Companies that received payments from Conn’s, Inc. or its affiliates before the bankruptcy filing may now face adversary proceedings seeking to recover those payments as alleged preferential or otherwise avoidable transfers.
For vendors, suppliers, landlords, service providers, and other creditors, receiving a Conn’s bankruptcy clawback complaint can be concerning—particularly when the payments at issue were received for legitimate goods or services provided in the ordinary course of business.
The most important point for defendants is this:
The amount identified in a Conn’s adversary complaint is not necessarily the amount your company ultimately owes.
Bankruptcy preference claims are subject to significant statutory and factual defenses. A careful analysis of the parties’ payment history, invoices, subsequent transactions, and course of dealing may substantially reduce—and in some cases eliminate—the asserted exposure.
Conn’s Bankruptcy and the Adversary Proceedings
Conn’s, Inc., the Texas-based furniture, appliance, electronics, and consumer-finance retailer, filed for Chapter 11 bankruptcy protection on July 23, 2024, in the United States Bankruptcy Court for the Southern District of Texas.
The bankruptcy case is:
In re Conn’s, Inc., et al.
Case No. 24-33357
United States Bankruptcy Court for the Southern District of Texas, Houston Division
The Bankruptcy Court subsequently confirmed Conn’s Chapter 11 plan. As part of the post-confirmation process, a Distribution Trust was established to pursue certain estate claims and make distributions to eligible creditors.
The Conn’s Distribution Trust is now pursuing adversary proceedings seeking recovery of certain transfers made before bankruptcy.
These lawsuits are commonly referred to as preference actions, avoidance actions, or bankruptcy clawback claims.
What Is a Conn’s Bankruptcy Preference Claim?
Section 547 of the Bankruptcy Code allows certain transfers made before bankruptcy to be avoided and recovered for the benefit of the bankruptcy estate or its successors.
For most non-insider creditors, the principal preference period covers payments made during the 90 days immediately preceding the bankruptcy filing.
Because Conn’s filed for bankruptcy on July 23, 2024, payments received by vendors and other non-insider creditors during the 90-day period preceding that date may potentially be targeted.
Importantly, a preference claim does not necessarily mean that the creditor did anything improper.
A company may have:
- supplied legitimate goods or services to Conn’s;
- invoiced Conn’s according to its normal business practices;
- received payment on legitimate invoices;
- had no knowledge that Conn’s would file bankruptcy; and
- continued doing business with Conn’s in good faith.
The payment may nevertheless fall within the technical definition of a preferential transfer.
That is why the critical question is usually not simply whether the payment was received.
The more important question is:
How much of the transfer is actually recoverable after all available defenses are applied?
The Amount in the Complaint Is Not Necessarily Your Actual Exposure
One of the most important concepts for a defendant facing a Conn’s bankruptcy adversary proceeding is the distinction between gross transfers and actual preference exposure.
The complaint may identify every payment received during the preference period and seek recovery of the entire amount.
That number is only the beginning of the analysis.
Potential liability should generally be evaluated transaction by transaction, taking into account both the plaintiff’s ability to establish the elements of the claim and the defendant’s available defenses.
A proper preference analysis may include:
- payment dates;
- invoice dates;
- invoice due dates;
- historical days-to-pay;
- payment methods;
- contracts and payment terms;
- subsequent invoices;
- goods or services supplied after each payment;
- credits and returns;
- collection activity;
- communications regarding payment; and
- the parties’ historical course of dealing.
After those factors are analyzed, the realistic exposure may be substantially different from the amount demanded in the complaint.
Ordinary Course of Business Defense
The ordinary course of business defense under 11 U.S.C. § 547(c)(2) is often one of the most important defenses available to vendors and other commercial creditors.
The defense is designed, in part, to protect payments made as part of ordinary commercial dealings rather than unusual transactions prompted by the debtor’s deteriorating financial condition.
For companies that had an established relationship with Conn’s, historical payment data can therefore be extremely important.
For example, if Conn’s historically paid a vendor approximately 45 to 60 days after invoice and continued paying within a comparable range during the preference period, those payment patterns may support an ordinary-course defense.
A meaningful ordinary-course analysis may examine:
- average payment timing;
- median days to payment;
- historical payment ranges;
- consistency of payment methods;
- changes in invoice aging;
- changes in payment terms;
- accelerated or delayed payments;
- partial or lump-sum payments;
- unusual collection activity; and
- other changes in the parties’ relationship.
Ordinary course is a fact-intensive defense. The quality and depth of the historical transaction data can therefore materially affect the strength of the defense.
Subsequent New Value Defense
The subsequent new value defense under 11 U.S.C. § 547(c)(4) can significantly reduce preference exposure for vendors that continued providing goods or services to Conn’s after receiving payments.
In simplified terms, when a creditor receives an allegedly preferential payment and subsequently provides additional qualifying value to the debtor, that subsequent value may offset the creditor’s preference exposure.
For example:
Conn’s pays a vendor $200,000 during the preference period.
After receiving that payment, the vendor supplies Conn’s with another $125,000 in qualifying goods or services before the bankruptcy filing.
Depending on the transaction sequence and applicable facts, the vendor may have a substantial new-value defense against the amount originally demanded.
For that reason, new value should generally be analyzed chronologically.
Simply comparing the total amount paid with the total amount invoiced can overlook significant defenses.
Contemporaneous Exchange for New Value
Another potential defense arises under 11 U.S.C. § 547(c)(1) where the parties intended a transaction to constitute a contemporaneous exchange for new value and the exchange was, in fact, substantially contemporaneous.
This defense may be relevant where a payment was closely connected with the delivery of new goods or services rather than payment of an older outstanding obligation.
The precise structure and timing of the transaction matter.
Purchase orders, invoices, shipping records, payment records, contracts, and communications may therefore be important in determining whether the defense applies.
The Conn’s Distribution Trust Must Still Establish the Preference Claim
Defendants should not focus exclusively on affirmative defenses.
The plaintiff bears the burden of establishing the statutory elements of an avoidable preference under Section 547.
Among other requirements, the plaintiff generally must establish that the challenged transfer:
- was made to or for the benefit of a creditor;
- was made on account of an antecedent debt;
- was made while the debtor was insolvent;
- occurred within the applicable preference period; and
- enabled the creditor to receive more than it would have received in a hypothetical Chapter 7 liquidation.
A complete defense strategy should therefore consider both sides of the claim:
Can the plaintiff establish every required element, and what statutory defenses apply even if it can?
Fraudulent Transfer and Other Avoidance Claims
Depending on the particular Conn’s adversary complaint, the plaintiff may assert additional avoidance or recovery theories beyond Section 547.
These claims require their own analysis and should not automatically be treated as simply another version of the preference claim.
Where the defendant provided legitimate goods or services in exchange for the challenged transfers, evidence establishing the value Conn’s received may become particularly important.
Relevant evidence may include:
- contracts;
- invoices;
- purchase orders;
- shipping and delivery records;
- proof of services performed;
- market pricing information; and
- evidence demonstrating that transactions occurred at arm’s length.
The particular causes of action asserted in the complaint should be reviewed individually.
What Should You Do If You Receive a Conn’s Clawback Complaint?
If your company receives a demand letter, summons, or adversary complaint relating to the Conn’s bankruptcy, preserve the relevant records immediately.
Do not limit the document collection to the 90-day preference period.
Historical transactions preceding the preference period may provide the baseline necessary to establish the ordinary course of business defense.
Companies should consider preserving:
- accounts-receivable ledgers;
- complete payment histories;
- invoices;
- purchase orders;
- contracts;
- account statements;
- shipping and delivery records;
- credit memoranda;
- proof of services;
- emails regarding payment;
- collection communications; and
- records showing goods or services supplied after the challenged payments.
The historical relationship can be just as important as the transactions identified in the complaint.
Do Not Negotiate a Conn’s Preference Claim Based Solely on the Demand Amount
A plaintiff may offer to settle a preference claim for a percentage of the transfers identified in the complaint.
That percentage alone does not determine whether the settlement is favorable.
The more meaningful comparison is between the proposed settlement and the defendant’s defense-adjusted exposure.
Consider a hypothetical defendant sued for $500,000.
If the defendant has substantial ordinary-course and subsequent-new-value defenses, its realistic exposure may be significantly below $500,000.
A settlement presented as a substantial discount from the gross transfer amount could therefore still exceed the defendant’s properly analyzed exposure.
Effective settlement strategy generally begins by determining:
Gross Transfers → Available Defenses → Defense-Adjusted Exposure → Litigation Risk → Settlement Value
The stronger the underlying analysis, the stronger the defendant’s negotiating position.
Bankruptcy Claims and Section 502(d)
A company facing a Conn’s avoidance action should also determine whether it holds a claim against the Conn’s bankruptcy estates or rights to distributions under the confirmed plan.
Section 502(d) of the Bankruptcy Code may affect the allowance of claims held by entities from which avoidable transfers are recoverable.
Settlement analysis should therefore consider more than simply the amount demanded in the adversary proceeding.
Depending on the circumstances, relevant considerations may include:
- the defendant’s bankruptcy claim;
- expected distributions;
- potential Section 502(d) consequences;
- setoff or related rights;
- treatment of the claim under a proposed settlement; and
- the overall economic effect of resolving the adversary proceeding.
These issues should be evaluated before finalizing a settlement.
Do Not Miss the Deadline to Respond to a Conn’s Adversary Complaint
An adversary proceeding is a federal lawsuit within the bankruptcy case.
It should not be treated as an informal collection demand.
A defendant that fails to respond to the complaint may face default proceedings and risk losing defenses that could otherwise substantially reduce the asserted liability.
The summons accompanying the complaint should be reviewed immediately to determine the applicable response deadline.
Early Defense Analysis Can Create Settlement Leverage
Many bankruptcy preference and avoidance actions resolve without trial.
But reaching an early settlement is not necessarily the same as reaching a favorable settlement.
The defendant’s negotiating position is substantially stronger when it can demonstrate its defenses through organized transaction data and a well-supported legal analysis.
Early review allows counsel to determine:
- which transfers are genuinely at risk;
- whether the payment history supports ordinary course;
- how much subsequent new value is available;
- whether other statutory defenses apply;
- whether the plaintiff can establish the underlying claim;
- what documentation supports the defenses; and
- what settlement range makes economic sense.
The goal is not simply to defend the amount printed on the complaint.
The goal is to identify the actual economic exposure and resolve the claim accordingly.
Defending Conn’s Bankruptcy Adversary Proceedings Nationwide
The Law Office of Magdalena Zalewski PLLC represents creditors and defendants in bankruptcy adversary proceedings nationwide, including preference, fraudulent-transfer, avoidance, and clawback litigation.
Our approach focuses on early exposure analysis, detailed review of payment histories, identification and quantification of statutory defenses, and strategic resolution of bankruptcy litigation.
If your company has received a Conn’s bankruptcy preference demand, summons, or adversary complaint, early analysis can help determine the difference between the amount demanded and the amount actually at risk.
Contact The Law Office of Magdalena Zalewski PLLC to discuss your Conn’s adversary proceeding and the defenses that may be available to your company.
This article is provided for informational purposes only and does not constitute legal advice. The availability and strength of any defense depend on the particular facts, transaction history, applicable law, and procedural posture of the individual case.