Nukote International Bankruptcy Case in Middle District of Tennessee Starts the Preference Recovery Process

Yesterday in the Middle District of Tennessee Bankruptcy Court, the Trust created in the Nukote International, Inc. bankruptcy began the process of filing adversary proceedings to recover preferences. So far, about 40 cases have been filed.

This is a process that generally happens after a Chapter 11 Plan is confirmed, in which the post-confirmation entity takes action on the various lawsuits it held as of the bankruptcy filing.

Here, the lawsuits make claims under 11 U.S.C. 547, which is a provision of the Bankruptcy Code that, under certain circumstances, allows a trustee to recover payments made to creditors within 90 days of the bankruptcy filing.

The basic theory is that, the debtor is presumed to be insolvent during those 90 days, and any payments made during that period were selective disbursements (a.k.a. preferential payments) to certain preferred creditors. By these actions, the trustee recovers these preference payments, puts the money into a big pot, and then distributes it evenly to all creditors.

Sounds pretty fair in theory, right? Well, in practice, these actions drive creditors crazy. “Not only did this company bankrupt on the debt, now, two years later, they’re suing me to take back some of the last money they paid me?” My response? “Yes.”

There are a number of defenses to these actions (see 11 USC 547(c)), and I’ll touch on those in a later post. Right now, I’m going to go look at the dockets to see who all is getting sued.

Things to Consider Before a Bankruptcy Preference Lawsuit

It only takes one lawsuit from a Bankruptcy Trustee to prove that, despite all the talk about fairness and equality, an avoidable preference lawsuit is one of the most unfair creations of the Bankruptcy Code. For those lucky few without first-hand experience, here’s the summary: A bankruptcy trustee may be able to sue creditors to recover payments received within the 90 days preceding the bankruptcy case filing. Lenders who have no collateral for their loans are particularly at risk for such actions.

Faced with account payments from customers who may be on the verge of bankruptcy, make sure to document all payments received during that 90-day period­ and how they were applied. These payment records will be critical to an “ordinary course of business” defense if you are sued. For material suppliers, be sure to advance new funds or sell goods after payment (thus triggering the “new value” defense) or upon cash terms (triggering the “contemporaneous exchange” defense).