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Showing posts from May, 2014
THE LESSER KNOWN DEFENSES TO PREFERENCE ACTIONS

     If you or your company have had any exposure to adversarial proceedings you are likely familiar with the terms ordinary course, new value and contemporaneous exchange for new value. Apart from these “better known” defenses to preference claims, the Bankruptcy Code provides for additional defenses which you may not be as familiar.

     These “lesser known” defenses are: the Earmarking, Conduit and Agency defenses. Because they utilize the similar terminology and application, they are easily confused. In fact, often times they are improperly combined into a single defense! Just like the “standard” preference defenses listed above, if any of these defenses apply, they are a complete defense to an otherwise avoidable transfer.

The Earmarking Defense: In large construction projects developers/owners (in this case the “debtor”) will often seek funding from a third party lender (bank) in order to finance the project. These third party le…