Preference Attacks To Recover Prepetition Compensation Paid to Consultants of Troubled Companies

While trade vendors and other unsecured creditors may be familiar with such claims, there are nuances to preference litigation against prepetition consultants that add layers of complexity not generally present in typical preference actions.  While the same defenses against other preference claims  are available to prepetition consultants, application of the defenses in this context requires consideration of certain factors that are not often scrutinized in the garden variety preference case.

Understanding the particular issues affecting employees/consultants is necessary for developing the best approach to prosecute or defend this type of claim.  Familiarity with these issues could help minimize the risk of future litigation if taken into consideration by a consultant before he or she decides to enter into a consulting agreement with a troubled company that is contemplating a bankruptcy filing.

Preference Claims and Defenses

Generally speaking, to recover a payment as a preference under section 547 of the Bankruptcy Code, the plaintiff must establish that it was made to or for the benefit of the creditor, on account of an antecedent debt owed by the debtor to the creditor before the transfer was made, while the debtor was insolvent, within 90 days of the bankruptcy filing (or within one year if the payment was made to an insider), and that the payment enabled the creditor to receive more than it would under a Chapter 7 case if the transfer had not been made.