keeping the gold: successfully resolving preference claims

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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 + Ritterlmcclatchey@keglerbrown.comkeglerbrown.com/mcclatchey614-462-5463