Recent Developments in Sofa Express, Inc. Bankruptcy Litigation

Sofa Express, Inc. filed nearly 40 avoidance actions and preference lawsuits in December, 2009. MGLAW has already been engaged in this bankruptcy case for over two years. We anticipate representing multiple defendants. By representing multiple defendants, MGLAW will work as hard as possible to achieve economies of scale to keep overall costs down as much as possible. Answers to the complaints or other responsive pleadings are due 30 days from issuance of the summons. For most defendants, that means that an answer must be filed towards the end of January. The first pretrial conference is scheduled for February 22, 2010 at 2:00 p.m. Central. If you have questions about this subject, please contact Dan Lins at 615-846-8000, or cdl@mglaw.net.

WHAT IS A PREFERENCE?

One of the fundamental tenets of bankruptcy law is the notion that equally situated creditors should receive an equal distribution of the debtor's property. This balance is upset when, in the months leading to bankruptcy, a company picks and chooses which creditors to pay. Often, there is no intent to prefer one creditor over another. The preferential payment may simply be the result of the squeaky wheel getting the grease.

However, in order to prevent the unequal treatment of creditors -- whether intentional or otherwise, the Bankruptcy Code grants the Chapter 11 debtor the power to undo (or, in bankruptcy parlance, to "avoid"), under appropriate circumstances, transfers of money or property that occurred prior to the bankruptcy filing. Moreover, the law also imposes upon a debtor the fiduciary obligation to exercise the power to avoid preferential payments.

Specifically, according to §547(b) of the Bankruptcy Code, a debtor may attack: (1) any transfer of money or property; (2) made on account of an antecedent debt; (3) while the debtor was insolvent; (4) during the 90 days before the bankruptcy filing; (5) where the transfer enabled the creditor to receive more than it would have in a hypothetical Chapter 7 liquidation. There are many nuances within these parameters, however, any payment to a creditor that satisfies these five elements is likely to be identified by a debtor as a potentially avoidable preference.

The Bankruptcy Code also identifies seven affirmative defenses that a creditor can employ to defend a preference action. Applying these defenses can require a fact-intensive analysis that varies from case to case. MGLAW works with each of its clients to identify the strengths and weaknesses of each case and to produce the best result possible.

Again, if you have questions about Sofa Express, Inc.'s avoidance actions and preference actions, please contact Dan Lins at 615-846-8000, or cdl@mglaw.net.