Defense of Preference Litigation

Common Defenses in Preference Actions

It is not all bad news. While the trustee may file suit seeking to avoid the alleged preferential transfers and recover (i.e. "Clawback") money from you, the trustee may not avoid such transfers to the extent they fit within several affirmative defenses contained within Section 547(c) of the Bankruptcy Code. For example, the most common defenses that may be available to a Defendant under Section 547(c) may include:
  • the transfer was a contemporaneous exchange for new value given to the debtor (i.e., the debtor received something of value in exchange for the transfer); 11 U.S.C. §547(c)(1)
  • after such transfer, Defendant gave new value to or for the benefit of the debtor (i.e., the Defendant extended additional credit to the Debtor after receiving the transfer) 11 U.S.C. §547(c)(4); or
  • the transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the recipient (i.e., Defendant made the transfer under ordinary business terms). 11 U.S.C. §547(c)(2)

Although that sounds simple enough, it is not quite that straight forward.  The defense based on the transfers having been made in the ordinary course of business is especially complicated.  There is a special language that needs to be conveyed to Plaintiff.   It is not simply that the Defendant did not do anything wrong or that it would not be fair to require Defendant to pay money to Plaintiff on top of all other losses. 


Ultimately, these very unfair laws allow Plaintiffs to try to take money from you.  On one hand, it is like Robin Hood, stealing (i.e. “legally clawing back payments”) from those who have been paid (at least in part) during the 90 days before the bankruptcy filing, and giving it to those who have not been paid.  But it is not necessarily about taking from the rich and giving to the poor.  In many cases, we are talking about Defendants who have suffered significant financial pains from the bankruptcy, such as loss of business and unpaid bills, and now the Defendant is being sued for more money, and will undoubtedly have to pay legal expenses.  How is that fair?  It is not, but it is the law.  Fortunately, there are defenses available to you.  We cannot guarantee results, but in the vast majority of cases, the very nature of the law and litigation process in these cases will very likely lead to a cost savings if you hire a lawyer to defend the case.  We can discuss all of that with you during a free consultation.  Call us at (302) 655-5303 or contact us today at info@tobialaw.com



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