The contemporaneous exchange defense is one of the most often disputed defenses. It should not be that way. The focus of the defense is very narrow. The focus is on the time when the potential preference payment was received. The payment must be made at or about the same time as the delivery of goods or services for which payment is made. So the “information zone” is very short.
The reason the contemporaneous exchange defense is often litigated is because the supplier has failed to get the proper documentation in place to establish the defense. Undoubtedly, when a supplier is placed on COD, there are substantial past dues from the supplier. The question thus becomes “Was the payment against the past dues or the current delivery?”
We have prepared a brief video in which we address THE CONTEMPORANEOUS EXCHANGE DEFENSE.
- . In particular we discuss the following elements:
- The “Zone of Information” that applies to this defense
- The basic elements of the defense
- A simple example of the application of the defense
You can see that the defense depends upon proving that both parties intended a contemporaneous exchange. Proof of intent becomes difficult because of the loss of personnel, fading of memories and loss of books and records.
This is one of the best illustrations of pre-bankruptcy opportunities for the supplier to improve its chances of surviving a bankruptcy preference action. A well advised supplier will have not only placed the customer on COD, it will also have obtained a “Payment Agreement” in which (1) the customer acknowledges that the payments are intended to be a “contemporaneous exchange” and (2) the parties agree on how the past dues will be handled. This “Payment Agreement” must be properly drafted by counsel familiar with bankruptcy preference actions.
Even if the agreement is not in place, if the customer has not yet filed bankruptcy there is still opportunity to document the contemporaneous exchange defense. You should consult your bankruptcy preference counsel on the steps that should be taken.
If the customer has filed bankruptcy, you should not wait until a bankruptcy preference claim is made. Act now to pull together the documentation that will give you the best chance of establishing the contemporaneous exchange defense.