Although business bankruptcy filings have trended down in recent months, the lingering legacy of litigation prompted by the surge in filings at the outset of the U.S. financial crisis remains with us and continues to strike many general counsel with unexpected actions for recovery of payments made by the debtor in the run-up to a Chapter 11 case. This article focuses on new lessons emerging from key preferential transfer cases issued since 2008, and will include practice points to assist general counsel in helping their organizations, insofar as possible, to mitigate future preference liability through thoughtful application of ordinary course of business, contemporaneous exchange, and prepayment strategies.
In conjunction with the avoidance provisions of §550 of the Bankruptcy Code, §547 permits a trustee or debtor-in-possession to set aside and recover certain "preferential transfers" for the benefit of the estate. A preferential transfer is one that satisfies each of the following criteria: (i) prior to the bankruptcy filing, the debtor transferred an interest in property; (ii) the debtor transferred the interest to or for the benefit of a creditor; (iii) the debtor transferred the interest to pay or secure an obligation owed to the creditor prior to the transfer (an "antecedent debt"); (iv) the debtor was insolvent at the time of the transfer; (v) the transfer occurred within 90 days before the bankruptcy petition date (the "preference period") or, if the transfer was made to or for the benefit of an "insider" of the debtor, within the year prior to the petition date (the "insider preference period"); and (vi) the transfer permitted the creditor to receive more than it would have received upon the liquidation of the debtor under the code.
