On February 5, 2015, RadioShack 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: RadioShack Pulls the Plug. On October 2, 2015, the Court confirmed the Plan of Liquidation in the RadioShack cases. Pursuant to the Plan, the RSH Liquidating Trust was established, providing the Liquidating Trustee, Peter Kravitz, authority to prosecute preference actions.
From October 28, 2015 until the day this post was published, November 2, 2015, the Trustee has filed 383 (largely identical) preference actions. The Trustee argues that the transfers, or payments, received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 of the United States Bankruptcy Code. In a majority of the complaints, the Trustee “acknowledges that some of the Transfers might be subject to defenses under Bankruptcy Code section 547(c), for which Defendant bears the burden of proof under Section 547(g).”
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 been sued 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.