The article discusses the dramatic decrease in home sales over the past few years and the consequential downturn in homebuilding. The increased number of companies subsequently filing for bankruptcy, slashing prices, and selling assets only indicates that those still in the business need to be more aware of what the short, or possibly, long-term effects of a decrease in homebuilding can mean for their business.

You can read the full article here.

What is Preference?
A potential preference is a payment received from a debtor, made within 90 days of the bankruptcy filing.  Bankruptcy Code section 547(b) allows a bankruptcy trustee or debtor-in-possession to avoid this payment, if the transfer was to or for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent.  When Congress enacted the Bankruptcy Code, the policy behind preferences was to level the playing field for all creditors by not allowing a creditor to receive more than it would have within the debtor’s bankruptcy case. 

Proper Response to the Preference Demand Letter Critical
Although the Bankruptcy Code gives the power to recover these transfers, your business may have certain defenses to eliminate, or at least lessen, your exposure. These defenses include: payments made within the ordinary course of business; contemporaneous exchange for new value; payments made outside of the 90 day preference period; settlements during the bankruptcy case; and/or payments made via C.O.D.  To determine if your transaction qualifies for one of these defenses and make the proper response, it is imperative review the account information.

Information Needed to Determine Defenses
Prior to contacting your attorney, you should gather the full payment history at least a year before the bankruptcy filing.  This information includes:
1.    all correspondence, contracts, emails and the like with the debtor;
2.    a copy of all invoices, showing invoice date, terms, and amount of each invoice;
3.    a copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your bank account;
4.    number of days elapsed between date of invoice and date payment was received; and
5.    personnel involved with the debtor’s account, so they can advise how payments were made, applied and any unique issues with the debtor. 

Once your attorney has this information, it will raise a number of questions  For instance, are some of the payments alleged as preferential outside the 90 day period?  Or, are the payments made within the ordinary course of your industry?  However, how do you determine your industry compared to a similar industry? Do you need an expert witness?  These and many more questions should be addressed with your bankruptcy attorney prior to sending any response.   

Stay tuned for future posts within the coming weeks dealing with a more detailed discussion on specific preference defenses, including ordinary course of dealings, contemporaneous exchange for new value and industry specific issues for the building and construction, REITs and commercial developers, and other service providers.

In the interim, for more information on defending a preference action, or other bankruptcy issues, please feel free to contact Tom Onder, Stark & Stark’s Bankruptcy & Creditor’s Rights Group at (609) 219-7458 or via email a tonder@Stark-Stark.com.