The Preference Payment Predicament

Most companies extend unsecured credit to their customers as a routine and often daily part of their business—a supplier ships parts to its customer along with an invoice and, at some point thereafter, the customer submits payment. Life is good.

Imagine a scenario, however, where a supplier ships $1,000,000 worth of parts to its customer. An invoice is sent and sometime thereafter the supplier receives payment. Shortly after payment is received and applied, the supplier receives a letter from a U.S. Bankruptcy Trustee informing the supplier that its customer has filed for bankruptcy protection and demands the return of the $1,000,000 because such payment was made by the customer in the 90 days preceding the customer's bankruptcy filing. The trustee's letter also accurately points out that under the Bankruptcy Code (Code) a trustee may avoid and recover such "preferential" payments for the benefit of the bankruptcy estate. Finally, the letter indicates that failure to