Adding Insult to Injury


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Information on bankruptcy preference and trade creditors' defenses.

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Adding Insult to Injury

  1. 1. Adding Insult to Injury: Bankruptcy Preference & Trade Creditors’ Defenses Presented by DORMAN WOOD, CEW, CCE July 23, 2009 DORMAN WOOD associates, LLC (c) 2009
  2. 2. DORMAN WOOD associates, LLC (c) 2009 YOU WANT ME TO PAY BACK HOW MUCH?!!!!!!!!@@@@####$$$%%%%&
  3. 3. DORMAN WOOD associates, LLC (c) 2009 TOTAL PAYMENTS LISTED = $17,821,740.18 , COMPLAINT FILED IN COURT ADDED $6,278,812.54 FOR A TOTAL CLAIM OF $24,100,552.72
  4. 4. WHAT IS A PREFERENCE? DORMAN WOOD associates, LLC (c) 2009 A preference or preferential transfer is any transfer of property, including money, made by an entity to a creditor of that entity within 90 days prior (including filing date) to the entity’s filing for bankruptcy United States Bankruptcy Code §547(b), 11 U.S.C. The trustee may avoid any transfer of an interest in the debtor in property – (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made [a] on or within 90 days before the date of the filing of the petition; or [b] between 90 days and one year before the date of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if – [a] the case were a case under Chapter 7 of this title; [b] the transfer had not been made; and [c] such creditor received payment of such debt to the extent provide by the provisions of this title
  5. 5. WHO CAN AVOID A TRANSFER? DORMAN WOOD associates, LLC (c) 2009 A bankruptcy trustee or debtor in possession (the unsecured trade creditors’ committee can act on behalf of the DIP) has the power to “avoid” a transfer and recover the property transferred. The property recovered (less the trustee’s fees and legal expenses) is shared with all of the entities creditors. The end result being that companies can be forced to return payments they received within 90 days of their customer’s bankruptcy. A preference claim is intended to discourage unusual action during a debtor’s slide into bankruptcy and to promote equality of treatment among creditors (whether paid or not).
  6. 6. DORMAN WOOD associates, LLC (c) 2009 I GOT PAID WITHIN 90 DAYS OF MY CUSTOMER’S BANKRUPTCY, DO I HAVE TO GIVE THE MONEY BACK? NOT NECESSARILY! Some transfers are protected from avoidance by “Affirmative Defenses” set forth in the Bankruptcy Code. “Affirmative” means that the defendant (YOU) will have the burden of proof. DOES THE TRANSFER QUALIFY FOR AN AFFIRMATIVE DEFENSE? Affirmative defenses include: 1) the transfer was made in a contemporaneous exchange for new value to the debtor; 2) the transfer was made in the ordinary course of business; 3) the transfer was a security interest in property securing new value for the debtor; 4) the transfer was made after the creditor provided new value; 5) the transfer was of property with an aggregate value of less than $5,475. CONTEMPORANEOUS EXCHANGE: Payments received as ‘cash on delivery’ (COD) and that result in the immediate shipment to the debtor is described as a contemporaneous exchange and is not recoverable.
  7. 7. <ul><li>ORDINARY COURSE OF BUSINESS: Payments made in the ordinary </li></ul><ul><li>course of business are not recoverable. Prior to October 2005, the Code </li></ul><ul><li>Required a creditor to prove 3 components or prongs of “ordinary course”: </li></ul><ul><li>(a) the debt was incurred by the debtor in the ordinary course of business between the debtor and transferee (creditor); </li></ul><ul><li>(b) the payment was made in the ordinary course of the business or financial affairs of the debtor and transferee; AND </li></ul><ul><li>(c) the payment was made according to ordinary business terms used in the industry in which the debtor and transferee operate </li></ul><ul><li>BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) took </li></ul><ul><li>Affect in October 2005. Revisions included in BAPCPA included a significant </li></ul><ul><li>change to an ordinary course of business defense. </li></ul>DORMAN WOOD associates, LLC (c) 2009
  8. 8. DORMAN WOOD associates, LLC (c) 2009 ORDINARY COURSE OF BUSINESS CONT’D: After October 2005 , the Code Required a creditor to only prove 2 components or prongs of “ordinary course” §547 (c)(2)(b) : (a) the debt was incurred by the debtor in the ordinary course of business between the debtor and transferee (creditor); (b) the payment was made in the ordinary course of the business or financial affairs of the debtor and transferee; OR (c) the payment was made according to ordinary business terms used in the industry in which the debtor and transferee operate Components (a) and (b) are considered the “subjective test” and requires testimony from company representatives about the way the two parties had historically conducted business with each other. The transferee (creditor) must Prove that the subject transfer(s) was/were consistent with the past practice between the two parties.
  9. 9. <ul><li>Component (c) is considered the “objective test” and usually requires the </li></ul><ul><li>testimony of an expert witness or witnesses about the way other businesses in </li></ul><ul><li>the same industry generally conduct business. The transferee must prove that </li></ul><ul><li>the subject transfer(s) was/were consistent with the way most businesses in </li></ul><ul><li>that industry would have done things. </li></ul><ul><li>Proving components (a) and (b) requires an analysis of the history and </li></ul><ul><li>variation of payment practices between the debtor and creditor. </li></ul><ul><li>This is a “fact finding” investigation. However, creditors usually have the data </li></ul><ul><li>available to determine whether the debtor routinely was a “slow pay” and </li></ul><ul><li>whether the alleged preferential payment(s) was/were within the usual </li></ul><ul><li>payment experience with the particular debtor. </li></ul>DORMAN WOOD associates, LLC (c) 2009
  10. 10. <ul><li>A major focus when comparing the relationship between the creditor and debtor </li></ul><ul><li>in the preference and pre-preference period is the timing of payments. </li></ul><ul><li>• The payment date or check clearing date becomes critical when a payment </li></ul><ul><li>history analysis is prepared to aid in the defense of a preference action. </li></ul><ul><li>Typically, the attorney filing a preference action prepares an analysis showing </li></ul><ul><li>a history of his or her client’s payments to creditors. Such analysis generally </li></ul><ul><li>uses the check date as the “date of payment.” </li></ul><ul><li>• Defense attorneys will generally use the date when the debtor’s check was </li></ul><ul><li>paid or cleared as the payment date. </li></ul><ul><li>• In calculating the period from a creditor’s invoice date until the payment date, </li></ul><ul><li>a discrepancy of several days can result between payment analysis prepared </li></ul><ul><li>by plaintiff and defense. Such discrepancies can make the difference of </li></ul><ul><li>whether a debtor’s payment falls within the 90 day preference period. This is especially </li></ul><ul><li>true if you use a lockbox system and customer checks are deposited to your account </li></ul><ul><li>on the same day received. </li></ul><ul><li>See In Re National Gas Distributors, LLC, Bankr E.D. North Carolina – the Court held that a preference defense must </li></ul><ul><li>include analysis of both the relationship between the debtor and creditor, as well as the standards within their relevant </li></ul><ul><li>industry </li></ul><ul><li>See In Re Barnhill v Johnson, 91-159, U.S. 10 th Circuit Court of Appeals, 1992 – the court of appeals held that a date of </li></ul><ul><li>Honor rule should govern 547(b) actions </li></ul>DORMAN WOOD associates, LLC (c) 2009
  11. 11. DORMAN WOOD associates, LLC (c) 2009 HISTORICAL PAYMENT ANALYSIS A payment history analysis should extend beyond the 90 day preference period. A payment history analysis should also include at least one year period prior to the beginning of the 90 day preference period. Two years if it is to your advantage. The payment history analysis is used to establish and compare several facts of the relationship between the parties: • DSO – time between invoice date and payment date; the creditor must establish that the range of DSO’s in the preference period is well within the range of DSO’s in the pre-preference period. • Range of Payments – the difference between the shortest payment time and the longest payment time (the low and the high) • Courts have often compared the range of payments between the preference period and the pre-preference period.
  12. 12. DORMAN WOOD associates, LLC (c) 2009 PAYMENT ANALYSIS EXAMPLE Check Num Amt Paid Paymt Rec Dt Inv Number Inv Date # Days 1400551920 21970.8 02/05/01 794299683 12/13/00 54 1400553795 46235.8 02/14/01 794317034 02/09/01 5 1400553795 24070 02/14/01 794317035 02/09/01 5 1400553795 138788.01 02/14/01 794317036 02/09/01 5 1400553881 676.6 02/15/01 794251802 10/09/00 129 1400553881 23231.7 02/15/01 794261267 10/20/00 118 1400553881 1250 02/15/01 794264175 10/25/00 113 1400553881 4103.09 02/15/01 794277461 11/09/00 98 1400553881 250 02/15/01 794282675 11/16/00 91 1400553881 48438.8 02/15/01 794299080 12/12/00 65 1400553881 9482.75 02/15/01 794299081 12/12/00 65 1400553881 270063.5 02/15/01 794299082 12/12/00 65 1400553881 153281.75 02/15/01 794299684 12/13/00 64 1400553881 3942.5 02/15/01 794299687 12/13/00 64 1400553881 88989.3 02/15/01 794299688 12/13/00 64 1400553881 20480.28 02/15/01 794299690 12/13/00 64 1400553881 10387 02/15/01 794301155 12/14/00 63 1400553881 207.5 02/15/01 794301156 12/14/00 63 1400553881 4807.6 02/15/01 794301157 12/14/00 63
  13. 13. DORMAN WOOD associates, LLC (c) 2009 OVERALL DSO COMPARISON                     1999 2000 2001   DSO AVERAGE             VENTURE LINE DSO HISTORY: 73.6 71.1 73.8   72.8             INDUSTRY DSO HISTORY: 63.3 68 58.5   67.3             DSO BRIDGE V MERISEL:         63.7                 OVERALL AVERAGE DSO: 67.9
  14. 14. DORMAN WOOD associates, LLC (c) 2009 THE MEAN The Mean is the average – it is computed by adding the DSO’s and dividing by the number of invoices. Courts have often considered the Mean as a measure of whether the payment practices during the preference period were ordinary in relation to the payment practices in the pre-preference period. See Official Unsecured Creditors Committee v. Ford Motor Credit Company (In re Ed Jefferson Contracting, Inc.), Bankr. E.D. Mo PAYMENT CONSISTENCY Historical data must establish not only that the payments were within the creditors’ usual payment experience with the debtor, but that the method of payment (i.e., standard company check v cashier’s check or wire transfer) did not change in any manner during the preference period.
  15. 15. DORMAN WOOD associates, LLC (c) 2009 ORDINARY BUSINESS TERMS Generally, the harder prong to prove is that payment of the debt was ordinary in the relevant industry . This usually requires expert testimony and external evidence from the creditor’s competitors. Testimony from the creditor’s own employees may be considered self-serving and given little weight by the courts. Sourcing this information can be problematic, as it is often considered proprietary in a competitive industry. Outside experts attempt to confirm this type of information from a variety of sources; i.e., NAICS/SIC, credit reporting agencies, industry credit group statistics and industry trade associations. See In re Bridge Information Systems, Inc. vs Gulfcoast Workstation Corp., Bankr. E.D. Mo 2006
  16. 16. DORMAN WOOD associates, LLC (c) 2009 WHAT IS AN INDUSTRY? The case most referred to with respect to establishing what an industry is, is Tolana Pizza Products in which the court stated: “… the most important thing is not that the dealings between the debtor and the allegedly favored creditor conform to some industry norm but that they conform to the norm established by the debtor and the creditor in the period before, preferably well before, the preference period. That condition is satisfied here—if anything……” “ We conclude that “ordinary business terms” refers to the range of terms that encompasses the practices in which firms similar in some general way to the creditor in question engage, and that only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary...” See Tolona Pizza Products Corp., U.S. Court of Appeals, 7 th Circuit No. 92-3386, August 19, 1993
  17. 17. DORMAN WOOD associates, LLC (c) 2009 BAPCPA RESTRICTIONS SMALL PREFERENCE CLAIMS – No preference claim can be filed unless the total of all alleged preferential transfers received by a particular creditor total at least $5,000. VENUE – Preference claims of less than $10,000 can only be filed in the jurisdiction where the defendant resides ( a corporate creditor ‘resides’ in any district where it has sufficient contacts to subject itself to jurisdiction, so there may be multiple districts where a corporate defendant may be sued)
  19. 19. KNOW YOUR ENEMY – Who can collect preference claims DORMAN WOOD associates, LLC (c) 2009 The strategies for defending against a preference claim are clearer if you understand who your opponent is and what his/her incentives are. Preference claims may be brought by any of several parties. These include attorneys representing: • the debtor • court appointed trustee • the unsecured trade creditors committee • bankruptcy plan administrator • collection agency “ Keep your friends close – hold your enemies closer”…An Arabian proverb
  20. 20. <ul><li>Regardless of the party bringing the claim, you should be aware of the following: </li></ul><ul><li>• In many cases the trustee, attorney or collection agency is employed on a </li></ul><ul><li>contingency or other incentive-based system. This usually encourages the </li></ul><ul><li>claimant to try and settle claims quickly while spending as little time as </li></ul><ul><li>possible. </li></ul><ul><li>• The debtor’s records are generally a mess. As a result, initial preference </li></ul><ul><li>demand letters are usually generated from the debtor’s check register or A/P </li></ul><ul><li>records, with no analysis of creditor-preference defenses. </li></ul><ul><li>• The claimant is generally pursuing a multitude of other preference claims, so </li></ul><ul><li>you aren’t the only one. This leads to several issues which may affect your </li></ul><ul><li>strategy. </li></ul><ul><li>• A preference claim can be filed at any time within 2 years after the date of the </li></ul><ul><li>bankruptcy filing. </li></ul><ul><li>• Although a preference claim can be filed at any time within 2 years after the </li></ul><ul><li>bankruptcy filing date, “John Doe” or sealed complaints can be filed to stop the 2 year </li></ul><ul><li>clock from running out, with defendants to be named at a later date. Also, a plaintiff and </li></ul><ul><li>a defendant may enter into a “tolling agreement” in which the 2 year clock is stopped </li></ul><ul><li>while the parties agree to negotiate a settlement without a trial, if possible. </li></ul><ul><li>• The 2 year period can be extended by 2 year in the event the trustee initially assigned </li></ul><ul><li>to the bankruptcy case is replaced. </li></ul>DORMAN WOOD associates, LLC (c) 2009
  21. 21. <ul><li>• Early settlements may set a precedent for future settlements. The claimant </li></ul><ul><li>may, therefore, show less flexibility at the beginning of his/her efforts than it will </li></ul><ul><li>after most claims are resolved. </li></ul><ul><li>• Big claims received almost all of the claimant’s attention over the smaller </li></ul><ul><li>claims. The attention your case receives may have more to do with the </li></ul><ul><li>comparative size of the claim rather than with its validity. The claimant will </li></ul><ul><li>probably ignore or be aware of any special facts concerning the claim against </li></ul><ul><li>you. </li></ul>DORMAN WOOD associates, LLC (c) 2009
  22. 22. <ul><li>DELAY: You have the money! Hold on to as much of it for as long as you </li></ul><ul><li>can! Depending on the amount of the preference claim against you (your </li></ul><ul><li>company), if you ignore the initial demand letter, you may never hear from the </li></ul><ul><li>claimant again. </li></ul><ul><li>MAKE THE CLAIMANT DISCLOSE ITS LEGAL THEORY </li></ul><ul><li>BEFORE YOUR RAISE YOUR DEFENSES: It is easier to </li></ul><ul><li>Defend a claim if you know the other side’s factual and legal arguments. </li></ul><ul><li>A good strategy is a letter to the claimant stating that your company records do </li></ul><ul><li>not show any receipt of payments that would be considered a preference. The </li></ul><ul><li>letter should ask the claimant to furnish you with any information they have </li></ul><ul><li>supporting their preference claim against your company. </li></ul>DORMAN WOOD associates, LLC (c) 2009
  23. 23. <ul><li>ANALYZE YOUR DEFENSES: Once you receive available Information </li></ul><ul><li>concerning the preference claim you should analyze your defenses. </li></ul><ul><li>If the claim is large, you may wish to retain the services of an attorney who </li></ul><ul><li>specializes in commercial bankruptcy matters. You may also want to consider </li></ul><ul><li>sending a detailed letter to the claimant’s attorney citing defenses to all claimed </li></ul><ul><li>amounts. Depending on the amount of the preference claim, you might </li></ul><ul><li>consider including a low settlement offer in this letter. </li></ul><ul><li>COST-BENEFIT SETTLEMENT ANALYSIS: Settlement strategies </li></ul><ul><li>depend on the size of the claim and the strength or weakness of your defenses. </li></ul><ul><li>Although you may think you have no viable defenses, you still have negotiating </li></ul><ul><li>power - YOU HAVE THE MONEY! </li></ul>DORMAN WOOD associates, LLC (c) 2009
  24. 24. <ul><li>SETTLEMENT NEGOTIATIONS: Never offer 100 cents on the </li></ul><ul><li>dollar. Remember, you have the money , they don’t! In almost all cases, the </li></ul><ul><li>Claimant will take less than the preference claim amount just to settle the case. </li></ul><ul><li>How much less depends on the facts of the case and amount of the claim. </li></ul><ul><li>• Never respond to a preference demand by sending a check. </li></ul><ul><li>• Never make your best (rock-bottom) settlement offer at the beginning of your </li></ul><ul><li>negotiations. Unless the claim amount is so small you don’t want to bother </li></ul><ul><li>with it, start with a low dollar offer and increase only if necessary. </li></ul>DORMAN WOOD associates, LLC (c) 2009
  25. 25. <ul><li>GOING TO TRIAL: This is always your last resort. On the whole, </li></ul><ul><li>bankruptcy judges do not want to see preference suits in their courts . </li></ul><ul><li>Plaintiffs and defendants in preference actions are strongly encouraged to </li></ul><ul><li>settle the matters outside of court. Of course, the dollar amount of the </li></ul><ul><li>preference claim and the strength of your defenses are the determining factors </li></ul><ul><li>in whether you proceed to trial. </li></ul><ul><li>If you and your attorney cannot reach a settlement with the claimant, there are </li></ul><ul><li>a number of factors to consider in going to trial: </li></ul><ul><li>• Cost – consider the overall costs involved in defending a preference claim; </li></ul><ul><li>attorney fees, expert witness fees, administrative costs involved in answering </li></ul><ul><li>discovery motions, travel expenses – if out of state, court costs and plaintiff </li></ul><ul><li>attorney fees if you lose, to name just a few. </li></ul><ul><li>• Time – trial preparation, depositions and time at trial can be extensive. Can </li></ul><ul><li>you and the necessary personnel really afford to devote the time required? </li></ul>DORMAN WOOD associates, LLC (c) 2009
  26. 26. <ul><li>WHAT TO EXPECT IN MOUNTING A PREFERENCE </li></ul><ul><li>DEFENSE: Remember that the plaintiff (debtor) does not have to prove </li></ul><ul><li>any aspect of a preference claim – the burden is solely upon the defendant </li></ul><ul><li>(creditor). That said, you can expect the plaintiff’s attorney to be aggressive in </li></ul><ul><li>prosecuting his or her claim. </li></ul><ul><li>In an effort to counter a creditor’s “ordinary course” defense, plaintiff’s attorneys </li></ul><ul><li>have been known to cite a variety of “common, everyday” processes as not in the “ordinary </li></ul><ul><li>course that credit professionals take for granted as ordinary.” Some of these are: </li></ul><ul><li>• Use of lockbox systems for collection of customer payments. </li></ul><ul><li>• Customer’s use of remittance advice for payment application instructions </li></ul><ul><li>• Change of credit terms during business relationship </li></ul><ul><li>• Regular collection or follow-up calls are made to customers </li></ul><ul><li>• Reliability/accuracy of creditor’s billings to debtor due to computer conversion </li></ul><ul><li>• Adherence to corporate credit policy </li></ul><ul><li>• An open credit memo is the same as a preference payment </li></ul>DORMAN WOOD associates, LLC (c) 2009
  27. 27. <ul><li>Discovery and Federal Rules of Civil Procedure: FRCP – Federal </li></ul><ul><li>Rules of civil procedure require that any and all documents and/or information </li></ul><ul><li>relating to the business relationship between two parties be identified and </li></ul><ul><li>secured as soon as potential litigation becomes evident. Such documents and </li></ul><ul><li>Information includes all hard copy and electronically stored matter. Such </li></ul><ul><li>information and documentation must be in its original form. The location </li></ul><ul><li>and custodian(s) of such documents and information must also be identified. </li></ul><ul><li>Cost and extent of discovery: Depending on the length of a business </li></ul><ul><li>relationship between two parties, discovery can be a time consuming and </li></ul><ul><li>expensive proposition. Potential time and expense of answering discovery </li></ul><ul><li>motions should be considered in your defense strategy. </li></ul>DORMAN WOOD associates, LLC (c) 2009
  28. 28. <ul><li>• Apply payments to most recent invoices. It is difficult to establish the ordinary-course-of-business </li></ul><ul><li>defense when payments are applied to ‘stale invoices’ and are otherwise outside of invoice terms. </li></ul><ul><li>The closer the payment is to the invoice date, the less likely it looks like an extraordinary or unusual </li></ul><ul><li>transaction. </li></ul><ul><li>• Go COD or CWO – transaction must involve cash, not payment by check. Such transactions likely </li></ul><ul><li>qualify for the extemporaneous exchange for new value defense. </li></ul><ul><li>• Third-party guaranties – payments or transfers received from third-parties do not qualify as an </li></ul><ul><li>interest in property of the debtor. </li></ul><ul><li>• Third-party proceeds – </li></ul><ul><li>+ Progress Payments </li></ul><ul><li>+ Performance Bond Payments </li></ul><ul><li>+ Completion Bond Payments </li></ul><ul><li>+ Letter of Credit </li></ul><ul><li>• Deposit payments </li></ul><ul><li>• Escrow payments or payments from a Trust Fund </li></ul><ul><li>• Avoid post-dated checks – remember the ‘check clearance’ date is the important factor </li></ul><ul><li>in preference matters, not the date the check is received. </li></ul><ul><li>• Setoffs may not be avoidable** </li></ul><ul><li>• Consistent policies and accurate record keeping – consistent credit policies, in both </li></ul><ul><li>theory and practice, are key to a creditor in establishing the ordinary course of business </li></ul><ul><li>defense. Accurate record keeping is key to establishing a new value defense – creditors must be </li></ul><ul><li>able to show that invoice dates, payment terms, billing period and dates payments were applied </li></ul><ul><li>• If you settle a preference claim, you may be able to file an administrative claim for the difference </li></ul><ul><li>• Be sure your bad debt reserve is sufficient to cover any preference claim amount </li></ul><ul><li>* See In Re ITXS, Inc., Bankr. W.D., PA, 2004 </li></ul><ul><li>** See In Re American Remanufacturers, Inc. Bankr.D. Del 2008 </li></ul>DORMAN WOOD associates, LLC (c) 2009 TIPS ON AVOIDING OR LIMITING PREFERENCE CLAIMS:
  29. 29. <ul><li>Opposing Attorneys generally take depositions for four reasons: </li></ul><ul><li>• They want to find out what facts you have in your actual knowledge and </li></ul><ul><li>possession regarding the issues of the preference claim. They are interested </li></ul><ul><li>in what your story is now and what it is going to be at trial. </li></ul><ul><li>• They want you to testify to a specific story so that you will have to tell the </li></ul><ul><li>same story at trial and they will know in advance what your story will be. </li></ul><ul><li>• Your testimony given in a deposition may be read at trial or entered into evidence. They hope to catch you in a lie or omission because if they were to do so, they can claim at the trial that you are not a truthful person, and therefore, your testimony is not to be believed on any of the points, particularly, the crucial ones. </li></ul><ul><li>• A deposition may be used to narrow the issues of the case. Stipulations of </li></ul><ul><li>fact may be made during the course of the deposition which may substantially </li></ul><ul><li>shorten a trial. </li></ul>DORMAN WOOD associates, LLC (c) 2009 DEPOSITION & TESTIMONY
  30. 30. <ul><li>Your testimony in a deposition, like in a courtroom, is given under oath. The </li></ul><ul><li>questions asked and your answers will be recorded by an official court reporter. </li></ul><ul><li>Your own attorney will be present during your deposition and can ask for </li></ul><ul><li>clarification of questions asked of you, or object to questions being asked. </li></ul><ul><li>However, despite your attorney’s objections, you must answer all questions put </li></ul><ul><li>to you by opposing counsel. During the deposition, you have the right to ask for </li></ul><ul><li>breaks and to speak with your attorney. </li></ul><ul><li>You will also have the opportunity to meet with your attorney before the </li></ul><ul><li>deposition to review your testimony. In fact, opposing counsel will ask you </li></ul><ul><li>during the first part of the deposition if you had a previous meeting with your </li></ul><ul><li>attorney. In answer to this question, you need only state that your attorney </li></ul><ul><li>instructed you to answer all questions as truthfully and to the best of your </li></ul><ul><li>ability. Anything else said during your meeting is covered by attorney-client </li></ul><ul><li>privilege. </li></ul>DORMAN WOOD associates, LLC (c) 2009 Deposition and Testimony Cont’d:
  31. 31. <ul><li>During your pre-testimony meeting, your attorney will no doubt instruct you on </li></ul><ul><li>how to conduct yourself during questioning by opposing counsel. It is only </li></ul><ul><li>natural that you will be nervous. However, try to stay relaxed; be polite; speak </li></ul><ul><li>in a calm voice; listen carefully to all of the attorney’s questions; ask for </li></ul><ul><li>clarification of any question or part of a question you do not fully understand; </li></ul><ul><li>you may take as much time as needed to think about your answer to a question </li></ul><ul><li>before you speak; when answering a question, remember only to answer the </li></ul><ul><li>question, do not offer any additional information than was asked for; never </li></ul><ul><li>attempt to explain or justify your answers; do not use words like “never” or </li></ul><ul><li>“ always;” if asked about conversations with others, or statements by others, </li></ul><ul><li>make it clear if you are paraphrasing comments made by you or others, as </li></ul><ul><li>opposed to quoting directly what was said; never argue with opposing counsel; </li></ul><ul><li>don’t lose your temper – this will play right into the attorney’s hands. Expect </li></ul><ul><li>him or her to try and upset or rattle you during your testimony. </li></ul><ul><li>Remember, he or she is the enemy! So, don’t get chummy with them. </li></ul>DORMAN WOOD associates, LLC (c) 2009 Deposition and Testimony Cont’d:
  32. 32. <ul><li>Unless otherwise instructed, do not bring any documents to the deposition as </li></ul><ul><li>they will subject to review or copying by opposing counsel. Opposing counsel </li></ul><ul><li>will probably bring a variety of documents for you to review and comment on </li></ul><ul><li>during the deposition. You will not be expected to remember all details of </li></ul><ul><li>transactions, events or conversations you may have had over a long period of </li></ul><ul><li>time. Don’t offer to answer questions about documents that are not available for </li></ul><ul><li>your review during the deposition. </li></ul><ul><li>Remember, it is opposing counsel’s job to try and trip you up on </li></ul><ul><li>answers to his/her questions. They may ask you the same question, </li></ul><ul><li>only phrased differently, more than once during the deposition. If you have </li></ul><ul><li>already answered the question, you can ask that the question be read back </li></ul><ul><li>from the court reporter’s transcript. </li></ul><ul><li>Courtroom testimony is basically the same as during a deposition, except that </li></ul><ul><li>you are in a courtroom with a judge presiding. Your counsel will lead you through direct </li></ul><ul><li>testimony regarding your experience and knowledge of the relationship between your </li></ul><ul><li>company and the debtor. The opposing counsel will usually refer to your deposition in an </li></ul><ul><li>effort to trip you up in court. </li></ul>DORMAN WOOD associates, LLC (c) 2009 Deposition and Testimony Cont’d:
  33. 33. <ul><li>At the conclusion opposing counsel’s questions, your attorney may ask you a </li></ul><ul><li>series of questions on “re-direct” to clarify certain points. Following your </li></ul><ul><li>deposition, a copy of the official transcript of your testimony will be provided for </li></ul><ul><li>your review and attestation as to it’s completeness and accuracy. Any </li></ul><ul><li>discrepancies can be corrected at that time. </li></ul><ul><li>Courtroom testimony is basically the same as during a deposition, except that </li></ul><ul><li>you are in a courtroom with a judge presiding. </li></ul><ul><li>Your own attorney will usually call you to the witness stand where you will be </li></ul><ul><li>sworn in. He or she will then lead you through some basic questions about your </li></ul><ul><li>background, employment and your relationship or role in the matter before the </li></ul><ul><li>court. Then, you will be questioned about certain aspects of your preference </li></ul><ul><li>defenses and you may be asked to review certain documents that pertain to the </li></ul><ul><li>case. </li></ul>DORMAN WOOD associates, LLC (c) 2009 Deposition and Testimony Cont’d:
  34. 34. <ul><li>At the conclusion of your testimony, the opposing attorney has his/her turn at </li></ul><ul><li>questioning you. </li></ul><ul><li>Opposing counsel will more than likely rely on your deposition testimony in </li></ul><ul><li>asking his/her questions while you on the witness stand. Again, the goal will be </li></ul><ul><li>to trip you up on any answers you may have previously given. Try to stay calm </li></ul><ul><li>and ask to review any parts of your deposition to clarify questions. </li></ul><ul><li>At the conclusion of opposing counsel’s questioning, your own attorney may </li></ul><ul><li>have questions for your on re-direct. </li></ul><ul><li>It is not uncommon for a judge to ask questions of witnesses during their </li></ul><ul><li>testimony if he/she wishes to clarify any information or testimony given in </li></ul><ul><li>court. </li></ul>DORMAN WOOD associates, LLC (c) 2009 Deposition and Testimony Concluded:
  35. 35. <ul><li>The cost of a trial should be a major part of your preference defense strategy. </li></ul><ul><li>Even a preference defense that ends up with a settlement can be expensive, </li></ul><ul><li>so you should do a cost-benefit analysis. </li></ul><ul><li>The length and cost of a trial depends largely on the amount of money at stake. </li></ul><ul><li>When considering trial costs, you must budget for not only your attorney fees, </li></ul><ul><li>but the cost and fees related to deposition prep-time and deposition time and </li></ul><ul><li>locations, fees that will be paid to expert witnesses, travel costs for all </li></ul><ul><li>concerned – even if the venue is local for you, your attorney and/or witnesses </li></ul><ul><li>may be from out of town or state. If the trial is in a state in which your attorney </li></ul><ul><li>is not licensed to practice, it will be necessary to hire “local counsel” to sit </li></ul><ul><li>second-chair during a trial. There will also be pre-trial costs for strategy </li></ul><ul><li>sessions with your attorney and witnesses, preparation of exhibits, pre-trial </li></ul><ul><li>motions to name just a few. </li></ul><ul><li>A trial normally lasts 1-2 days. However, large, complex case may take 3 to 5 </li></ul><ul><li>days at trial. </li></ul>DORMAN WOOD associates, LLC (c) 2009 Length and Cost of a trial:
  36. 36. DORMAN WOOD associates, LLC (c) 2009 CASES OF INTEREST Bridge Information Systems v Merisel/MOCA - $24.1m preference claim , Bankr. E.D. Mo Plaintiff alleged that certain practices between the parties were not ‘ordinary course’ of business: 1) Use of bank lockbox system for collection of customer payments; 2) Use of remittance advice for payment application; 3) Monthly calls by creditor to debtor regarding payments; 4) Creditor extended greater credit limit and longer terms than competitors; 5) Terms listed on creditor’s web page were not the terms extended to debtor; 6) Terms listed on creditor’s web page were not normal for the industry; 7) Product sold by creditor could have been purchased from other sources by debtor; 8) Original invoices issued to debtor by creditor could not be reproduced; 9) Accuracy or validity of reprinted invoices could not be verified due to a computer system conversion. Bridge Information Systems v Gulfcoast Workstation Corp. - $2.2m preference claim – appeal of previous decision , Bankr. E.D. Mo Gulfcoast Workstation Corp. filed an appeal in an effort to have an earlier court decision against their ordinary course of business defense overturned. In the original suit, the plaintiff alleged that business transactions between the parties were not in the ordinary course of business and that defendant had failed to prove their new value defense. In the original suit, plaintiff had alleged that the use of remittance advice by Bridge and payment application by Gulfcoast in accordance with the remittance advice was not ordinary. Gulfcoast offered no evidence to support their defense other than the testimony of their controller and general manager, which the court found insufficient. The appellate court upheld the district court’s original decision. Hardwood P-G, Inc/Custom Forest Products v Columbia Forest Products - $3.1m preference claim, Bankr. W. D. Texas Plaintiff alleged that certain practices between parties were not ‘ordinary course’ of business: 1) Changed credit terms; 2) Stopped selling certain products to debtor; 3) Did not adhere to corporate credit/collection policy; 4) calling customer regarding late payments; 5) No written document retention policy
  37. 37. DORMAN WOOD associates, LLC (c) 2009 SUGGESTED BOOKS FOR YOUR LIBRARY Bankruptcy In Practice, 4 th Edition , American Bankruptcy Institute, $125. Preference Handbook, 2 nd Edition , American Bankruptcy Institute, $ The Electronic Evidence and Discovery Handbook , American Bar Association, $129.95 NOTE: None of the information contained in or discussed during this presentation should be considered as legal advice. Advice of competent legal counsel should always be sought in bankruptcy and other creditors’ rights matters.
  38. 38. DORMAN WOOD associates, LLC (c) 2009 Th-Th-Th-Th-Th-Th-Th-Th-Th-That's all folks! [email_address] V. 719-641-0169 F. 623-584-6041