensive.
If you want more information on this riveting topic, call me at 402-505-3555.