Although most in-house attorneys, credit managers, and other professionals dealing with credit issues have encountered preferential transfers, fraudulent transfer actions against trade creditors are not as common. This article explains defending wrong payor fraudulent transfer cases, offers guidance in defense strategy and analysis, and explores how to prevent these actions in the first place.
Avoidance Actions: A Brief Overview of Preferences and Fraudulent Transfers
A bankruptcy trustee can sue to recover or "avoid" payments that a creditor received from a debtor prior to a debtor's bankruptcy. (A debtor in possession can also avoid pre-petition transfers. However, because most avoidance actions are brought by a Chapter 7 trustee or a liquidating trustee in a Chapter 11 case, for simplicity's sake this article will generically refer to the party seeking to avoid a pre-petition transfer as "the trustee.") A trustee is empowered with a variety of avoidance actions. The most common is avoiding a "preference" under section 547 of Title 11 of the United States Code (the Bankruptcy Code). An important distinction for the discussion below: In order for the trustee to claw back a payment as a preference, section 547 requires that the payment be "on account of antecedent debt owed by the debtor." In other words, for it to be a preference, the debtor must have paid its own obligation.