Preference Claims in New York State Bankruptcy: A Creditor's Options

Preference Claims in New York State Bankruptcy: A Creditor's Options

November 21, 2023

Commercial bankruptcy filings in New York State are on the rise, with 1,133 cases filed in 2022, compared to just 795 cases in 2021. When a business faces the difficult decision to file for bankruptcy protection, it often comes after all other options have been exhausted.

Take this scenario: a business is in financial trouble. Believing it can work through its issues, the business negotiates with a primary creditor to make a lump sum payment on past due invoices in exchange for the creditor continuing to deliver products. The business is ultimately not able to turn things around, and two months later, files for bankruptcy protection.

Though two months have passed since the business made partial payment to its creditor for goods or services that were delivered, the creditor may face an action brought on behalf of a bankruptcy trustee to pay that money back under a preference claim. In New York State, as in many jurisdictions, understanding and addressing such claims is crucial to protect a creditor's interests and assets.

What is a Preference Claim?

In the context of bankruptcy law, a preference claim arises when a creditor receives payment or other transfer of assets from a debtor within a specific period preceding the bankruptcy filing (typically a payment made within 90 days of the bankruptcy filing).

When a debtor pays some bills during the 90 day preference period, those creditors may have received a preference over the creditors whose bills were not paid.  The creditors who were paid did not need to wait for payment or have their claims for payment reduced or eliminated because the debtor did not have enough assets to repay every creditor in full.

Bankruptcy law aims to ensure fair treatment among creditors when it comes to creditors getting paid from a debtor’s assets.  To that end, the Bankruptcy Code deems certain transfers made within a certain period of time before a bankruptcy filing as preferential. Bankruptcy trustees are given broad leeway to go after monies which were paid out within the specified timeframe. This is sometimes referred to as a claw back action.

Laws Governing Preference Claims

The relevant statutes pertaining to preference claims are covered in Sections 547 and 548 of the Bankruptcy Code.

Section 547 addresses the avoidance of preferential transfers, while Section 548 covers fraudulent transfers. Understanding the intricacies and nuances of these laws is fundamental for creditors navigating a preference claim situation. It can be a complicated and frustrating process filled with uncertainty, and that is where we come in. We work regularly with clients to respond to preference claims and reach a reasonable resolution. We have represented New York business in out-of-state bankruptcy courts and out-of-state businesses in New York bankruptcy proceedings.

Creditors Have Options

There are two primary options a creditor has when faced with a preference claim. There is no one-size-fits-all solution, so we work with our clients to decide which course of action best suits their situation, and their desired outcome.

  1. Defend against the Preference Claim: A creditor may oppose the trustee's preference claim by demonstrating that the transaction in question does not meet the criteria for avoidance as a preferential transfer. This could involve proving that the payment or transfer was made in the ordinary course of business or that it did not actually provide the creditor with more than it would have received in a hypothetical liquidation scenario.
  2. Negotiation and Settlement: In some cases, creditors may choose to negotiate and settle with the trustee. This is often the strategy when the trustee has a strong case to claw back the funds but is willing to negotiate to avoid a costly trial. Though it may result in the creditor paying back monies, our team works with the trustee to negotiate a lower repayment to settle the matter.

Navigating preference claims in bankruptcy cases can be complex and demanding. Thus, seeking counsel from an experienced bankruptcy attorney is often crucial. Additionally, every situation has unique elements to the claim. Our team of experienced attorneys works with each client to assess the specifics of the situation, evaluate available defenses, and guide them through the intricate legal process.

For creditors faced with preference claims in bankruptcy cases, a proactive and informed approach is key. Seeking out experienced legal counsel to ensure a full understanding of the relevant statutes and to assess available defenses, is a fundamental first step toward mitigating the impact of preference claims and safeguarding a creditor's interests in the bankruptcy process.

If you are a creditor with concerns in this area, our commercial bankruptcy team is available to answer your questions and work with you to protect your best interests. Give me a call today.

Kevin R. Lelonek provides counsel to clients in the areas of business bankruptcy and reorganization as well as commercial and business litigation. He can be reached at 716-854-4300 ext. 207 or [email protected]