A trade creditor is certainly frustrated when a customer with a large unpaid balance files Chapter 11, leaving the collectability of the claim in question. But even more frustrating is the risk that the creditor also may be compelled to disgorge “preference” payments that the creditor received within the 90 days of the debtor’s bankruptcy filing in addition to potentially recovering only pennies on the dollar on its claim.
Adding even further insult to injury, debtors frequently pursue preference claims en masse against their creditors and use the recoveries from those preference claims to fund their Chapter 11 cases, such as by paying higher priority administrative expense claims. This is the harsh reality seen in the recent Chapter 11 cases of Sears/Kmart and Southern Foods (Dean Foods).
One potential shield against this practice has been the “home field” defense to small preference claims. Specifically, the U.S. Code provides that small claims must be brought in the defendant’s home district, rather than in the district in which the bankruptcy case is pending if such claims fall below a certain dollar amount. Congress increased that dollar amount from $13,650 to $25,000 when it passed the Small Business Reorganization Act of 2019 (SBRA), which became effective Feb. 19, 2020.Click here to view the full article