State Law Preferences Are Alive and Well

Prior to the enactment of the Bankruptcy Code in the late 1970s, many struggling and insolvent companies relied on state insolvency proceedings to address their financial distress. For example, the states enacted statutes or recognize a common law right permitting a debtor to make an assignment for the benefit of creditors (frequently referred to as an ABC). The laws governing ABCs generally vary by state, including with respect to the recovery of avoidable transfers such as preference claims.

However, with the enactment of the Bankruptcy Code came the emergence of a federal statutory scheme that provides a comprehensive framework for bankruptcy cases—including priority rules for a debtor or bankruptcy trustee when making distributions to creditors and a debtor’s or trustee’s right to recover avoidable transfers such as prepetition preferences. Bankruptcy cases became the insolvency proceeding of choice for many distressed companies, but still coexisted with state insolvency proceedings like ABCs—generally without conflict.