Preference Litigation

The laws that govern bankruptcy cases, including the James River Coal Company cases, are located in title 11 of the United States Code, 11 U.S.C. §§ 101-1330, which is commonly known as the Bankruptcy Code. One of the provisions in the Bankruptcy Code allows a bankrupt company to “avoid” or “reverse” certain types of transfers, if the transfers meet certain specific criteria. If the transfers meet these criteria (which are listed below), the transfers can be reversed and the value of the transfers, whether in cash or some other form of consideration, can be recovered by the bankrupt company. These types of transfers are known in the Bankruptcy Code as “Preferences” or “Preferential Transfers”.

Generally speaking, in order for a transfer to be considered to be a Preferential Transfer, it must have occurred: (1) within 90 days immediately before the bankruptcy case was filed with the court; (2) the transfer paid or was intended to pay a debt owed to the bankrupt company; (3) the transfer was for the benefit of the creditor who received the transfer; and (4) the creditor who received the transfer received more value than it would have had the bankrupt company liquidated its assets in a chapter 7 bankruptcy proceeding.

The purpose of the Preference provisions is twofold. First, by permitting the avoidance of transfers occurring in the pre-bankruptcy period, creditors are discouraged from racing to the courthouse to dismantle the debtor during its slide into bankruptcy. Second, the Bankruptcy Code facilitates the policy of equality of distribution among creditors, because any creditor receiving payments during the 90 days before the bankruptcy was filed for more value than it normally would receive without enriching the debtor, must return such payments so that they may be shared equally by all creditors in the same situation.

As part of the James River Coal Companies’ plan of reorganization, the JRCC Unsecured Creditor Liquidating Trust was created for the benefit of all general unsecured creditors. When this happened, all of James River’s rights and obligations under the Bankruptcy Code to analyze and, if appropriate, bring litigation to collect Preferential Transfers for equal redistribution to all unsecured creditors were transferred to the Trust. If you have any questions about Preferential Transfers, or the status of the Trust’s review of these transfers, you may contact Sean Malloy at smalloy@mcdonaldhopkins.com or Jean Robertson at jrobertson@mcdonaldhopkins.com.

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