Under Section 365 of the Bankruptcy Code, the debtor may assume or reject any executory contract or unexpired lease, subject to court approval. This allows the debtor to select and choose between their executable contracts and leases. In the retail context, this enables the insolvent to abandon leases for underperforming locations while retaining leases for profitable locations. Effective rejection of leases can reduce a retailer to a nucleus of profitable locations and improve its post-bankruptcy prospects. However, not all retailers fully utilize their ability to decline leases.
Preference Exposure
There is a significant possibility that creditors will be sued by the debtor's estate to prevent preferential transfers in any large retail bankruptcy case. The preference period is the ninety days preceding a bankruptcy petition.
The Bankruptcy Code allows the debtor to recover from creditors payments made shortly before the bankruptcy filing if the payment granted the creditor more than other creditors in a comparable position would receive through the bankruptcy process. The preference laws are merely an attempt to establish equity among creditors. Creditors are almost always better off pursuing payment of their claims and then dealing with any attempts to recover the money if and when they occur in bankruptcy.
Code of Bankruptcy 547 describes a predilection as
Payment on a prior (as opposed to present) debt;
During the debtor's insolvency;
To a creditor who is not an insider, within 90 days of the bankruptcy petition;
This enables the creditor to receive more on its claim than if the payment had not been made and the creditor's claim had been paid through the bankruptcy proceeding.
547© of the Bankruptcy Code contains defenses to the recovery of a preference. They consist of:
Contemporaneous exchanges; Amounts of subsequent credit extended and unpaid; Payments made in the ordinary course of business of the debtor and the creditor on ordinary business terms; and Security interests that secure debts that add to the debtor's value.
These defenses must be raised in a response to a discrimination claim. The burden of proof is on the creditor to establish that the transfer is protected by one or more of these defenses despite the existence of a preference.""
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