SAFE ASSUMPTION: Another Court Rules That Payments Under An Assumed Contract Cannot Be Clawed Back As Preferences

TRADE CREDITORS THAT RECEIVE PAYMENTS FROM DISTRESSED CUSTOMERS UNDER SUPPLY AGREEMENTS, LONG‑TERM PURCHASE ORDERS, AND OTHER EXECUTORY CONTRACTS CAN REST A BIT MORE ASSURED THANKS TO A RECENT DECISION BY THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF IOWA.

In In re Mercy Hospital, the Iowa bankruptcy court dismissed a preference action by relying on the well-established principle that when a debtor assumes an executory contract under section 365 of the Bankruptcy Code, the bankruptcy estate cannot later claw back payments made before the bankruptcy filing under that same contract as preferences under section 547. In the court’s words, assumption under section 365 and preference recovery under section 547 are “mutually exclusive remedies.”