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2017 Legal Seminar for Credit Professionals - Cleveland


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On July 25, Kegler Brown attorneys and guest speakers presented in Cleveland on a variety of current issues relevant to credit professionals, including collections, managing privacy + security risk, accounts receivable and bankruptcy case updates.

Published in: Law
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2017 Legal Seminar for Credit Professionals - Cleveland

  1. 1. z 2017 Legal Seminar for Credit Professionals
  2. 2. z Roadmap For Collections Timothy J. Gallagher
  3. 3. z Improving Your Position At The Start
  4. 4. z Gather Information Verify Personal Guaranties References
  5. 5. z Additional Consideration at the Start of a Relationship Think Outside the Box File in Proper Place Keep It Current Security Agreements
  6. 6. z Steps for Prompt Collection +Keep Close Eye on Receivables + Easier to Collect when “Younger” +Demand Letters + From you + From an attorney + Act on them if no response
  7. 7. z Different Corporate Structures = Different Ways to Collect If Nonpayment INDIVIDUAL Could pursue the individual and all assets CORPORATION | LLC Personal guaranties in order to pursue individuals
  8. 8. z Collection Via Litigation $15,000 Corporation must have counsel MUNICIPAL COURT ≤ No Limit Corporation must have counsel COMMON PLEAS $ $3,000 Pursue without counsel SMALL CLAIMS COURT ≤
  9. 9. z Collection Via Litigation cont’d If no response, obtain a Default Judgment. Still need to collect the judgment. A judgment is only a piece of paper. Can not “cash it in”.
  10. 10. z Collection After Judgment Wage Garnishments1 Bank Account Garnishments2 Attachment of Assets3 Judgment Debtor Examination4 Certify Judgment and Attach to Real Property5 Creditors Bill6
  11. 11. z Garnishment of Personal Earnings Garnishment is ongoing and continuing Paid as often as the judgment debtor is paid Cannot garnish a corporation or LLC Creditors can garnish the debtor’s wages
  12. 12. z LANDS LEASEHOLD INTERESTS GOODS OF THE DEBTOR Range of property available for execution is unlimited Execution Against Property
  13. 13. z Bank Account Garnishments Creditors can garnish LLC, corporation + individual accounts
  14. 14. z Judgment Debtor Examination + Allows a creditor to ask Debtor questions under oath + Allows a creditor to get a big picture view of assets, along with details + Good chance Debtor may not show up to exam + Can be held in contempt of court for failing to show + A warrant for arrest can be issued but just to individuals
  15. 15. z Certification of Judgment +Attached to all real property owned in county +Will be paid if debtor sells property +Can foreclose on property +Can transfer judgment to other counties + states
  16. 16. z CREDITOR’S BILL
  17. 17. z Receiverships Move to have receiver appointed Paid from the assets of the company Receiver will either… A Run the company OR B Sell or liquidate the company
  18. 18. z Piercing the Corporate Veil Regular meeting of members Corporate records Separate bank accounts without comingling of funds
  19. 19. z Avoiding Fraudulent Transfers +If a company or individual tries to move assets during the time you are seeking to collect, you can avoid these fraudulent transfers to get those assets back into the collection pool. +Requires a separate suit +Use ORC § 1336.04
  20. 20. z Have to show: A. The transfer was made with actual intent to hinder, delay or defraud a creditor, as judged by a number of factors the court considers, (A) (1), or B. it was made without receiving a reasonably equivalent value for the transfer and the debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or C. the debtor intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due. (A)(2). ORC § 1336.04
  21. 21. z Bankruptcy +New set of rules +Protect your rights +Can get sued +Do not violate the automatic stay
  22. 22. zz Thank You! Timothy J. Gallagher Associate Cleveland: 216-586-6784 Columbus: 614-462-5476
  23. 23. z Best Practices for Managing Privacy + Security Risk
  24. 24. z Understand GOALS Cyber security is a business issue, not just a technical issue Common current cyber business threats Best practices for managing privacy + security risk
  25. 25. z Cyber Issues Are All Over The News
  26. 26. z Common Threats – Bad Actors
  27. 27. z Prevents unauthorized disclosure of sensitive information Prevents unauthorized modification of data, systems, and information, thereby providing assurance of the accuracy of information Prevents of loss of access to resources and information to ensure that information is available for use when it is needed Availability Information Security 101
  28. 28. z Cost of a Data Breach Cost per record Global Average $158 +15% since 2013 Highest Countries Lowest Countries $221 United States $100 Brazil $213 Germany $61 India Cost per incident Global Average $4M +29% since 2013 Highest Countries Lowest Countries $7M United States $1.8M Brazil $5M Germany $1.6M India Source:
  29. 29. z Impact – How Your Customer Sees You
  30. 30. z And How Others See you … Your Cyber Footprints Matter Publicly available information: + Indicators of compromise + Infected machines + Proper or improper configuration of certain security controls + Positive or poor security hygiene + Potentially harmful user behaviors Security health & hygiene being used to: + Select and manage vendors + Insurance underwriting decisions + Mergers and acquisitions + SMB / mid market firms are expected to have enterprise scale InfoSec / Compliance programs
  31. 31. z Common Threats By Technique + Techniques change over time. + We build a 10 foot wall & the hackers build an 11 foot ladder. + Focusing only on technique will lead us astray. + Phishing + Spear phishing + Whale phishing + Botnets + Distributed denial-of-service (DDoS) + Baiting + Hacking + Malware + Pharming + Phishing + Ransomware + Ransacking + Spam + War driving + War dialing + Web defacement + Distributed Malware Attacks
  32. 32. z
  33. 33. z
  34. 34. z Cyber Security Must be Managed from the Strategic to the Tactical
  35. 35. z Five Steps to a Security Program 1. ORGANIZE • Build a Team • Select a Framework 2. PLAN – Understand & Prioritize Risk • Likelihood and Impact of Threats to Assets • Consider all assets, all data flows, 3rd Parties 3. DO – Mitigate Risks with Controls • Manage Risk in a Risk Register • Remediate or fix risk with Controls from selected framework 4. CHECK – Measure & Test Controls • Security Assessment • Penetration Tests • Asset / Form Factor Focused Tests 5. ACT – Correct & Improve 6. REPEAT!
  36. 36. z Organize – Select a Framework Regulatory Authority Framework Source HIPAA Fed Contractors Defense Supply Chain Critical Infrastructure Financial Institution Some B2B Buyers NIST 800 series Payment Card Industry PCI DSS https://www.pcisecuritystan International Business Some B2B Buyers ISO 27K (27001/27002) 27001-information- security.html Multi-Authority ISO 27K to Organize NIST to Prescribe Controls Are you regulated? If yes, select framework most closely associated with regulations:
  37. 37. z Organize – Select a Framework Are you regulated? If no, consider Common Sense Security Framework (CSSF) with 49 controls: + Protect Your Applications + Protect Your Endpoints + Protect Your Network + Protect Your Servers + Protect Your Data + Protect Your Locations + Protect Your People
  38. 38. z Plan - Understand Risk
  39. 39. z Risk Registers and Risk Ranking Leads to Focus on Priorities 5 0 5 10 15 20 25 4 0 4 8 12 16 20 3 0 3 6 9 12 15 2 0 2 4 6 8 10 1 0 1 2 3 4 5 0 0 0 0 0 0 0 0 1 2 3 4 5 Impact Likelihood
  40. 40. z Check - Measure and Test + Risk (Risk Assessment) + Compliance (Control & Compliance Assessments & Audits) + IT assets for weakness (Vulnerability Assessment & Penetration Testing) • Network • Devices of all kinds • Cloud • Appliances + Key processes for weakness (Vulnerability Assessment) + Employees ability to fend off phishing attacks (Social Engineering Testing) + Data leakage (Sensitive Data Scans | Open Source Intelligence Testing) + Ability to react to disaster or security incidents (Table Top Testing)
  41. 41. z General Best Practices + Keep operating systems up to date + Keep software up to date + Create a clean installation restore point + Install a traditional antivirus for reactive protection + Install a security solution against spyware + Back up your system & information + Be careful online and don’t click suspicious links + Have a second admin account that you only use to take care of the PC + Set strong passwords + Keep your user account control turned ON + Secure web browser before going online + Use BitLocker to encrypt your hard drive + Keep it locked up
  42. 42. z Spear-phishing Best Practices + Think Twice before clicking – spear phishing works because it conveys a sense of urgency + “Show details” on emails (be careful on mobile or with Gmail) + Use common sense and beware + When in doubt, call to verify + Enable 2 factor authentication for account communication where possible
  43. 43. z Ransomware Best Practices + Back up, back up, back up – it’s a pain, but DO IT. + Install security updates as soon as they are available. + Antivirus + If you decide to pay the ransom, remember that there is no guaranty that they will be honorable and supply the key + If possible, unplug rather than power down
  44. 44. z Baiting Best Practices + Avoid the use of external storage devices + Do not connect unknown devices
  45. 45. z Web Browsing Best Practices + If using sensitive data, then HTTPS (not HTTP) + Consider the use of a browser add or HTTPS Everywhere from the Electronic Frontier Foundation + Avoid public WiFi + Don’t forget to log out
  46. 46. z Mobile Best Practices + Use most current operating system and update whenever updates are available + Enable your passcode lock/pin + Enable wiping and device tracking + Enable encryption both on phone and for backups + Be cognizant of access/permission requests when downloading apps + Update settings related to downloads from unknown sources – check box in Android settings + Be cautious when dealing with unsecured hotspots and QR codes + Do not “jailbreak” or “root” your phone
  47. 47. z Password Best Practices + Change default passwords + Do not reuse or daisy chain passwords + Long pass phrases recommended + Do not keep a file with the word, “password” + When possible, use two factor authentication or other tools + Fingerprint scanners + Text messages + Security tokens + Consider the use of a password manager
  48. 48. z Best Practices for Disposal of Data Consider guidance found in: NIST SP 800-88 rev. 1. + Media sanitization + Clear, Purge and destroy + Deguassing (change the magnetic polarity) – only works on magnetic storage – magnetic drives, not flash drives or CDs + Overwriting (wiping) + Physical destruction + Mobile + Factory reset + Physical destruction
  49. 49. z
  50. 50. z Best Practices from the IRS If your SSN is compromised and you know or suspect you are a victim of tax-related identity theft, the IRS recommends these additional steps: + Respond immediately to any IRS notice; call the number provided. + Complete IRS Form 14039, Identity Theft Affidavit, if your efiled return rejects because of a duplicate filing under your SSN or you are instructed to do so. Use a fillable form at, print, then attach the form to your return and mail according to instructions. + If you previously contacted the IRS and did not have a resolution, contact us for specialized assistance at 1-800-908-4490. We have teams available to assist.
  51. 51. z
  52. 52. z
  53. 53. z + David Wilson has been a global business attorney with Kegler Brown since 2011. + He is a member of the International Association of Privacy Professionals and is a Certified Information Privacy Manager. + David regularly works with clients to safeguard their information and intellectual property interests and comply with domestic and cross border compliance obligations, through the development of privacy frameworks, policies, certifications, and drafting and negotiating of technology licenses, joint venture agreements, and service agreements with an eye toward preparing for and responding to data breaches. DAVID WILSON (614) 462-5406
  54. 54. z + Doug’s passion is for the business side of the information risk management, security and compliance equation. + He works with business leaders and executives in small and middle market companies to assess and improve the operationalization of information risk and information security programs. + Doug also advises information security and compliance leadership in larger enterprises focusing on control assessment and improvement in areas such as security leadership, policy and procedure, security awareness, third party risk management and compliance with HIPAA, PCI and ISO 27001. DOUG DAVIDSON (614) 947-5259
  55. 55. z Ins and Outs of Accounts Receivable Renee Tyack | Capital-Plus Inc.
  56. 56. z Agenda 1. Small Business Market Overview 2. Accounts Receivable 101 • Establishing a Credit Policy • Extending Credit to Customers • Invoicing & Collection Procedures 3. Receivables & Liquidity • Internal Controls • Receivables Financing • Traditional Financing
  57. 57. z http://bschool.pepperdin
  58. 58. z ▪ 44% more confident in business growth prospects in 2017 vs 22% in 2012 (down from 50% in 2016) ▪ 40% found limited access to capital to be one of the least influential impediments to U.S. GDP Growth next year. ▪ Government regulations was reported to be the most influential at 39%, close 2nd with Global political and/or economic conditions at 32% Capital-Plus, Inc. |
  59. 59. z Capital-Plus, Inc. |
  60. 60. z ▪ Cost of capital and accessibility of capital varied by capital type, size, and perceived risk. ▪ Primary borrower motivation to secure financing: + 32% refinance existing loans or equity, + 18% management buyout and + 15% worsening conditions Q2, 2012 Q1, 2017 Bank Loans 68% 76% Grants (SBIR, STTR, etc.) 29% 41% Crowdfunding 10% 40% Trade Credit 35% 22% Angel 30% 25% VC 26% 27% PEG 28% 29% Banks ABL Mezz PEG VC Angel 4% - 6% 5.5% - 14.0% 10.0% - 24.0% 20.5% - 27.5% 25% - 35% 35% - 60% Primary reason for declined loans: 31% quality of earnings/cash flow 20% insufficient collateral 18 % debt load
  61. 61. z High Cash flow determines sustainability Low Growth/ Activity Opportunity Inception Launch HarvestGrowth Evolve / retire Start up Mid-market Enterprise (departmental) Small Business Company Size Business Needs Change Over Time
  62. 62. z Accounts Receivable 101 Small Business Reality 1. Win the sale 2. Execute as promised and ask for more business 3. Invoice Client 4. Wait to Receive Payment _______________________________________ Risks: + Never get paid + Get Paid in 45, 60, 77, or 120 Days + Take a discount on invoice value
  63. 63. z Accounts Receivable 101
  64. 64. z • Sales & Credit go hand in hand • Establish a Credit Policy o Establish a DSO Goal and understand the impact on cash flow o Extend credit decisions based on information - know your risk o Set the limit and the term o Follow the Policy • Invoicing Methods o Clarity o Complete o Correct • Manage Receivables Carefully o Verify Invoice received and complete o Call on every invoice o Cash Discount Plan o Fees for late pays Accounts Receivable 101
  65. 65. z Goals Roles Procedures Measurements of Success Key Elements of a Solid Credit Policy
  66. 66. z Define Procedures • Evaluate Creditworthiness of Customers (New and Existing) • Perfect Invoicing Procedures o Terms & Conditions of Sale o Required Supporting Docs o Remit to instructions • Collections Procedures o Office Procedures from beginning to end o Disputes & Deductions o Credit Holds or Payment Plans Define Goals in line with company cash flow requirements (ideal DSO) and financial objectives Define roles, responsibilities, and authority Measure Results Impact of DSO on cash flow Key Elements of a Solid Credit Policy
  67. 67. z Requested Credit Limit Credit Application Completed and Signed Check References Obtain Credit Report Initial Terms Credit Limit Approval <$250.00 Yes Yes No Prepaid then Net 30 $250.00 Analyst $500 - $2500 Yes Yes Basic Report Due on Receipt then Net 30 $500 - $2500 Credit Manager >$2500 Yes w/signed personal guarantee & financials Yes Full Report 50% on 1st order then Net 30 ???? Credit Manager Extending Credit To New & Existing Clients
  68. 68. z Invoicing & Collection Procedures
  69. 69. z Timeliness Accuracy Complete Clarity Relationship Regularity Statements Easy Payment Options Invoicing & Collection Procedures
  70. 70. z Outsource Credit, Collections & Management Finance Accounts Receivable Use A/R balance as collateral within a traditional facility Mind the Gap
  71. 71. z America’s oldest form of financing and yet, the most misunderstood… • Flexibility • Measurement of Success • Fees / Rates / Terms • Notification • Management Services • Client Support Invoice Value Advance Rate (,85%) Fees DSO Cost per Transaction: $10,000 $8,500 1% every 10 days 45 5% $500 Accounts Receivable Financing
  72. 72. z • Leveraging Receivables for cash flow • Serving Small to Mid-Sized Businesses  Easy Application Process  Mitigates: historical financial performance, personal credit issues, length of time in business  Assets pledged as collateral  Notification/Verification  Boutique lenders providing additional services for small business Trade Finance
  73. 73. z Trade Finance More expensive than a traditional line of credit for ongoing financing. Not regulated, so do your homework on the company you choose.
  74. 74. z Traditional Line of Credit Leveraging Receivables as an Asset for Traditional Financing Leveraging Receivables as an Asset for Traditional Financing
  75. 75. z Traditional Line of Credit • Typically require at least 2 years historical financials with positive cash flow • Receivables often are valued at 70%, concentration and age will play a role in value • Complete loan package required • Often priced variable w/in relation to Prime
  76. 76. z Larry J. McClatchey Ins and Outs of Accounts Receivable
  77. 77. z A/R usually large item on business balance sheet Credit manager protects asset value Prompt and complete collection required Avoidance of losses due to collection issues Accounts Receivable – A Valuable Business Asset
  78. 78. z Personal guarantees PMSI and consensual security interests Statutory liens Letters of credit Most Commonly Used Protections
  79. 79. z Alternative Devices to Secure Payment Sale of A/R or factoring of accounts Financing with A/R as collateral Revolving credit terms and conditions Usually no notification to account debtors
  80. 80. z Nature of trade credit insurance How insurance of receivables works Typical covered losses Types of available policies Cancelable or non-cancelable coverage Export trade credit insurance Trade Credit Insurance
  81. 81. z Reduce or limit bad debt losses Offer more aggressive credit terms Possible reduction of bad debt reserves Assist in meeting bank covenants Insurer data base supports credit analysis Insurer may assist in funding litigation on account Key Benefits to A/R Insurance
  82. 82. z Cost of insurance coverage and timing Not all industries are covered Insurer may conduct its own credit evaluation and payment history Insurer may require coverage of entire portfolio Imposed credit limits hinder flexibility Claims disputes not uncommon Drawbacks + Limitations of Credit Insurance
  83. 83. z Not substitute for sound credit policy Management retains transactional risk Need for policy endorsements Other Considerations
  84. 84. z Trade Receivable Put Options Guaranteed promise to buy single account Applicable upon customer bankruptcy Normally covers specific time period Exercise of put is optional Higher risks and higher premium costs Flexible coverage of cost of goods or profit May be available for DIP sales Deductibles and purchase rate
  85. 85. z Sample Insurance Companies
  86. 86. z Q&A
  87. 87. z Thank You! Larry J. McClatchey Director 614-462-5463
  88. 88. z Christy A. Prince What’s New in Bankruptcy
  89. 89. z Bankruptcy StepsBankruptcy Steps Automatic Stay Creditor meeting Filing a claim Defending + negotiating a preference demand Considering dischargeability actions
  90. 90. z Automatic Stay Creditors cannot take action against the debtor or against the property of the estate, or exert control over property of the estate +Can’t make collection calls or send demand letters +Can’t file a lawsuit or enforce a judgment +Can’t repossess collateral or setoff debt +Can’t allow prior actions to proceed + i.e., wage garnishments or bank attachments
  91. 91. z Purpose of the Automatic Stay + To provide the debtor with a “breathing spell” from creditor action + To promote an orderly administration of the case, including equality of distribution among claimants and prevention of claims being filed in different forums
  92. 92. z Penalties for Violating the Stay 1. Compensatory damages for any violation • Lack of actual notice is not a defense 2. Punitive damages for willful violation 3. Courts are very hard on creditors who received notice of bankruptcy, even if creditor didn’t have actual notice (i.e., if creditor’s system didn’t catch the notice)
  93. 93. z Stay Safe +Make sure you have a system in place for notices of bankruptcy +Any employee anywhere in your organization who may make collection call against your account debtor must be immediately advised if a bankruptcy has been filed +Especially important if you have multiple offices and mailing addresses
  94. 94. z Stay Safe +The automatic stay is interpreted very broadly +Obtain relief from stay if appropriate + To repossess collateral + To proceed with a pre-petition lawsuit against non-debtor parties
  95. 95. z Special Issue: Liens +The automatic stay does NOT prevent a creditor from perfecting a lien +If you have an unperfected lien (i.e., mechanic’s lien), you can perfect the lien even if a bankruptcy is filed
  96. 96. z Special Issue: Setoff +If you are holding funds that belong to the customer, your contract with debtor may give you a right of setoff +Must obtain relief from stay to exercise right of setoff +Can freeze account until you obtain relief from stay
  97. 97. z Special Issue: Co-Debtor Stay +Two borrowers are jointly liable on a debt +One borrower files a chapter 13 bankruptcy +Automatic stay prevents creditor from collecting debt from the non-filing co-debtor
  98. 98. z Special Issue: Co-Debtor Stay Creditor can move for relief from co-debtor stay if: +Debtor’s chapter 13 plan does not propose to pay creditor in full, or +Non-filing borrower received consideration for the claim (not just a guarantor, etc.)
  99. 99. z Should you attend the creditor meeting? +Creditor representative can attend +No need for counsel to attend +Gives an opportunity to question the debtor
  100. 100. z Attend the Creditors Meeting? Consider: +Whether the claim is secured by collateral +Whether there was some irregularity in the extension of credit, i.e., false lien waivers or credit application
  101. 101. z Attend the Creditors Meeting? POTENTIAL USES Verify Negotiate Question Gather
  102. 102. z When to File a Claim +Creditors can file a claim as soon as they receive the notice of bankruptcy +Deadline to file claims is stated on the notice of bankruptcy – typically 120 days +You may receive no distribution even if you file a claim
  103. 103. z Special Issue: Filing Claims +New forms required effective December 2016 +The form included with the Notice to File Claim will be accurate +If you handle reaffirmations, those forms also changed
  104. 104. z Special Issue: Expired Claims +New Supreme Court decision -- An expired statute of limitations is not a barrier to filing a proof of claim +BUT the trustee or debtor may object to the claim
  105. 105. z Preference Defense + Negotiations 1. Correct any inaccuracies in the trustee’s demand 2. Offer a data analysis that establishes your defenses 3. Make a counteroffer
  106. 106. z 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
  107. 107. z Elements of a Preference Claims 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 Within 90 days prior to bankruptcy
  108. 108. z Debtor/trustee must prove each element of preference Burden of proof for elements is on debtor/trustee Creditor can establish an “affirmative defense” Creditor has burden of proof on any affirmative defense Defense Considerations
  109. 109. z Preference Negotiation +Review demand +Correct any misinformation +Complete any incomplete information PHASE 1
  110. 110. z + The demand may include credits as transfers + The demand may be based on incomplete information + The demand may completely omit new value that you provided + The demand may claim transfers which were returned NSF PHASE 1
  111. 111. z +Verify the delivery dates +Verify the payment dates + Date when payment was received + Date when payment cleared debtor’s bank PHASE 1
  112. 112. z +Analyze the defenses available to you +Gather historical data and industry data +Structure your data analysis to support those defenses PHASE 2
  113. 113. z +Let’s talk about defenses + Ordinary course of business + Subsequent new value + Contemporaneous exchange + Lien rights issues PHASE 2
  114. 114. z Ordinary Course of Business Defense Encourages creditors to deal with companies on “normal” credit terms
  115. 115. z Ordinary Course of Business Defense The debt was incurred in the ordinary course of the business between debtor and creditor, AND: EITHER Payment is made in the ordinary course of business of the debtor and the transferee OR Payment is made according to ordinary business terms in the industry
  116. 116. z Ordinary Course of Business Between the Parties Consistency with other business transactions between parties Examines course of conduct + payment history prior to filing Historical period v. preference period Consistency late payments may qualify as ordinary payments Payment that is “normal” in parties’ course of dealing
  117. 117. z 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
  118. 118. z Ordinary Business Terms: Objective Ordinary Course Payment is “ordinary” in relation to the relevant industry standard Examine industry as a whole Explore practices common to similarly situated businesses Usually requires expert testimony
  119. 119. z Subsequent New Value Defense Creditor may have replenished the value of Debtor by continuing to supply goods/services
  120. 120. z Subsequent New Value 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 are not relevant
  121. 121. z Subsequent New Value Defense Creditor may have replenished the value of Debtor by continuing to supply goods/services
  122. 122. z Subsequent New Value +May not be available if Creditor retains a security interest +May not be available if Debtor later paid for the new goods prior to the petition date
  123. 123. z Contemporaneous Exchange Defense Creditor gave new value at the same time that Debtor made a payment (COD)
  124. 124. z Lien Rights Defense Creditor had lien rights or security interest and therefore would have received full payment from collateral regardless of preferential payment
  125. 125. z +Demands and counteroffers +Trustee generally demands 100% of preference payment +Present all defenses in a persuasive manner, then offer a portion of your exposure PHASE 3
  126. 126. z +Don’t wait for the preference demand letter +Consider addressing a potential preference earlier in the case, such as + When debtor wants to negotiate post- bankruptcy terms + When discussing 503(b)(9) claims + When discussing reclamation claims + When discussing lien rights PHASE 3
  127. 127. z +The type of bankruptcy becomes important in preference negotiations +Chapter 7 claims are sometimes cheaper to resolve +Chapter 11 claims may be more regimented +Court approval of a settlement may be required in some cases PHASE 3
  128. 128. z +If the bankruptcy is a large chapter 11 with many preference claims, the court may have entered an order establishing preapproved settlement terms +This is a shortcut to see the minimum that the debtor can accept without requesting court approval of the settlement +Exactly like seeing the opponent’s playbook PHASE 3
  129. 129. z Customer has payment problems? +Be aware of changes in the customer relationship +Maintain consistency in the customer relationship +Consider retaining a security interest +Consider requiring COD terms
  130. 130. z Customer has payment problems? +Accept payments even if you are wary of a looming bankruptcy +If a bankruptcy is filed, maintain the invoice/payment records in case you receive a preference demand up to 2 years later
  131. 131. z Special Issue: Dischargeability +Prevent the debtor from escaping liability +Only for special circumstances +If you win, the debtor still owes the debt BUT there’s still no guarantee of collection
  132. 132. z Dischargeability of Certain Debts + Money/services obtained by false pretenses, false representations, or actual fraud + Embezzlement, larceny, or defalcation + Debts for willful or malicious injury by the debtor to another entity or to the property of another entity + Failure of the debtor to name the creditor in the bankruptcy, unless the creditor had notice or actual knowledge of the case
  133. 133. z Dischargeability of Certain Debts +Creditor/claimant must file a complaint in the bankruptcy court by the deadline +Debtor has the opportunity to defend the complaint and try to overcome the presumption +These are hotly contested and can involve a lot of legal costs
  134. 134. z Christy A. Prince (614) 462-5444 Thank You!