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What Is Preference Litigation

preference litigation.jpgPreference litigation refers to a lawsuit that has been filed by a debtor party, or a bankruptcy trustee, in an attempt to seek the return of payments made by the debtor company before it entered bankruptcy. Facing preference litigation is often extremely frustrating for creditors. If you are dealing with a preference claim, contact an experienced San Jose creditors' rights lawyer for immediate legal help.

When Does Preference Litigation Occur?

A preference claim can only occur when the following conditions are met:

  • A payment was made by the debtor;
  • The payment was made on old debt;
  • The debtor company was legally insolvent at the time of the payment;
  • Bankruptcy was filed within 90 days of that payment; and
  • The creditor in question received more than they would have had their claim gone through bankruptcy.

The policy goal is twofold: First, preference claims try to keep creditors from getting more than their 'fair share' from an insolvent company. This is done by limiting the ability to collect payments just prior to when a company goes into bankruptcy. Further, preference rules are meant to discourage any especially aggressive debt collection action by creditors if they feel that a company might be on the verge of insolvency.

How to Defend Against a Preference Claim

  • Ordinary course of business: Preference actions are only available to recoup payments from the creditors that unfairly tried to squeeze value out of an insolvent company immediately prior to bankruptcy. If a creditor received payments in the ordinary course of business, those payments are not subject to preference action. There are two things that creditors must show in order to prove that a payment was received in the ordinary course of business. First, the recent payments must not have been the result of an overt and aggressive debt collection attempt. Second, the payments received must have been similar in amount and timeframe to previously received payments. For example, if a debtor company pays a creditor the same amount every month, those payments are exempt from any preference action.
  • New exchange for goods and services: If new goods or services were exchanged at the time of the payments in question, or after the payments in question were received, then those payments are also not subject to preference action. Preference action can only be taken against payments that were made for an older debt.

Contact an Experienced San Jose Creditors' Rights Lawyer

Once a creditor receives a preference claim letter from a debtor or a bankruptcy trustee, they should speak to a qualified San Jose creditors' rights lawyer immediately. Preferences claim demands must be taken seriously. Your attorney may be able to raise a defense in your case or possibly settle the action before any lawsuit is filed. At Diemer, Whitman & Cardosi, LLP we have extensive experience defending creditors in preference action cases. We serve clients throughout the Bay Area, including Mountain View, Sunnyvale and Cupertino. Call our office today at 408-971-6270 to schedule a free legal consultation.



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  • Santa Clara County Bar Association | 1917
  • American Inns of Court
  • CWL | California Woman Lawyers
  • Bay Area Bankruptcy | Forun
  • The State Bar of California
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