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Preference avoidance actions provide a means for trustees, debtors, and creditors committees to recoup money paid to a creditor for its redistribution among all creditors during bankruptcy. All payments made by debtors to creditors within 90 days of filing a business bankruptcy in Delaware may be examined for preference or fraudulent conveyance.
The underlying concept behind preference avoidance under §547 of the U.S. Bankruptcy Code is that the debtor intended to give preference to one creditor by paying off a debt when the debtor was insolvent or intended to file bankruptcy, resulting in unfair treatment of other creditors. In such actions, the plaintiff must also prove that the creditor received more payment than was receivable through a Chapter 7 bankruptcy.
Fraudulent conveyance is another common adversary proceeding brought in Delaware business bankruptcy litigation. It is an avoidance action that falls into two categories:
Available defenses used in preference avoidance by our Delaware bankruptcy attorneys often include:
Contemporaneous exchange. A contemporaneous exchange given to the debtor makes the transfer legitimate. The value exchanged is equal to the amount transferred. An example is a simultaneous exchange of equipment worth $250,000 and a $250,000 payment.
Ordinary course of business. If the agreement for exchanging payment for goods and services is net 45, and the transaction occured regularly on a net 45 basis, then an ordinary course of business took place.
New value. The creditor must continue to deliver service or goods for which no payment is received after the potential preference avoidance action. Even though the initial transaction may be considered a preference, continued delivery with no payment creates a new monetary value that may cancel out the preference.
To discuss possible defenses in a preference, avoidance, or fraudulent conveyance proceeding, contact Werb & Sullivan online or call us at (302) 652-1100, today.