On September 9, 2013, Furniture Brands International (“Furniture Brands”) and various related entities filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  We initially published a blog post about the filing here: Furniture Brands Files for Bankruptcy in Delaware Seeking to Sell Assets

On August 1, 2014, the Debtors’ confirmed chapter 11 plan became effective, thereby creating the FBI Wind Down, Inc. Liquidating Trust (the “Trust”) and appointing Alan D. Halperin as the Trustee.  We recently were informed that the Trustee has begun sending out preference demand letters, informing recipients that if they do not settle their liability, he will bring a preference lawsuit.  The Trustee will argue that the transfers, or payments, received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 and 548 of the United States Bankruptcy Code.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, the Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

If you have received one of these demand letters and would like to discuss your options, feel free to give us a call.  Note that until we are retained, however, we can only provide general advice as our conversation will not be protected by the attorney client privilege.