keeping the gold: successfully resolving preference claims
TRANSCRIPT
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presented by Larry J. McClatchey2015 Great Lakes Region Credit ConferenceNovember 18-19, 2015
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What is a Preference?Payment or transfer made during the
ninety days prior to bankruptcy
Debtor makes a payment or payments to some creditors and not to others
90
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Purpose of Preference Law?Prevent “piecemeal” dismemberment of a debtor
To promote equal distribution among creditors similarly situated
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Who Can Avoid a Preferential Transfer?
1 Bankruptcy trustee or “debtor in possession”
2 Representative of Liquidating Trust in chapter 11 case
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Elements of a Preference
Transfer of property of
a debtor
To or for benefit of creditor
On account of an
antecedent debt
Made while debtor was insolvent
Within 90 days before bankruptcy
Enables creditor to receive more than if transfer had not been
made
Or 1 year to an insider
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Who Has Burden of
?
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Plaintiff/trustee must prove each element of preference
Burden of proof is on plaintiff
Defendant/creditor can establish an “affirmative defense”
Creditor has burden of proof on any affirmative defense
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BASIC
1 Contemporaneous exchange for new value
2 Enabling Loan
3 Floating Lien
4 Statutory Lien
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Ordinary Course of Business Defense
Encourages creditors to deal with companies on “normal” credit terms
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Payment in ordinary course of business is payment:
of a debt incurred in the ordinary course of the business or financial affairs of the debtor and the transferee
made in the ordinary course of business of the debtor and the transferee
made according to ordinary business terms
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Ordinary Course of Business Between the Parties
Payment that is “normal” in parties’ course of dealingConsistency with other business transactions between partiesExamines course of conduct + payment history prior to filing
Historical period v. preference period
Consistency late payments may qualify as ordinary payments
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Payment NOT in subjective ordinary course of business
Creditor requires a cashier’s check for the first time
Creditor imposes new terms during the preference period
Payment results from coercive collection practices
Creditor imposes or threatens credit hold
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Ordinary Business Terms: Objective Ordinary Course
Payment is “ordinary in relation to the relevant industry standard
Examines industry as a whole
Determines practices common to businesses similarity situated
Usually requires expert testimony
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Subsequent new value or subsequent advance
Transfer by creditor after payment received
Not secured by otherwise unavoidable security interest
On account of which new value debtor did not make an otherwise unavoidable transfer to or benefit of creditor
New value determined as of petition date, so post-petition payments not relevant
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In re Globe Building Materials, Inc.
Table sets forth dates of shipment by Seneca Petroleum and dates of payment of invoices by debtor
Trustee sued to recover
Petition filed January 19; 90-day period started October 19
$356,823
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Must new value remain
unpaid?
Effect of Court
Approved Post-Petition
Payments?
Payments Made by
Third Party Under LC?
New Value Issues in the Courts
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Additional Defenses to
Consider
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Transfer <$600 in consumer cases <$600
Transfer <$5,000 in business cases<$5000
Improper to sue other than in defendant’s jurisdiction (venue)
Case filed too late (statute of limitations)
Transfer to “critical vendor” of as part of contract assumption
Transfer to holder of unperfected lien rights
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Checklist of Defenses Against Preference Claims
Where is the lawsuit filed?
When was the lawsuit filed?
How much is the claim?
Did the debtor make the transfer?
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Checklist of Defenses Against Preference Claims
Do lien rights exist?
Debtor receive “20 day goods”?
Has debtor made “critical vendor” offer?
Executory supply agreement with debtor?
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TIPSPractical
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Review your invoices to compare to
industry standards
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Stay consistent in your collection
practices
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If problem customer files bankruptcy, work up defenses
while fresh
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Preserve all records of collection
communications
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Don’t ignore a demand letter
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TAKEAWAYS
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OK to be aggressive if consistent
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Always, always take payment offered
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May not face future avoidance or can
settle claim
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Thank You!Larry J. McClatchey, DirectorKegler Brown Hill + [email protected]/mcclatchey614-462-5463