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An Antecedent Debt is a Condition to a Preference
Explanation of the correlation between "antecedent debt" and a "preferential payment."
By Robert Norman

What is the correlation between "antecedent debt" and a "preferential payment?" If a payment on antecedent debt is made by a debtor to a creditor during the preference period (i.e. within 90 days of the bankruptcy filing), the money may be avoided by the court and returned to the debtor's estate. Theoretically, the preferential transfer will be returned to the debtor's estate to enable an equal distribution for unsecured creditors. To illuminate the United States Bankruptcy Code, we must define what is an "antecedent debt," and how does this effect a payment made within the "preference period."

To review, the bankruptcy trustee may avoid a payment made by a debtor to a vendor within 90 days before the bankruptcy filing if the court finds that certain elements are established. According to section 547 (b) of the bankruptcy code, the trustee has the burden of proving:

  1. the payment was made to a creditor,

  2. the payment was for or on account of an "antecedent debt,"

  3. the payment was made while the debtor was insolvent,

  4. within 90 days before the bank- ruptcy filing (or one year if such creditor was an insider), and

  5. the creditor received more than it was entitled.

In In re Vanguard Airlines, Inc., 295 B.R. 329, 335 (Bankr.W.D.Mo. 2003), the court found that payments made to a vendor in the 90 days before the debtor's bankruptcy filing were not on account of an antecedent debt, and thus not preferential. Accordingly, the vendor was able to keep a large portion of the payments made by the debtor during the preference period. The court reasoned that a debt to the vendor did not occur until the vendor provided the contracted services. Consequently, the payments to the vendor were for future services, not antecedent debt.

How does the court determine what a debt is and when it is incurred? Pursuant to the bankruptcy code, a debt is a "liability on a claim." In re First Jersey Securities, Inc., 180 F.3d 504, 511 (3d Cir. 1999). Also, pursuant to the bankruptcy code, a claim is broadly defined as a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal equitable, secured, or unsecured. " A debt is 'antecedent' if it was incurred before the allegedly preferential transfer. A debt is incurred 'on the date upon which the debtor first becomes legally bound to pay.' " In re Jones Truck Lines, Inc., 130 F.3d 323, 329 (8th Cir. 1998). Typically, a debtor becomes liable to a vendor when a resource is consumed or a service performed, not when the vendor decides to bill the debtor.

In Vanguard Airlines, the debtor asserted that it had a legal obligation to pay for estimated charges for a particular month when it received an invoice at the beginning of that month. However, an invoice does not create or establish a debt, nor does it give a creditor a right to payment. An invoice estimating the cost of services to be provided in the future does not create a debt. The debt arises when the debtor receives the goods or services, not when the vendor decides to invoice the debtor. Vanguard Airlines, 295 B.R. at 334.

To delve further into "antecedent debt," consider the policies underlying the preference section of the bankruptcy code. To promote equal distribution to a debtor's vendors, the bankruptcy code was designed to prevent vendors from "racing to the courthouse to dismember the debtor during its slide into bankruptcy." First Jersey, 180 F.3d at 511. If "antecedent debt" was calculated from the date of invoicing instead of the date of obligation, the creditor would be left with the discretion to determine the date the obligation was incurred.

Not only would this create the possibility of unequal treatment of similarly situated creditors, but also the opportunity for a particular creditor, who foresees that his debtor is approaching bankruptcy, to secure preferential treatment for himself by the timing of his bill. Hence, in the pursuit of justice the courts have taken the liberty to define what a debt is, when it is incurred, and how a recent payment to an unsecured vendor may be avoided.

Although the bankruptcy code is designed to assist debtors through tremendous financial difficulties, the court will protect vendors by requiring due process of the law before any monies are avoided through preference litigation.

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