Preference Claims

A Syracuse, New York based grocery retailer, The Penn Traffic Company, filed for Bankruptcy in Delaware on November 18, 2009. When a company is incorporated in Delaware, it may file bankruptcy in a bankruptcy court located in Delaware. Otherwise, if a company is incorporated in New York, it would file bankruptcy in a New York court.

The 2009 bankruptcy filing was Penn Traffic’s third time in bankruptcy within the last ten years. With annual revenues of $872 million around the time of bankruptcy filing, Penn Traffic, a food retailer in the Northeastern part of the United States, operated 79 retail stores. The company provided transportation, warehousing, distribution, and retail support for C&S Wholesale Grocers, a large wholesale grocery supply company.

News on bankruptcy filings should provoke a creditor or supplier of a bankruptcy debtor to review claims against the debtor or to go over any payments recently received from the debtor. In bankruptcy, a debtor’s most significant asset may be its preference claims against creditors. The Bankruptcy Code allows a debtor to force a creditor to return the payments the debtor made to the creditor shortly prior to filing bankruptcy.

According to William B. Creim, the managing partner of the Los Angeles, CA office of Bronson, Bronson & McKinnon LLP in 1999, “preference” means: The transfer of an interest of the debtor in property, (a) to or for the benefit of a creditor, (b) for or on account of an antecedent debt owed by the debtor before such transfer was made, (c) made while the debtor was insolvent, on or within 90 days before the filing of the bankruptcy petition (or within one year before the filing if the transferee creditor was an insider), (d) that enables the creditor to receive more than such creditor would have received if the case were a Chapter 7 liquidation proceeding.

For a creditor served with a complaint alleging a preference claim, consult with an experienced New York bankruptcy attorney before complying with any payment demands. A bankruptcy lawyer will help evaluate whether defenses prohibit or limit the debtor’s ability to require the creditor to return a payment.

One preference claim defense is the “ordinary course of business defense”. The creditor details the events as to the challenged payments during the 90 days before the debtor’s bankruptcy filing to establish when and how the debtor usually paid the creditor. If the debtor’s payment during the year before bankruptcy filing is consistent with the payment schedule during the 90 days before filing bankruptcy and with industry standards, the court will not order the creditor to return the alleged preference payment.