Preference Actions in a Bankruptcy Case

In November 2010, the trustee for the Circuit City Stores, Inc., liquidating trust filed more preference actions.  Some of the actions were against software vendors who provided services to Circuit City Stores, Inc.

Preference Actions

Preference actions allow a trustee to recover from creditors payments made by the debtor during the period before the bankruptcy filing.  Preference claims remedy preferential treatment for the benefit of all the estate’s creditors. 

Preference actions are discussed in 11 USC Section 547.  The trustee must establish the payment was:  (1) transfer, (2) of an interest of the debtor in property, (3) made to or for benefit of a creditor, (4) for or on account of an antecedent debt (debt incurred before the alleged preferential transfer0, (5) made while the debtor was insolvent, (6) made within 90 days or 1 year, in the case of an insider, and (7) resulted in the creditor getting a greater distribution than it otherwise would have in a Chapter 7. 

What is a Transfer?

According to Section 101 of the Bankruptcy Code, a transfer is the creation of a lien, retention of title as a security interest, foreclosure of a debtor’s equity, or disposing of or party with property or an interest in property.  Whether a transfer is made while a debtor is insolvent depends on the balance sheet as to whether liabilities exceed assets. 

Because a creditor does not get more than it otherwise would have in a Chapter 7, the trustee is not able to recover payments from a secured creditor. Property of the estate includes all legal and equitable interests of the debtor at the beginning of the case according to 11 USC Section 541. Usually a trustee has 2 years from the bankruptcy petition date to bring the preference action.  The trustee has burden of proof in a preference case.