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Keeping the Gold: Successfully Resolving Preference Claims

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Larry McClatchey presented "Keeping the Gold: Successfully Resolving Preference Claims" on November 18-19 at the 2015 Great Lakes Region Credit Conference.

The presentation examined the definition of preference law, preferential transfer, courses of business defense and new value issues in the courts.

Published in: Law
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Keeping the Gold: Successfully Resolving Preference Claims

  1. 1. z presented by Larry J. McClatchey 2015 Great Lakes Region Credit Conference November 18-19, 2015
  2. 2. 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
  3. 3. z Purpose of Preference Law? Prevent “piecemeal” dismemberment of a debtor To promote equal distribution among creditors similarly situated
  4. 4. z Who Can Avoid a Preferential Transfer? 1 Bankruptcy trustee or “debtor in possession” 2 Representative of Liquidating Trust in chapter 11 case
  5. 5. z 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
  6. 6. z Who Has Burden of ?
  7. 7. z 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
  8. 8. z BASIC 1 Contemporaneous exchange for new value 2 Enabling Loan 3 Floating Lien 4 Statutory Lien
  9. 9. z Ordinary Course of Business Defense Encourages creditors to deal with companies on “normal” credit terms
  10. 10. z 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
  11. 11. z Ordinary Course of Business Between the Parties Payment that is “normal” in parties’ course of dealing 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
  12. 12. 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
  13. 13. z 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
  14. 14. z 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
  15. 15. z 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
  16. 16. z
  17. 17. z 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
  18. 18. z Additional Defenses to Consider
  19. 19. z 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
  20. 20. z 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?
  21. 21. z 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?
  22. 22. z TIPS Practical
  23. 23. z Review your invoices to compare to industry standards
  24. 24. z Stay consistent in your collection practices
  25. 25. z If problem customer files bankruptcy, work up defenses while fresh
  26. 26. z Preserve all records of collection communications
  27. 27. z Don’t ignore a demand letter
  28. 28. z TAKEAWAYS
  29. 29. z OK to be aggressive if consistent 1
  30. 30. z Always, always take payment offered 2
  31. 31. z May not face future avoidance or can settle claim 3
  32. 32. z Thank You! Larry J. McClatchey, Director Kegler Brown Hill + Ritter lmcclatchey@keglerbrown.com keglerbrown.com/mcclatchey 614-462-5463

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