Critical Vendor Defense to a Preference Claim? Not so Fast!

Trade creditors face the risk of preference liability in too many bankruptcy cases. The Bankruptcy Code provides the subsequent new value, ordinary course of business and contemporaneous exchange defenses to preference liability. However, that has not stopped creditors from thinking outside of the box and asserting novel defenses to reduce their preference risk.

In a recent case, a creditor/preference defendant asserted a full defense to a preference claim based on the creditor’s status as a “critical vendor,” whose pre-petition claim was paid pursuant to an order approved by the bankruptcy court. The United States Bankruptcy Court for the Eastern District of New York, in In re Personal Communications Devices, LLC, rejected this novel “critical vendor defense.” The court relied on the absence of a waiver of preference claims in the order approving the payment of the vendor’s pre-petition claim. The court also rejected the creditor’s creative “hindsight” argument that the bankruptcy court would have approved, as part of the critical vendor arrangement, the debtor’s post-petition payment of the creditor’s pre-petition invoices that were paid by the alleged preference payments if the debtor had not made these payments.