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Seller Beware: Recovering the Value of Preferential Transfers of Goods or Equipment
Imagine you are an equipment manufacturer. You sell $45 million in goods to a reliable customer on credit, shipping them to a third-party warehouse to be held for the customer to pick up when needed. Months later, unable to pay and sliding toward bankruptcy, the customer returns the unused equipment. The next thing you know, the customer, having filed for bankruptcy, sues you to recover not only the $45 million value of the returned equipment, but also an additional $55 million in cash payments the customer had made.
That is exactly the situation Nortel Networks Inc. ('Nortel') recently faced in connection with the Chapter 11 cases of 360networks (USA) inc. and related entities ('360'), in which the Official Committee of Unsecured Creditors (the 'Committee') sought to avoid and recover aggregate transfers of over $101 million ' making the preference action one of the largest ever commenced against a single defendant.
This case, which was recently settled by Nortel's payment of $45.5 million to the Committee, was far from a garden-variety preference action, implicating extremely complex and esoteric areas of preference law, including: 1) the prospective claims and defenses arising when, on the eve of bankruptcy, a debtor returns unused equipment or goods to their original seller, and 2) the timing and extent of a party's obligations, both before and after a bankruptcy filing, to preserve electronic documents potentially relating to the statutory elements of an avoidable preferential transfer.
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