Many preference defendants are not aware of the fact that if their pre-petition contract with the debtor is assumed or assigned in the course of the bankruptcy, then such assumption/assignment will generally serve as a bar to recovery for receipt of alleged preferential transfers.
Under established Third Circuit law, the assumption or assignment of a contract prohibits recovery for pre-petition transfers made to such creditor during the 90 day preference period. See Kimmelman v. Port Authority of New York and New Jersey (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311, 321 (3d Cir. 2003) (holding that Section 547(b)(5) could not be satisfied if the executory contract at issue was assumed pursuant to a court order because “had the creditors not received the payments prepetition, they would have received amounts reflecting those sums, in any event, when the Bankruptcy Court approved the cures of assumed agreements.”).
Accordingly, a preference defendant should consult with counsel to determine if its pre-petition contract with the debtor has been assumed or assigned by court order, which may in turn serve as a complete defense to a threatened or pending preference action.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.