If you are a true Packers fan, you know that January 23, 2011 was one of the most exciting days in recent memory for the Packers’ defensive line. The Packers were playing Bears in the NFC Championship Game at Soldier Field. By the time the 4th quarter rolled around we were winning, but it was an ugly game. Then, seemingly out of nowhere, Packers defensive tackle B.J. Raji intercepted a pass and returned it for a touchdown. The 338-pound Raji then broke into a very memorable hula dance, and the Packers went on to win that game, and the Super Bowl.
Preference defense is not as exciting as the Packers defense, but it can be just as critical to your success as the Packers defensive line is to the team’s success.
A preference defense is necessary when a preference action is filed against your business. Preference actions are the technical legal name for the notice you get when a customer files for bankruptcy. They exist because the court has the power to claw back any funds paid to you by someone who has filed for bankruptcy if the payment was made within 90 days of the bankruptcy. Policymakers gave courts this power because they don’t want people who are planning on filing bankruptcy to pay off their favorite creditors and leave others in a lurch. This is where the term preference action comes from.
Policymakers also wanted to make sure that debtors couldn’t transfer assets to a creditor just to keep them out of the bankruptcy estate. They wanted to make it easy for the courts to claw back assets if they thought anything other than business as usual was going on.
Although preference actions were created to protect against shady behavior, most preference actions are filed against a business that was just going about its business as usual, not suspecting that its customer was in financial distress. No wrongdoing is necessary on the part of the creditor for a preference action to be filed against them.
Fortunately, there are several defensive tactics that creditors can rely on if served with notice of a preferential action. For example, if the payment or transfer of other assets to you was made at the time of the sale or transfer of something of value to the debtor, and that is how you typically did business, and how you intended this transaction to go, you may be able to use a contemporaneous exchange defense. This defense is common, and is why a lot of contracts specify that they are cash-on-delivery (COD).
Most preference actions settle, so it is a good idea to talk with an experienced bankruptcy attorney about what your options are if you are served with one. It is understandably frustrating to pay someone to protect money that is rightfully yours, but it is better to pay a little than to pay it all back to a court. Just like with the Packers, a little defense can help you take your deals to the end zone.