Payment Claw-Backs

Section 547 of the Bankruptcy Code allows a debtor or trustee to recover or “claw-back” certain payments or “preferences” made to a creditor a short time (usually 90 days) before a bankruptcy filing. In the construction context, a bankruptcy estate could claw-back good-faith payments for properly performed construction work. Protecting payments from claw-backs by the bankruptcy estate requires careful transaction structuring.

Case Study

Recently, in Gold v. Myers Controlled Power, LLC, the trustee of a bankrupt subcontractor tried to recover an alleged “preferential transfer” made by joint check to the debtor and supplier within 90 days of the bankruptcy filing. In response, the supplier made two main arguments against the trustee’s recovery of the alleged preferential transfer.

First, the supplier argued that the joint check was not a preferential transfer because it did not belong to the debtor’s estate. Instead, the joint check was held in trust pursuant to a joint checking agreement.

Second, the supplier argued that even if the joint check was a preferential transfer, the bankruptcy code’s exception to claw-backs of “substantially contemporaneous exchanges” for new value applied.

This exception applies where a transfer is both

  1. intended to be a contemporaneous exchange for new value given to the debtor
  2. in fact a substantially contemporaneous exchange

The Result

The court rejected the first argument because the joint checking agreement originated during the 90-day preference period and involved a transfer of property interest, rendering the joint checking agreement itself a preference. The joint checking agreement involved the transfer of a property interest because the debtor parted with an interest in check proceeds.

The court also rejected the supplier’s second argument. Though the court found intent to create a substantially contemporaneous exchange for new value, the respective gaps in time of 44 days and 23 days between equipment release and payment were “too long to be considered truly ‘contemporaneous’.”

What This Means for You

In short, if a debtor’s potential bankruptcy is imminent, you may need to protect yourself from potential payment claw-backs. A joint checking agreement within the 90-day preference window likely is not enough. Instead, you should carefully structure transactions to fall within one of the exceptions to claw-backs outlined in the bankruptcy code, such as contemporaneous exchanges for new value.


Brought to you by

portrait of Karen Stemland

Karen M. Stemland
Of Counsel

If you have questions about construction bankruptcy issues or other topics in construction law, contact Karen Stemland at kstemland@woodsrogers.com or (434) 220–6826.