What You Need to Know about Preferences: Practical Considerations for Lessors

The pain of a preference action is much easier to accept in those situations where a creditor knowingly accepted a preferential transfer, but did so in the hope that a bankruptcy would not be filed or the preference suit would never be commenced. This occurs when a lawyer was consulted before the collection efforts were made, and the creditor was advised that the collection process might actually result in the recovery of funds that may have to be repaid if the obligor files for bankruptcy 90 days hence. We have seen a glint in the eye of many a client when deciding whether to accept a payment, or additional collateral from a financially strapped customer when we use the old adage: “Real men take preferences, wimps file proofs of claim.” Of course, the advice to knowingly accept a preferential transfer should only be given after consideration of the cost of obtaining the potentially preferential transfer. If legal action has to be taken to obtain a judgment or the leverage necessary to get payment, the cost may not be justified if a bankruptcy filing is inevitable. Often the creditor has very little information that will allow it to predict with any amount of accuracy the likelihood of a customer filing a bankruptcy petition in the succeeding 90 days.

The policy behind Section 547 makes some sense to most bankruptcy lawyers while leaving the typical preference defendant feeling like it is the victim of a grave injustice. Section 547 was intended to redistribute assets of the debtor to creditors to alleviate the unfairness resulting from payments made by debtors to favored creditors prior to the initiation of the bankruptcy case. It was intended to prevent creditors who had increased their collection efforts and pressured or sued the debtor for payments prior to the petition date to profit from such pressure or lawsuit to the disadvantage of other creditors who had failed to take such measures. Section 547 empowers the trustee or the debtor in possession to recovery money or property that the debtor owned prior to the bankruptcy and to redistribute that money more equitably to creditors. The idea was that money and property recovered from preference actions would be redistributed to creditors more fairly than what occurred pre-petition when only the most vocal, litigious or important creditors were paid.