Tips for Protecting Your Money from a Bankruptcy Trustee
By: Cathy Moore, Counsel at Bradley Arant Boult Cummings
The policy rationale behind the preference statute is to prevent a troubled company from making pre-bankruptcy payments to certain favored creditors, thereby leaving less for distribution in bankruptcy to similarly situated creditors, and to discourage aggressive collection tactics against financially distressed companies.
As applied, however, the statute goes far beyond these policy objectives. Intent is not an element—if a payment falls within the applicable preference period, and no defenses apply, the payment may be recovered as a preference. While the potential for preference liability is an unavoidable reality of doing business, there are steps you can take after being served with a preference action—or better yet, before your customer ever files for bankruptcy—to reduce your exposure.
Section 547 of the Bankruptcy Code permits the trustee to recover certain payments made by the debtor to a (non-insider) creditor within 90 days before the date of the bankruptcy filing. Specifically, the trustee may avoid any transfer:
- Made to or for the benefit of a creditor;
- Made for or on account of an antecedent debt;
- Made while the debtor was insolvent;
- Made within 90 days of the filing of the bankruptcy petition;
That allows the creditor to receive more on its claim than it would have received in a chapter 7 liquidation case if the payment had not been made and the claim paid through the bankruptcy proceeding.
About Cathy Moore
Cathy Moore represents creditors and debtors in state, federal, and bankruptcy courts. She is known for her attention to detail and determination to find the legal solutions that are tailored to meet the complex business needs of her clients. Cathy practices in the firm’s Bankruptcy, Restructuring, and Distressed Investing Practice Group, as well as the Complex Business Litigation Team.
Cathy is a member of the American Bar Association, the New York State Bar, the Alabama State Bar and the Birmingham Bar Association. She received her B.A., summa cum laude, in English and Political Science from Fairfield University. She received her J.D. from the University of Virginia School of Law.