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Preference Actions: Contemporaneous Exchange for New Value Defense

bankruptcy.jpgA preference action refers to a lawsuit brought under the U.S. Bankruptcy Code in which a creditor or bankruptcy trustee seeks to get pre-bankruptcy payments reversed. Under U.S. law, bankruptcy courts can automatically review all payments made by the filing business, to any party, within the last 90 days before the bankruptcy petition was filed. Courts have the authority to force individuals and companies that received inappropriate payments to compensate damaged creditors. In this post, our top-rated San Jose business bankruptcy attorneys discuss one of the common defenses that can be used to fight against preference lawsuits: contemporaneous exchange for new value.

The 'Contemporaneous Exchange' Defense: Explained

Why Does Preference Matter?

Ultimately, the point of preference rules is to ensure that insolvent companies do not transfer away their assets or pay certain debts in an unfair order immediately before filing for bankruptcy protection. This helps to ensure that bankruptcy filings stay orderly and that all creditors are treated in a fair and just manner.

Contemporaneous Exchange is About New Value

On the surface level, the contemporaneous exchange defense is relatively straightforward. If a company exchanged money for new value in the last 90 days prior to filing a bankruptcy petition, then that transaction is legally valid. For example, if a company purchased new equipment and immediately paid the vendor, then, assuming the transaction was made in good faith, that exchange is permissible. However, if a company made a large, unusual debt payment to one specific creditor immediately before filing for bankruptcy protection, that transaction is almost certainly invalid. The creditor likely went outside of the preference order when collecting the debt. A bankruptcy court would undoubtedly give extremely high scrutiny to that type of transaction.

Contemporaneousness is the Key Legal Element

In some cases, it can be difficult to determine whether or not the contemporaneous exchange defense is viable. Most often, these types of disputes come down to exactly when goods or services were exchanged, and exactly when a payment was made. The precise timing matters. For example, if a filing business paid another business on the same day that it received goods or services, then that transaction would be protected from preference lawsuits using the contemporaneous exchange defense. However, the more time that passes between the value exchanged and the actual payment, the more difficult it will be to use this defense. So, if a month passes between the new value and the actual payment, the company receiving payment may have to worry about facing a preference lawsuit.

Contact Our Business Bankruptcy Law Firm Today

At Diemer, Whitman & Cardosi, LLP, our passionate San Jose business bankruptcy lawyers have extensive experience handling all aspects of preference actions. To get immediate assistance with your case, please contact us today to set up your free case evaluation. From our office in San Jose, we represent clients throughout the Bay Area, including in San Mateo County, Marin County, and Contra Costa County.

Source:

https://www.law.cornell.edu/uscode/text/11/547

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