Bankruptcy: Weapons for the Bankruptcy: Weapons for the Proactive - - PowerPoint PPT Presentation
Bankruptcy: Weapons for the Bankruptcy: Weapons for the Proactive Credit Professional Presented to the Presented to the 2009 MFSG Educational Seminar May 13 2009 Rosemont Illinois May 13, 2009 Rosemont, Illinois By: Joseph M.
Presented to the Presented to the 2009 MFSG Educational Seminar May 13 2009 – Rosemont Illinois May 13, 2009 – Rosemont, Illinois
By: Joseph M. Coleman KANE RUSSELL COLEMAN & LOGAN PC Ph 214 777 4280
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Phone: 214-777-4280 Email: jcoleman@krcl.com
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Weapons for the Proactive Credit Professional
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Weapons for the Proactive Credit Professional
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Section 503(b)(9) – 20 day Administrative Claims
Suppliers can receive an administrative claim for the value of any goods received by the debtor within 20 value of any goods received by the debtor within 20 days before the bankruptcy case.
Benefits 1) Converts a prepetition claim into an allowable administrative expense 2) Administrative claim must be paid in full as a condition of 2) Administrative claim must be paid in full as a condition of confirmation of a chapter 11 plan 3) Potential for a more prompt payment of the “20 day” Administrative Claim Means Trade Suppliers = Lawyers ) p p p y y liability
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pp y
Section 503(b)(9) – 20 day Administrative Claims
Only for goods sold in the ordinary course of Requirements
business Cl i t t ti l fil th d i i t ti l i
Recent Developments Recent Developments
the amo nt of $1 401 053 for goods deli ered to the the amount of $1,401,053 for goods delivered to the debtors was DENIED by the court.
6 In re Dana Corporation, 2007 WL 1577763 (Bankr. S.D.N.Y. May 30, 2007)
Section 503(b)(9) – 20 day Administrative Claims
When Does the Debtor Pay the y Administrative Claim?
should be paid based on: (1) prejudice to the debtor; (2) hardship to the claimant; (3) potential detriment to other creditors creditors.
confirmation payment of the administrative claim. p y
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Section 503(b)(9) – 20 day Administrative Claims
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Weapons for the Proactive Credit Professional
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Provides unsecured suppliers of goods with a relatively short window of opportunity to regain y pp y g possession of goods, despite not possessing a security interest in inventory. Immediate action is essential! is essential!
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q y customer's receipt of goods (20 days in some jurisdictions). W itt i t ti f l ithi 3 th f
delivery? No 10-day limitation.
Subject to rights of ordinary course buyers and secured lenders.
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E d d R l ti Ri ht U d BAPCPA
Bankruptcy Rights of Reclamation
Expanded Reclamation Rights Under BAPCPA
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New Law:
goods in which to demand reclamation of the goods. Demand/notice is required within 20 days after the Demand/notice is required within 20 days after the commencement of the bankruptcy case.
the debtor in the 45 days prior to petition date.
holder of a security interest in the goods or the goods’ proceeds.
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g p
Bankruptcy Rights of Reclamation Rights of reclamation claimant in bankruptcy include:
M t k t f l ti i ht b d
proceeding/TRO to recover goods.
P bl R l ti dit ’ i ht bj t t Problem: Reclamation creditor’s rights are subject to:
l d l ti l i i lik l l l lender means reclamation claim is likely valueless.
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Bankruptcy Rights of Reclamation
Impact of the Changes
can still file administrative claim for the 20-day period period.
“automatic priority ” reclamation is now important automatic priority, reclamation is now important primarily on goods delivered in the 21 to 45 days prior to the bankruptcy filing. p p y g
In re Tucker, 329 B.R. 291 (Bankr. D. Ariz. 2005). I D C 367 B R 409 (B k S D N Y 2007) 16 In re Dana Corp., 367 B.R. 409 (Bankr. S.D.N.Y. 2007).
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Weapons for the Proactive Credit Professional
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The Creditor's Committee – Fighting within the System
a) Object to Financing/Cash Collateral b) Object to Debtor’s professionals c) Object to critical vendors if disproportionate d) Retain forensic accountants e) Demand documents – including copy of Directors & Officers policy
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The Creditor's Committee – Fighting within the System
a) Discovery: Bankruptcy Rule 2004 examinations examinations b) “Take over” debtors’ lawsuits c) Attack bank’s liens and prepetition conduct c) Attack bank s liens and prepetition conduct d) Force sales process ) D l ti l f i ti e) Develop competing plan of reorganization
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The Creditor's Committee – Fighting within the System
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The Creditor's Committee – Fighting within the System
i t i i i ti voice – a very strong voice – in reorganization cases.
invitation to the party – the Committee must not p y
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The Committee's Role: Section 1103(c)
concerning administration of the case concerning administration of the case
g , , , , financial condition of the debtor, including the
the continuance of such business the continuance of such business
under § 1104 of the bankruptcy code
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The Committee's Weapons
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Other Weapons in Your Arsenal
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Other Weapons: Appoint a Trustee (§ 1104(a))
Strong presumption debtor should be permitted to remain in possession
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a) Fraud a) Fraud b) Dishonesty c) Incompetence d) Gross mismanagement d) Gross mismanagement e) Other (Examples: failure to keep accurate records, questionable transactions)
B t i t t f dit it it h ld d
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interest of creditors
Other Weapons: Force a Sale Process (§ 363)
g equity, jobs, and control versus Committee's desire to maximize distribution E l
(a) Forcing sale process (b) Competitive dynamic (b) Competitive dynamic
late (a) Opportunity for buyer (b) Opportunity for creditors to maximize
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value
Other Weapons: Director & Officer Lawsuits
Upon becoming insolvent, directors owe a fiduciary duty to creditors (a) states differ upon the precise duty ( ) p p y (b) creditors v. shareholders
( ) f d l h h i l (a) forced sale through involuntary bankruptcy (b) D&O (b) D&O (c) Reverse Merger
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Important to use throughout case in negotiations
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Getting on the Committee
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Getting on the Committee
3. Attend formation meeting
– In person In person – Via telephone – Written proxy
4. Once selected
– Select Committee chairperson Select Committee chairperson – Select counsel – Agree to bylaws ATTACK! – ATTACK!
5. Committee member time commitment
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Committee Impact
– 180 million out of the money 180 million out of the money – Objected to cash collateral, financial advisor, bidding procedures 2004 E i ti f th b k d th d bt – 2004 Examinations of the bank and the debtor – Emergency Hearings – Deal Deal
– Deal – Size up case – Pick fights carefully Get deal done
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– Get deal done
Committee Impact
– Attack first days Attack first days – Attack cash collateral – Attack sale – Attack insiders
– 300 boxes of documents 25 2004 Examinations in 75 days – 25 2004 Examinations in 75 days – Reach deal – Obtain court approval of deal
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Obtain court approval of deal
The Creditor's Committee – Fighting within the System
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Weapons for the Proactive Credit Professional
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y y
paid.
manner.
bankruptcy, and your company may have to return the money!
the government here to help you??? (Answer: No, you're not G.M.)
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Rationale Behind Bankruptcy Code Section 547 “The purpose of the preference section is twofold. p p p First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short i d b f b k t dit di d period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during the debtor's slide into bankruptcy debtor during the debtor s slide into bankruptcy. The protection thus afforded the debtor often enables the debtor to work its way out of a difficult y financial situation through cooperation with all of his
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Rationale Behind Bankruptcy Code Section 547
Second, and more important, the preference provisions facilitate the prime bankruptcy policy of p p p y p y equality of distribution among creditors of the
payment than others of his class is required to disgorge so that all may share equally. The ti f th f ti t d t 'th
race of diligent' of creditors to dismember the debtor before bankruptcy furthers the second goal debtor before bankruptcy furthers the second goal
distribution.”
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distribution.
C S Rationale Behind Bankruptcy Code Section 547
dealing with troubled companies in the di f b i
favored customers favored customers.
related entities.
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Mechanics of a Preference Lawsuit
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Assets include preference lawsuits. Mechanics of a Preference Lawsuit Trustee Assets include preference lawsuits. ASSETS ASSETS TRUSTEE (Debtor-in-Possession) HAS THE FIDUCIARY DUTY TO GATHER ASSETS UNDER BANKRUPTCY
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UMBRELLA
Mechanics of a Preference Lawsuit
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Creditor Debtor 90 d
within
90 days
preference
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preference lawsuit
Creditor Trustee
Mechanics of a Preference Lawsuit
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Mechanics of a Preference Lawsuit
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Mechanics of a Preference Lawsuit
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Mechanics of a Preference Lawsuit
Plaintiff: Has burden of proving that a given p g g transfer(s) is avoidable, according to the standard set forth in Bankruptcy p y Code Section 547(b). Defendant: Has burden of proving the non- avoidability of a transfer under one
in Bankruptcy Code Section 547(c).
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Mechanics of a Preference Lawsuit
Parties Liable. Parties liable for preferences include not only p y the initial transferee, but also the parties for whose benefit the transfer was made and the immediate or mediate transferees of the initial immediate or mediate transferees of the initial transferee.
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1. Transfer by the debtor; 1. Transfer by the debtor; 2. Of an interest of the debtor’s property; 3 To or for the benefit of a creditor; 3. To or for the benefit of a creditor; 4. On account of an antecedent debt; 5 Made while the debtor is insolvent; 5. Made while the debtor is insolvent; 6. Made within 90 days before bankruptcy; and 7 Enables creditor to receive more than in 7. Enables creditor to receive more than in Chapter 7.
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Elements of Proof in a Preference Lawsuit (Trustee’s Burden)
1. Any transfer;
( )
indirect, absolute or conditional, voluntary or involuntary, disposing of or parting with y, p g p g property or an interest in property . . .”
In other words, any action that removes property or an , y p p y interest in property from the debtor and delivers it to another party is a “transfer.” If the property given to the creditor does not come from the debtor then it is the creditor does not come from the debtor, then it is not a “transfer” for preference purposes.
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Elements of Proof in a Preference Lawsuit (Trustee’s Burden)
2. Of an interest of the Debtor in property; "property that would have been part of the
( )
property that would have been part of the estate had it not been transferred before the commencement of the bankruptcy [case]".
Payments; Granting liens; Executions on judgments; Giving up options; Anything that diminishes or depletes the d bt ' t t debtor's estate. Examples include security interests, assignments, distribution rights, tax benefits, options, and numerous g p
being a debtor's "property." Virtually any kind of advantage that a creditor obtains from a debtor during the period is l bl t tt k
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vulnerable to attack.
Compare letter of credit
Elements of Proof in a Preference Lawsuit (Trustee’s Burden)
3. To or for the benefit of a creditor;
( ) y y contingent, disputed, not matured. . .
4. For or on account of an antecedent debt
was made;
p
they are due or not, is a payment on account of an antecedent debt an antecedent debt.
to shipping or receiving those goods is not a payment of an antecedent debt
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payment of an antecedent debt.
Elements of Proof in a Preference Lawsuit (Trustee’s Burden)
5. Made while the debtor was insolvent;
( )
debtor's debts is greater than all of the debtor's property at a fair valuation property, at a fair valuation
S l ti b “b t”
6. Made within 90 days before bankruptcy is filed (one year for insiders); and
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Elements of Proof in a Preference Lawsuit (Trustee’s Burden)
7. That enables such creditor to receive more than such creditor would receive if –
( )
a. the case were a case under Chapter 7 of the Bankruptcy Code; b the transfer had not been made; b. the transfer had not been made; and c. such creditor received payment of c. such creditor received payment of such debt to the extent provided by the provisions of the Bankruptcy C d Code.
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Preference Defenses
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Defenses in a Preference Lawsuit (Creditor’s Burden)
( )
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Defenses in a Preference Lawsuit (Creditor’s Burden)
( )
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Defenses in a Preference Lawsuit
Ordinary course of business test requires that a transfer be in payment of a debt incurred by the debtor in the ordinary course of business the debtor in the ordinary course of business
transferee, and either:
1) Made in the ordinary course of business or financial affairs of the debtor and the transferee (the so- called “subjective” ordinary course test); or called subjective ordinary course test); or 2) Made according to ordinary business terms (the so- called “objective” ordinary course test).
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Ordinary course defense is essentially a new statute post- y y p
changing an 'and' to an 'or'.
What does this mean for creditors?
Two disjunctive, alternative defenses:
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y y terms.
Defenses in a Preference Lawsuit
Ordinary course of business test requires that a transfer be in payment of a debt incurred by the debtor in the ordinary course of business the debtor in the ordinary course of business
transferee, and either:
1) Made in the ordinary course of business or financial affairs of the debtor and the transferee (the so- called “subjective” ordinary course test); or called subjective ordinary course test); or 2) Made according to ordinary business terms (the so- called “objective” ordinary course test).
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Defenses in a Preference Lawsuit
(Mathematical comparison of payment (Mathematical comparison of payment history before and during the preference period); and p );
(i.e., timing, amount, manner, collection efforts, and circumstances of transfers).
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Defenses in a Preference Lawsuit Ex: Debtor files bankruptcy on May 11, 2009 Preference Period Pre-preference “Historical” Period
Beginning of
90 days
Beginning of Vendor relationship 02/10/09 05/11/09 (Petition Date)
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Defenses in a Preference Lawsuit
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Defenses in a Preference Lawsuit
To properly evaluate your company's defenses to the alleged preferential transfers at issue it to the alleged preferential transfers at issue, it is essential that we understand the business relationship between your company and the p y p y bankrupt debtor. Accordingly, we ask that you provide us with a brief, but complete, written response to the following questions:
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Defenses in a Preference Lawsuit
debtor?
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Defenses in a Preference Lawsuit 2 Wh t i th f th tit t hi h th t
were made? Is that the same as the entity being sued?
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Defenses in a Preference Lawsuit
received the payments? Is that the name of the debtor seeking avoidance of the transfers?
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Defenses in a Preference Lawsuit 4 What credit terms did you offer the debtor before the
bankruptcy? (Beginning 15 months prior to the debtor's petition date and continuing to the petition date itself ) What grace period if any do you allow date itself.) What grace period, if any, do you allow for payment? Are special terms ever given for limited periods of time for promotional/seasonal reasons?
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Defenses in a Preference Lawsuit
products you sell, such that you sell more product (or the debtor pays earlier or later) depending on the time
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Defenses in a Preference Lawsuit
to those you offered to similarly situated customers? Are your credit terms for this debtor comparable to Are your credit terms for this debtor comparable to those provided by your competitors?
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Defenses in a Preference Lawsuit 7 Do you have any reason to believe the debtor was
paying you in a more favorable manner than it paid
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Defenses in a Preference Lawsuit
preference period or in the year prior to the preference period? Explain. Is there any documentation (memos letters e-mails etc ) of the change? How (memos, letters, e mails, etc.) of the change? How was the change communicated to the debtor?
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Defenses in a Preference Lawsuit
activity during, or immediately prior to, the preference period? Cessation of shipments? Threatening collection phone calls or Threatening collection phone calls or correspondence? Describe in detail, and be prepared to provide copies of all related correspondence.
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Defenses in a Preference Lawsuit
including timing of returns and credits and payment
customers?
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Defenses in a Preference Lawsuit 11 What is the timing between the date an invoice is 11.What is the timing between the date an invoice is prepared and the date related product is shipped?
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Defenses in a Preference Lawsuit 12.Did the debtor pay for goods shipped/services provided during the preference period? Be prepared provided during the preference period? Be prepared to identify by (i) invoice number, date and amount and (ii) check number, check amount and deposit date.
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Defenses in a Preference Lawsuit 13.Has a proof of claim been filed? If not, why not? Be prepared to provide us with a copy of all proofs of prepared to provide us with a copy of all proofs of claim, including any exhibits or attachments to the proof of claim.
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Defenses in a Preference Lawsuit 14.Did you receive financial statements from the debtor in the six months prior to the bankruptcy filing or did in the six months prior to the bankruptcy filing, or did you receive any other information or assurances from the debtor during that time indicating that the debtor was financially sound? was financially sound?
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Defenses in a Preference Lawsuit 15.Are there other facts that might indicate that your preference period transactions with the debtor took place in the ordinary course of business? Explain.
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Preference Defenses
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Creditor Defenses in a Preference Lawsuit
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Invoice Number Invoice Date Invoice Amount Check/Wire No. Check/Wire Date Payment Amount Payment Due Date Payment Receipt Date Invoice Date to Payment Receipt Date (Days)
HISTORICAL DATA
15 Month History Before Petition Date
1001 03/01/08 $10,000.00 536 03/07/08 $10,000.00 03/31/08 03/11/08 10 1002 04/01/08 $15,000.00 604 04/13/08 $15,000.00 05/01/08 04/17/08 16 1003 05/01/08 $25,000.00 642 06/05/08 $25,000.00 05/31/08 06/09/08 39 1004 06/01/08 $62,000.00 699 07/17/08 $62,000.00 07/01/08 07/21/08 50 1005 07/01/08 $40,000.00 713 07/16/08 $40,000.00 07/31/08 07/20/08 19 1006 08/01/08 $70,000.00 722 09/05/08 $70,000.00 08/31/08 09/09/08 39 $ $ HISTORICAL DATA 1007 09/01/08 $45,000.00 754 10/15/08 $45,000.00 10/01/08 10/19/08 48 1008 10/01/08 $30,000.00 789 11/23/08 $30,000.00 10/31/08 11/27/08 57 1009 11/01/08 $22,000.00 839 12/15/08 $22,000.00 12/01/08 12/19/08 48 1010 12/01/08 $13,000.00 862 01/16/09 $13,000.00 12/31/08 01/20/09 50 1011 01/01/09 $18,000.00 899 02/12/09 $18,000.00 01/31/09 02/16/09 46 1012 02/01/09 $20,000.00 908 03/17/09 $20,000.00 03/03/09 03/21/09 48 PREFERENCE PERIOD DATA 1013 03/01/09 $21,000.00 912 04/16/09 $21,000.00 03/31/09 04/20/09 50 1014 04/01/09 $40,000.00 950 06/20/09 $40,000.00 05/01/09 06/24/09 84 1015 05/01/09 $62,000.00 951 06/09/09 $62,000.00 05/31/09 06/13/09 43
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Invoice Number Invoice Date Invoice Amount Check/Wire No. Check/Wire Date Payment Amount Payment Due Date Payment Receipt Date Invoice Date to Payment Receipt Date (Days) HISTORICAL DATA
12 Month History Before Petition Date
1001 03/01/08 $10,000.00 536 03/07/08 $10,000.00 03/31/08 03/11/08 10 1002 04/01/08 $15,000.00 604 04/13/08 $15,000.00 05/01/08 04/17/08 16 1003 05/01/08 $25,000.00 642 06/05/08 $25,000.00 05/31/08 06/09/08 39 1004 06/01/08 $62,000.00 699 07/17/08 $62,000.00 07/01/08 07/21/08 50 1005 07/01/08 $40,000.00 713 07/16/08 $40,000.00 07/31/08 07/20/08 19 1006 08/01/08 $70,000.00 722 09/05/08 $70,000.00 08/31/08 09/09/08 39 $ $
HISTORICAL DATA
1007 09/01/08 $45,000.00 754 10/15/08 $45,000.00 10/01/08 10/19/08 48 1008 10/01/08 $30,000.00 789 11/23/08 $30,000.00 10/31/08 11/27/08 57 1009 11/01/08 $22,000.00 839 12/15/08 $22,000.00 12/01/08 12/19/08 48 1010 12/01/08 $13,000.00 862 01/16/09 $13,000.00 12/31/08 01/20/09 50 1011 01/01/09 $18,000.00 899 02/12/09 $18,000.00 01/31/09 02/16/09 46 1012 02/01/09 $20,000.00 908 03/17/09 $20,000.00 03/03/09 03/21/09 48 Mean 39 Median 47 Mode 48
15 Minimum 10 Maximum 57
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Invoice Number Invoice Date Invoice Amount Check/Wire No. Check/Wire Date Payment Amount Payment Due Date Payment Receipt Date Invoice Date to Payment Receipt Date (Days)
Preference Period
1013 03/01/09 $21,000.00 912 04/16/09 $21,000.00 03/31/09 04/20/09 50 1014 04/01/09 $40,000.00 950 06/20/09 $40,000.00 05/01/09 06/24/09 84 1015 05/01/09 $62,000.00 951 06/09/09 $62,000.00 05/31/09 06/13/09 43 Mean 59 Median 50 M d N/A PREFERENCE PERIOD DATA Mode N/A Minimum 43 Maximum 84
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Defenses in a Preference Lawsuit
Ordinary Course of Business Worksheet Focus is on average number of days between invoice date and date check is received (or between due date and check receipt date) and check receipt date).
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Defenses in a Preference Lawsuit
Average time to pay during Preference Period: A ti t hi t i ll 59 days 39 d Average time to pay historically: 39 days Which data set works best for you? A. 12 month historical average: _________ 39 days y B. 9 month historical average: _________ C. 6 month historical average: _________ y 45 days 50 days
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Defenses in a Preference Lawsuit
What is within “Ordinary Course?”
C I id th hi t i l ?
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Defenses in a Preference Lawsuit
Get creative: Get creative:
skew averages g
months; 24 months
F l i
S i l ti ff t
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Defenses in a Preference Lawsuit
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Defenses in a Preference Lawsuit
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Defenses in a Preference Lawsuit
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Defenses in a Preference Lawsuit
Was the transfer: i d th th b h k?
check? check?
mailed?
payment?
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Defenses in a Preference Lawsuit
to the debtor's deteriorating financial to the debtor s deteriorating financial condition,” or otherwise use economic pressure so as to take the payments out of p p y the ordinary course of business exception?
O h i di ?
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Defenses in a Preference Lawsuit
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Defenses in a Preference Lawsuit
Ordinary course of business test requires that a transfer be in payment of a debt incurred by the debtor in the ordinary course of business the debtor in the ordinary course of business
transferee, and either:
1) Made in the ordinary course of business or financial affairs of the debtor and the transferee (the so- called “subjective” ordinary course test); or called subjective ordinary course test); or 2) Made according to ordinary business terms (the so- called “objective” ordinary course test).
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New Ordinary Course of Business Defense: Ordinary Business Terms
Ordinary Business Terms How courts have interpreted this change:
the 'ordinary business terms' component has been removed by the ordinary business terms component has been removed by BAPCPA
y pp the transfer to determine “ordinary business terms”
In re National Gas Distributors, 346 B.R. 394 (E.D.N.C. 2006) 105
Defenses in a Preference Lawsuit
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Defenses in a Preference Lawsuit
Q: What is the relevant industry from which to draw the industry standard for to draw the industry standard for challenged credit arrangements? A: Courts look at credit practices between suppliers to whom a debtor might bl t f it i t d reasonably turn for its inventory and companies with whom the debtor competes (i.e., credit practices between co petes ( e , c ed t p act ces bet ee your competitors and the debtor's competitors).
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Defenses in a Preference Lawsuit
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Defenses in a Preference Lawsuit
Protects transfers to or for the benefit of a Protects transfers to or for the benefit of a creditor, such that after the transfer creditor gave new value to or for the benefit of debtor, g and
security interest; and security interest; and
make an otherwise unavoidable transfer to or for the benefit of s ch creditor the benefit of such creditor.
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Defenses in a Preference Lawsuit
New Value Exception After alleged preferential transfer, creditor: P id d l i l di a. Provides unsecured new value, including
b. On account of which the creditor does not receive an otherwise unavoidable transfer (i.e. avoidable lien) avoidable lien)
creditors dealing with financially troubled
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creditors dealing with financially troubled company
Defenses in a Preference Lawsuit
1. Without the exception, a creditor who extends credit to the debtor perhaps in extends credit to the debtor, perhaps in implicit reliance on prior payments, would merely be increasing his bankruptcy loss. 2. Limited protection provided by the subsequent advance rule encourages creditors to continue their revolving credit creditors to continue their revolving credit arrangements with financially troubled debtors, and potentially helps the debtor
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avoid bankruptcy altogether.
Defenses in a Preference Lawsuit
Invoice Number Invoice Date Invoice Amount Check No. Check Date Check Amount Check Receipt Date
NOTE TO PREPARER: This worksheet is intended to show the chronology of payments received and shipments made during the Preference Period. Each individual payment (by check,
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wire or otherwise) received during the Preference Period, and each shipment made during the Preference Period, should be listed chronologically. The information should be forwarded to us by e-mail in Microsoft Excel format, if possible.
(90 days prior to preference period only)
Check Invoice Number Invoice Date Invoice Amount Check No. Check Date Check Amount Check Receipt Date Net Preference 04/16/09 $18,056.21 04/20/09 $18,056.21 1015 04/21/09 $20 590 11 1234 $0 00 1015 04/21/09 $20,590.11 1234 $0.00 04/19/09 $18,420.07 04/23/09 $18,420.07 1016 04/25/09 $23,056.79 2345 $0.00 05/02/09 $18,922.37 05/06/09 $18,922.37 05/09/09 $23,479.03 05/13/09 $42,401.40 1017 05/17/09 $17,436.51 3456 $24,964.89 05/28/09 $17,127.20 06/01/09 $42,092.09 1018 06/10/09 $113,566.47 4567 $0.00
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PAID v. UNPAID NEW VALUE
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THIS IS BECOMING THE MAJORITY VIEW.
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THIS IS BECOMING THE MAJORITY VIEW.
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Creditor Prevention of Preference Lawsuits
Third Party Payment. A payment is not preferential if (i) it is made from the A payment is not preferential if (i) it is made from the assets of a third party and (ii) it does not diminish the assets remaining in the debtor's estate. Ideally, the g y debtor should have no part in such a transaction. If the debtor simply borrows the money from a third t t k th t th i d th t th party to make the payment, there is a danger that the court will still construe the payment as having been made by the debtor to the creditor rendering it an made by the debtor to the creditor, rendering it an avoidable preference. On the other hand, if a third party makes the payment directly to the creditor, the
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p y p y y , preferential transfer issue can be avoided.
Creditor Prevention of Preference Lawsuits
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Creditor Prevention of Preference Lawsuits
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Creditor Prevention of Preference Lawsuits Obtain a purchase money security interest. If you are supplying inventory for the debtor, demand a purchase money security interest in the goods sold to the debtor This requires a UCC filing and should be
accomplished prior to the 90-day preference period, or the security interest risks avoidance as a preference. If the h it i t t i t d d i th purchase money security interest is granted during the preference period and enables the debtor to acquire product that is the subject of the security interest, make sure that the funds received were used to acquire the product, and that the UCC is filed on or before 30 days after the debtor acquires possession of the product
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acquires possession of the product.
Creditor Prevention of Preference Lawsuits
The Trust or Bailment Exception. p To be preferential, a transfer must be made from “an interest in the property of the debtor ” In some interest in the property of the debtor. In some circumstances, it may be possible to structure a settlement as a return of property of the creditor that was being held by the debtor in express or constructive trust. If the property used to make the t b t d t th dit th i i l payment can be traced to the creditor as the original source, the payment may survive attack as a preference
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preference.
Creditor Prevention of Preference Lawsuits Payment in Property. The return or other transfer of property in payment of a debt i ht tit t id bl f Th i i l might constitute an avoidable preference. The principal danger here is that the transfer expressly or implicitly
p p y , y g preference liability in excess of the value the creditor actually
goods from a customer in the shadow of the customer's goods from a customer in the shadow of the customer s bankruptcy, a settlement document or credit memo should expressly state the value of the goods returned to the vendor. Th d i ht th i b h ld li bl i f The vendor might otherwise be held liable in a preference action for the original purchase price of the goods.
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Creditor Prevention of Preference Lawsuits
Change to a “cash in advance” or COD basis. If you find that an account debtor is getting If you find that an account debtor is getting behind on its payments, then decisively change payment requirements to a “cash in advance” or payment requirements to a cash in advance or COD basis. Insist on cash, cashier's check, certified check or wire transfer, and demand payment based upon the immediate same day exchange of new inventory that the debtor i k th t f COD d t receives, or make the transfer COD and accept no company checks – only cash, cashier's check
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Creditor Prevention of Preference Lawsuits
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Creditor Prevention of Preference Lawsuits
Save all payment envelopes so as to preserve the post-mark date. The post-mark will provide evidence of when the debtor mailed the check. Receipt stamps or lockbox p p schedules provide when you received the check. By doing so you might later be able to argue that the d t f ili h ld b d t d t i th ti date of mailing should be used to determine the time the debtor transferred the funds. One court has ruled that the date of mailing would apply Also ruled that the date of mailing would apply. Also helps in “slicing and dicing” the data.
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Creditor Prevention of Preference Lawsuits
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Creditor Prevention of Preference Lawsuits
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Creditor Prevention of Preference Lawsuits
Demand receipt of regular, timely financial statements. When you are dealing with a slow-paying debtor, ask that the debtor provide regular, timely financial p g y statements showing the debtor's assets and
i l t ti th th dit is a solvent corporation, then the creditor can assert the debtor's solvency in the event of any subsequent preference avoidance action You subsequent preference avoidance action. You should ask for financial statements from a slow- paying company every month or so, and no less
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p y g p y y , frequently than quarterly.
Creditor Prevention of Preference Lawsuits
Make the debtor prove its prima facie case. p p Do not return the alleged preferential payment to the debtor even if you feel that the debtor is correct in his debtor, even if you feel that the debtor is correct in his
will often settle for a smaller percentage of the preferential payment. You could save yourself some money just by making the debtor go through the h f idi ith id f i f i hoops of providing you with evidence of a prima facie case.
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Creditor Prevention of Preference Lawsuits
Does workout destroy ordinary course of business defense?
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Creditor Prevention of Preference Lawsuits
Cash in advance vs. application of payment to earliest unpaid invoice a) likelihood of bankruptcy ) p y b) What does application to oldest invoice do to ordinary course of business c) Unusually large payment
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Creditor Prevention of Preference Lawsuits
Eliminating Small Nuisances ( /k/ “ h k d ”) (a/k/a “shake downs”)
action to be filed (11 U.S.C. § 547(c)(9)).
l h $10 000 b fil d i h di i i hi h h less than $10,000 must be filed in the district in which the defendant resides (28 U.S.C. § 1409(b)). Practical impact: Preferences less than $10 000 may be
demanded, but unlikely to be pursued.
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Weapons for the Proactive Credit Professional
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Preparation of Proof of Claim
FORM AND CONTENT
1.
A Proof of Claim is required to conform substantially to Official form No. 10. 2. Who May Execute. A Proof of Claim is required to be executed by the Creditor or the Creditor's authorized representative. 3. Claim Based on Writing. When a claim is based on a writing, the original or a duplicate shall be filed with the Proof of Claim. If the writing has been lost or destroyed, a statement of the circumstances of loss or destruction must be filed with the claim. If the documents are voluminous, the official form authorizes the creditor to provide a summary. 4 Necessity for Filing In order for an unsecured creditor's claims to be allowed it must file a Proof of 4. Necessity for Filing. In order for an unsecured creditor s claims to be allowed it must file a Proof of Claim in accordance with the Bankruptcy Rules unless certain exceptions apply. With respect to reorganization cases under Chapter 11 of the Bankruptcy Code, the debtor's Schedule of Liabilities filed pursuant to bankruptcy Code Section 521(1) constitutes prima face evidence of the validity of amount the claim of creditors, unless they are scheduled as disputed, contingent or unliquidated. If a claim is scheduled as disputed, contingent or unliquidated or if a creditor disputes the amount
best rule is to always file a Proof of Claim. 5. Evidentiary Effect. A Proof of Claim executed and filed in accordance with the bankruptcy 136 5. Evidentiary Effect. A Proof of Claim executed and filed in accordance with the bankruptcy rules, constitutes prima face evidence of the validity in the amount of claim.
PROOF OF CLAIM
6. Time to File. (1) Chapter 7 Case. A Proof of Claim must be filed within ninety (90) days after the first day set for the meeting of creditors pursuant to Section 341(a) of the Bankruptcy Code, l N ti f I ffi i t A t t P Di id d i t dit d th unless a Notice of Insufficient Assets to Pay a Dividend was given to creditor and the trustee thereafter notifies the court that payment of a dividend appears possible. In such a case, creditors should receive notice of that fact and they must file Proof of Claims within 90 days of such notice. (2) Chapter 11 Cases. The court fixes a time for filing Proofs of Claim, or in a Chapter 11 case notice of such "Bar Date" may often be found on the Notice of Commencement
is binding, it is the recommendation of this author that a Proof of Claim be filed well in the advance of any bar date set by any Notice of Commencement of Case received in the advance of any bar date set by any Notice of Commencement of Case received by a creditor. 137
PROOF OF CLAIM
7. Objections to Claims. (1) Who May File A debtor or any interested party may file an objection to any claim (1) Who May File. A debtor or any interested party may file an objection to any claim against the debtor in a bankruptcy case. Generally, the debtor in a Chapter 11 case
hearing on such an objection, the debtor or the Trustee will bear the burden of proof to support the grounds to his objection. (2) Time for Objecting to Claims. Generally, Objection to Claims are filed after all assets of the estate have been liquidated in a Chapter 7 case or after confirmation of
In Chapter 11 reorganization cases the
plan and/or the disclosure statement should provide information regarding the deadline for filing Objection to Proofs of Claim. 8. A Reason not to File a Proof of Claim. In the event a particular creditor has significant preferential t f f d l t th t dit t t id t fili f transfer or fraudulent conveyance exposure, that creditor may want to consider not filing a proof
jurisdiction and thereby waive its right to a jury trial. 138
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PROOF OF CLAIM
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PROOF OF CLAIM
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PROOF OF CLAIM (cont'd)
Secured
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P i it (li t d P f f Cl i ) Priority (listed on Proof of Claim)
Governmental Units
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PROOF OF CLAIM (cont'd)
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PROOF OF CLAIM (cont'd)
Penalty for presenting fraudulent claim: Fine of up to $500,000 or imprisonment for up to 5 years, or both. 18 U.S.C. §§ 152 and 3571.
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