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The Chapter 11 Giveback: Preventing Preferential Transfers When Negotiating Settlement Agreements with Defaulting Tenants
You negotiated a settlement for your landlord client with a tenant that had not paid rent for a number of months, and, as part of the settlement, you recently received all the defaulted payments. Shortly thereafter, however, the tenant commenced bankruptcy proceedings. Moreover, accompanying the notice of commencement of bankruptcy was a summons and complaint against your client in which the debtor/tenant seeks the recovery of every settlement payment made, claiming they were preferential transfers.
You check '547 of the Bankruptcy Code and confirm that a preferential transfer is a pre-petition transfer of property of the debtor's estate, to or for the benefit of a creditor, in the payment of an antecedent debt, made while the debtor was insolvent and within 90 days of the bankruptcy, and which enabled the creditor to receive more than the creditor would have received if the payment had not been made and the creditor received whatever it would have received under a hypothetical Chapter 7 liquidation.
Accordingly, if the settlement payments exceeded your security deposit, the settlement payments may well qualify as a preferential transfer. Moreover, you know from your negotiations with the debtor that it had virtually no free assets, ie, they were all subject to the security interest of its lender; hence, the debtor may well have been insolvent at the time of the settlement payments. Thus, the settlement payments enabled your client to receive more than it would have received in a Chapter 7 liquidation. In such a circumstance, one must then turn to the defenses that are available. The problem exacerbates if none of the defenses are available.
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