In this instance, the non-debtor may fall under the umbrella of a statutory lienholder, and will be recognized by the bankruptcy court as a secured creditor that is entitled to the full value of amounts due under the applicable construction contract and the amounts due to be paid prior to the bankruptcy filing or amounts, which were in fact paid during the 90-day preference period. For example, the non-debtor participant may be the holder of a statutory lien right in association with its contractual project obligation to provide labor, materials or services as it relates to the debtor contractor, as well as the non-debtor's right to receive payment. The good news is that there are additional defenses available to non-debtor project participants that, in certain circumstances, may result in an objective defense that no liability exists in connection with a preference demand. However, these common defenses can be subjective in nature, and they rarely convince the trustee to fully drop its preference demand. Most common among these are the ordinary course of business defense (payments were made according to ordinary business terms and the historical practice of the parties), and the new value defense (e.g., after receiving the preference payment, the non-debtor provided new goods or services to the debtor, offsetting the preference payment).
However, there are various defenses that one can raise to a preference demand.
#ONE CLICK CONTRACTOR CODE#
The Bankruptcy Code recognizes that, in many cases, payments within the 90-day preference window were not preferential in nature. The policy behind this bankruptcy law is that a debtor should not be permitted to "prefer" one creditor over its other creditors, and any amounts paid out immediately prior to bankruptcy should be brought back into the bankruptcy estate for a more even distribution among the debtor's entire list of creditors. This preference period is extended to one year if the payments were made to an "insider" such as a family member of the debtor's owners or certain business affiliates. The general rule is that a trustee may seek the return of funds paid by the debtor to third parties in the 90 days prior to the bankruptcy filing. Preference claims have become a regular occurrence as bankruptcy trustees hunt for funds available to pay creditors. Below is a discussion of strategies on how project participants are able to address preference demands that are often overlooked in these disputes. Many of these defenses are available to all payment recipients, and there are particular defenses that specifically apply to project participants given the contractual relationships among these parties. The good news is that non-bankrupt project participants have several defenses that may reduce or completely eliminate liability in connection with preference demands. These demands often take the form of the letter from the debtor's or trustee's attorney (sometimes years after the bankruptcy was filed) and can be followed by a lawsuit filed in the bankruptcy court if the payment demand is not resolved in the debtor's bankruptcy case. The bankruptcy filing of a construction project participant will likely lead to payment stoppages and project disruptions, and on top of that, a trustee can seek to claw back partial payments received by other contractors, subcontractors or suppliers from the debtor. Other project participants not involved in the bankruptcy can be understandably upset when they learn about this aspect of bankruptcy law. These are often referred to as "preference demands." In addition, the bankrupt company (debtor) or a court-appointed trustee (trustee) has the ability to demand the return or "claw back" of all payments made by the debtor to third parties in a 90-day period prior to the date that the debtor's bankruptcy case began. Therefore, a bankruptcy filing by a single construction project participant can cause a chain reaction, leading to financial distress, impacts to project payment systems and completion schedules, and/or bankruptcy for other participants. Because of the injunction that begins as soon as a debtor files for Chapters 7, 11 or 13 bankruptcy – called the automatic stay – creditors and collection agencies are prevented from seeking payment from the debtor.
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