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Most Commonly Used Defenses Against Demands for the Return of Preferential Transfers
An Overview
By Michael C. Dennis, MBA, CBF

1. An Overview if the New Value Exception:

New value given to the debtor involving sales made to the debtor during the 90-day preference period reduces the size of the preference.

Receipt of preference payments can be offset by sales made on open account terms if the debt that arose from those sales remained unpaid at the time of the bankruptcy filing.

2. An Overview of the Ordinary Course of Business exception:

Payments received in the ordinary course of business are not preferential...but the burden is on the creditor to prove this exception applies...and Courts and trustees tend to interpret this particular exception narrowly. Courts look at industry standards, as well as to the creditor's payment history with the debtor. In addition, different district courts have varying interpretations of what constitutes a payment in the ordinary course of business.

3. An Overview of the Contemporaneous Exchange of Value Exception:

An example would be a sale made on COD or wire transfer terms during the preference period. This exception applies only to the extent the new value equals the payment received. For example, if a creditor demanded a 3 for 1 exchange, only 1/3 of the payment received would not be considered preferential.

4. An Overview of the Subsequent New Value Defense

This defense provides that the trustee may not avoid a transfer to or for the benefit of a creditor, if the creditor gave new value to the debtor (i.e., a subsequent shipment of goods) after the payment, which was not secured by an otherwise unavoidable security interest and on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of the creditor.

5. An Overview of the Defense Relating to No Improvement In Position By A Secured Creditor:

A trustee may not avoid a transfer of a perfected security interest in inventory or receivable or the proceeds of either, except to the extent that the aggregate of all such transfers (or perfected security interests) caused a reduction in the ratio between the indebtedness to that creditor and the value of that creditor's
collateral as of the date of the petition and the 90th day prior to the bankruptcy filing date - which prejudices other creditors holding unsecured claims.

Please note: This information is not intended as legal advice, or as a substitute for legal advice. It is for informational purposes only.

Reprinted with permission from the Covering Credit Newsletter

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