In the last few days, hundreds of bankruptcy complaints against trade creditors were filed by bankrupt Chapter 11 debtor RadioShack. The crux of the complaints concern “preferences” requesting the return of money received from bankrupt debtors prior to the bankruptcy filing for goods or services sold. However, before you or your business start writing a check to return hard earned money, you should know that you may have defenses that can be asserted.

What is Preference?

To start, a 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 (in this instance, RadioShack) to avoid these payments if the transfers were to or for the benefit of a creditor on account of an antecedent debt but while the debtor was insolvent (unable to pay the debts owed).

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.

Tight Deadline from Service

Once the complaint is served, there is a tight deadline of 30 days to respond. If you’re a trade creditor that did work with RadioShack, it’s advisable that you alert your billing, reception and other departments of this important pleading. You don’t want it sitting on someone’s desk who may be out on vacation and miss the opportunity to defend yourself.

Defenses to the Complaint

Although the Bankruptcy Code gives the debtor-in-possession the power to recover these transfers, your business may still have certain defenses. These defenses include:

  • Payments made within the ordinary course of business;
  • New value for payments / payments made outside of the 90 day preference period; and
  • Settlements during the bankruptcy case and/or payments made via C.O.D.

Information to Gather Immediately

In order to determine if you have any defenses and properly respond, it is critical to analyze your situation with bankruptcy counsel. A thorough review of the full payment history, at least a year before the bankruptcy filing, is essential. This information includes:

  • All correspondence, contracts, emails and the like with the debtor;
  • A copy of all invoices, showing invoice date, terms and amount of each invoice;
  • A copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your bank account;
  • Number of days elapsed between date of invoice and date payment was received; and
  • Personnel involved with the debtor’s account so they can advise how payments were made, applied and any unique issues with the debtor.

It is critical to properly analyze this information and formulate a corresponding defense.

For more information on defending a preference action, or other bankruptcy issues, please feel free to contact Stark & Stark’s Bankruptcy & Creditor’s Rights Group to discuss your situation.