Under Title 11 of the United States Code (the “Bankruptcy Code”) a trustee or debtor in possession (“DIP”) may avoid certain payments made by the debtor to a creditor within ninety days prior to filing for bankruptcy, or one year if the creditor is an insider. The Bankruptcy Code contains certain defenses to preference claims. A court may also release a creditor from such claims. Such a release may be found in orders approving payment of pre-petition claims to a “critical vendor.” Absent such an express release, it is unclear whether a trustee or DIP is precluded from pursuing a preference claim against a critical vendor.
This memorandum analyzes whether a critical vendor is immune from a preference claim under the Bankruptcy Code. Part I provides an overview of preference law and the critical vendor doctrine. Part II examines rules established through case law covering when a critical vendor designation will bar a preference claim.