In a previous post (“Defenses to Preference Actions – Part I“), I explained that there are three common defenses to preference actions (also often called “preference lawsuits”) that you can use if you’ve received a demand letter from a bankruptcy trustee, from counsel to a Debtor-In-Possession or counsel to a creditors committee.
In a subsequent post I explained the “Ordinary Course of Business” Defense. Next I’ll explain the…
“Contemporaneous Exchange” Defense
The “Contemporaneous Exchange” Defense (also sometimes referred as the “Contemporaneous Exchange for New Value” Defense, but not to be confused with the “New Value” Defense), simply means that in the debtor paid money to you in exchange for something of value.
For example, if you delivered goods to the debtor, and right then and there the debtor paid you for those goods, then that would be a contemporaneous exchange for new value. If a trustee pursued a preference action against you for that transaction, then you would likely be successful employing the “Contemporaneous Exchange Defense.”
Of course, the devil is in the details and the facts of a particular situation are the key to a successful or unsuccessful defense.
Timing, for example, is an important element. If you deliver goods or perform a service for the debtor without receiving payment. Then a month later you get the debtor to pay what they owe you, you have a much weaker “contemporaneous exchange” defense. Why? Because the exchange was not contemporaneous.
Getting into the nitty gritty a bit, there was a big court decision in 2007 that revolved around the issue of credit transactions. (Hechinger Investment Company of Delaware, Inc. v. Universal Forest Products, Inc., Nos. 06-2166, 06-2229, 2007 U.S. App. LEXIS 13155 (3rd Cir. June 7, 2007)) And the court decided that even in the instance of a credit transaction–in other words, where there’s a delay between the transaction for goods and the actual payment for those goods–it can still be valid to invoke the “contemporaneous exchange” defense.
The main takeaway for any creditor involved in transactions such as these is to be aware that trustees can pursue preference actions against you, even for seemingly valid and legitimate transactions. However, you also have some good defenses at your disposal.
The key to defending yourself is to have an experienced bankruptcy lawyer, particularly one who knows the ins and outs of preference actions.
Our experience both representing trustees and representing creditors against trustees gives us unique perspective on how to help our clients deal with preference actions.
If you’re facing a preference action in New York and need a skilled and experienced lawyer to help you navigate, please contact me for a free initial consultation.