A Preference Reference: Common Issues that Arise in Delaware Preference Litigation

July 2012E-Books


Under Chapter 5 of the Bankruptcy Code, a trustee, debtor or assignee of the debtor may recover payments made by the debtor during the ninety days prior to the commencement of a bankruptcy proceeding. The policy behind allowing plaintiffs to bring preference claims is twofold: (i) to discourage creditors from aggressive attempts at collecting from a debtor and (ii) to distribute assets evenly among all creditors by recovering payments that constitute “avoidable transfers.”

As more companies file for bankruptcy, more creditors are forced to defend themselves in preference actions. The purpose of this booklet is to address common issues that arise in preference litigation. The information provided here is intended to provide businesses, as well as their counsel, with a better understanding of the claims and defenses that arise when a party is defending a preference action. Where possible, we have cited cases from the Third Circuit Court of Appeals, the U.S. District Court for Delaware, or the U.S.
Bankruptcy Court of the District of Delaware.

No two preference claims are the same. The findings of the courts in the cases discussed herein are obviously case specific. Any individual or organization that receives a demand letter or adversary complaint seeking the recovery of preference payments should consult with an attorney. Finally, since these materials are intended for a more general audience, we have tried where possible to avoid using jargon understood only by attorneys. For those in the legal profession, we have added endnotes with citations for much of the information offered.

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