Creditors are often confused by the concept of preferences, which are best understood by reference to their policy justification. Assignments, like bankruptcy and other similar proceedings, are collective proceedings – the debtor transfers all of its property to a disinterested third party who administers that property for the benefit of creditors. Without a prohibition, companies in trouble would simply pay off their favored (or, “preferred”) creditors before making the assignment, depleting assets available for everyone else.
The law generally does not punish debtors for making preferential transfers. Instead, it looks to restore the debtor’s property and the creditors’ claims to the position they would have occupied at the time of the assignment but for the preferential transfers. Avoidance of the transfers is the mechanism for accomplishing this.
Not all transfers made before the assignment are preferential. In general, for a transfer to be an avoidable preference, the following requirements must be met:
The governing state law may impose additional requirements and all states with a preference statute will also set out defenses that the creditor may assert.
This summary belies the complexity of preference law. You need to consult with your lawyer to know whether the Assignee in any particular assignment can seek to recover a preference from you and what defenses you may have.
Note: The information in response to these questions is general in nature. Creditors in assignment cases should determine the state law governing the particular matter they have a claim in and applicability of the specific law to their specific situation. DSI will address general inquiries regarding general assignments; however, such responses should not be considered the equivalent of legal advice from a lawyer or professional retained by the creditor for the specific purpose of answering questions related to any particular matter.