The Chapter 11 Giveback: Preventing Preferential Transfers When Negotiating Settlement Agreements with Defaulting Tenants

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.