Preference Litigation Pursuant To Chapter 128 Of The Wisconsin Statutes Vs. Preference Litigation Pursuant To The United States Bankruptcy Code

Many creditors have had the unfortunate experience of receiving a demand letter or adversary complaint alleging that they received avoidable transfers—commonly known as "preferential payments" or "preferences"—during the 90 days preceding a customer's federal bankruptcy filing. Such claims arise under section 547 of the Bankruptcy Code, and can result in a creditor having to return certain payments made during the 90-day preference period.

What some creditors of Wisconsin companies may not know, however, is that the Bankruptcy Code is not the sole source of preference litigation in Wisconsin. Chapter 128 of the Wisconsin Statutes provides for the ability to liquidate a company in a state-court receivership action via a process that is vaguely similar to a Chapter 7 liquidation under the Bankruptcy Code. Wisconsin Statute § 128.07 allows the receiver in a Chapter 128 receivership to recover preferential transfers made to creditors within the four months preceding the receivership.

The theory behind preference litigation under Chapter 128 is the same as under the Bankruptcy Code: To place creditors who received payments just prior to the receivership in the same position as creditors who did not receive such payments, thereby forcing them to share pro rata with other creditors in the assets of the debtor's estate. Though similar in concept, preference litigation under Chapter 128 varies from preference litigation under the Bankruptcy Code in some important ways. A summary of some of the more significant differences is provided below.

Different Preference Elements

Preferences under the Bankruptcy Code and Chapter 128 share many common elements: (a) there must have been a transfer of the debtor's property; (b) the transfer must have been made to a creditor; (c) the transfer must have been made while the debtor was insolvent; (d) the transfer must have enabled the creditor to receive more than it would have received in bankruptcy or receivership; and (e) the transfer must have been made on account of antecedent debt (although this element is implied rather than explicit in Chapter 128).

There are two primary elements of Chapter 128 preferences that differ from preferences under the Bankruptcy Code. The first is that a Chapter 128 receiver may seek to recover preferential transfers made by the debtor within the four months (roughly 120 days) before the receivership. Wis. Stat. § 128.07(2). This is approximately one month longer than the 90-day...