Bankruptcy Court Takes Harsh Stance Against
Trustee for Duplicative Action Against Vendor
Preference Relief
By Bradley D. Blakeley

Does a debtor get two bites at the proverbial apple, first, by objecting to your claim and then, second, by filing a preference action against you? No, not if the case is litigated before Judge Lloyd King in the District of Delaware.

As a credit professional, you receive notice that one of your customers has filed for bankruptcy. The debtor schedules your company's claim for less than the balance owed, and you timely file your proof of claim. Thereafter, the debtor objects to your proof of claim, but you resolve the objection and the bankruptcy court approves your settlement. Now, all you have to do now is wait for your distribution check, right? That is what creditor TKA Fabco Corp. ("TKA") thought before it was served with a preference complaint by the liquidating trustee in In re Cambridge Industries Holdings, Inc.

In corporate bankruptcy filings, debtors often resolve claim objections before seeking bankruptcy court confirmation of a plan of reorganization. Once a plan is confirmed, debtors are often succeeded by liquidating committees, disbursing agents or other entities that are assigned avoidance powers by the debtor and are required to make distributions under the plan. These entities often pick through any "assets" of the debtor to see if there are any matters worth pursuing for the benefit of creditors, unsecured and administrative alike. Often, especially in recent years, these postconfirmation entities will file preference actions seeking the recovery of transfers made by the debtor to the creditor within the ninety days preceding the petition date. Some bankruptcy courts, such as the one in bankruptcy case of In re Cambridge Industries Holdings, Inc., may come to the rescue of the creditor and prevent that creditor's claim from being relitigated, if it was previously resolved through a claim objection.

In In re Cambridge Industries Holdings, Inc., TKA timely filed its proof of claim for $173,425.63, to which the Debtors objected. The parties resolved the claim objection and TKA received an allowed claim for $166,672. The settlement was approved by the bankruptcy court, and TKA received its first distribution under the confirmed plan of reorganization. Thereafter, the Liquidating Trustee filed a preference complaint alleging that TKA received avoidable transfers of $91,227.

TKA filed a motion for summary judgment asserting that the Liquidating Trustee was precluded from religating the same claim. The bankruptcy court found that the language of 11 U.S.C. section 502(d) and principles of fairness do not permit sandbagging a creditor by first objecting to and obtaining a stipulated order allowing the claim in a reduced amount and, after the claim objection has been resolved, commencing an adversary proceeding alleging that the creditor received an avoidable preference. The court found that 11 U.S.C. section 502(d) mandates that the resolution of the Debtor's claim also resolves any potential preference claim by the Debtor against TKA.

1. So next time you receive that claim objection in the mail, it may be a blessing in disguise. If you are later the subject of a preference action, you just might find the bankruptcy court at your protection.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Summer 03