In my last blog, I described what constitutes a preferential transfer under the Bankruptcy Code. Now I’ll go into a few of the defenses a creditor might have to a preference lawsuit by the bankruptcy Trustee. These defenses, as well as several others, are set forth in Section 547 of the Bankruptcy Code.
Contemporaneous Exchange for New Value
One defense a creditor might have is that the transfer was a contemporaneous exchange for new value. This means that the debtor paid the creditor while at the same time receiving something of value. The debtor and creditor must intend for there to be a contemporaneous exchange for new value, the exchange must in fact be contemporaneous, and the debtor must have received new value for the transfer.
Payment Made in Course of Business
A second defense is that the payment to the creditor was made in the ordinary course of business. An example of this would be if the debtor was a sole proprietor. Every 30 days he received an order from creditor, and paid the invoice 10 days later. The debtor paid the $10,000 invoice as usual and then filed bankruptcy a month later, within the preference period. If the Trustee brought a preference action to recover that payment, the creditor would have the defense that the payment was made in the ordinary course of their business.
There is also a defense for purchase money security interests. This defense will protect a creditor who loaned money to the debtor to purchase specific property. If there was a security agreement that describes the property, the funds are used to buy that property, and the creditor perfects its security interest in the property within 30 days after the debtor purchases it, then the creditor would have a defense to a preference action.
Another defense is that the payment was for a domestic support obligation. If the payment was to pay child support, alimony, or any other domestic support obligation, a preference action would fail.