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Leveraging Bankruptcy Preference Defenses: Trade Creditor Payments, - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Leveraging Bankruptcy Preference Defenses: Trade Creditor Payments, Earmarking, Critical Vendor, Claim Waivers, Set-Offs WEDNESDAY, APRIL 1, 2015 1pm Eastern | 12pm Central |


  1. Presenting a live 90-minute webinar with interactive Q&A Leveraging Bankruptcy Preference Defenses: Trade Creditor Payments, Earmarking, Critical Vendor, Claim Waivers, Set-Offs WEDNESDAY, APRIL 1, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Howard A. Cohen, Partner, Drinker Biddle , Wilmington, Del. Michael W. Yurkewicz, Of Counsel, Klehr Harrison Harvey Branzburg , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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  4. Advanced Preference Litigation: Leveraging Key Defenses Michael W. Yurkewicz, Esq. Klehr | Harrison | Harvey | Branzburg LLP myurkewicz@klehr.com (302) 552-5519 Howard A. Cohen, Esq. Drinker Biddle & Reath LLP howard.cohen@dbr.com (302) 467-4213 April 1, 2015

  5. Elements of a Preference • Bankruptcy Code § 547(b) defines a preference as:  a transfer of the debtor’s interest in its property,  to or for the benefit of a creditor,  on account of an antecedent or existing debt that the debtor owed to the creditor,  made while the debtor was insolvent (rebuttable presumption of insolvency during the 90 days prior to the petition date), and  on or within 90 days prior to the bankruptcy filing (or within one year if to an insider) that enables the creditor to receive more than such creditor would have received if the case were a Chapter 7 liquidation proceeding - 5 -

  6. Attacking the Prima Facie Case • Was there a transfer of a debtor’s interest in its property? • Was the transfer on account of an antecedent debt? • Did the transfer occur within the 90 days preceding the filing (or 1 year period for insiders)? • Was the debtor insolvent? • Was the creditor fully secured? - 6 -

  7. 100% Plan Payment • § 547(b)(5) requires that the debtor prove that the preferential transfer enabled the creditor to receive more than such creditor would have received if the case were a Chapter 7 liquidation proceeding. • In cases where the distribution is one-hundred percent, the allegedly preferential transfers did not enable the creditor to receive more that it would have received in a liquidation, and thus § 547(b)(5) cannot be satisfied. See 5 Collier on Bankruptcy ¶ 547.03[7] (16 th Ed. 2010) - 7 -

  8. Burden of Proof and Statute of Limitations Burden of Proof • The trustee or debtor-in-possession has the burden of proof on each element of a preference under Bankruptcy Code § 547(b) • A defendant has the burden of proof on the affirmative defenses under Bankruptcy Code § 547(c) Statute of Limitations (Bankruptcy Code § 546) • A preference action must be filed before a bankruptcy case is closed and before the later of • 2 years after entry of the order for relief (usually filing date); or • 1 year after the appointment or election of a trustee - 8 -

  9. Pleading Requirements and Motions to Dismiss Pleading requirements generally: • Complaint must contain “enough facts to state a claim to relief that is plausible on its face . . . to raise a right to relief above the speculative level” • Complaint that offers “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” • “Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of any ‘further factual enhancement.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) - 9 -

  10. Pleading Requirements and Motions to Dismiss • Although bankruptcy trustees are generally allowed more leniency in pleading than other plaintiffs, some courts have applied the Twombly/Iqbal analysis to dismiss a trustee’s preference complaint. – Gellert v. The Lenick Co. (In re Crucible Materials Corp.), Adv. No. 10-55178 (Bankr. D. Del. July 6, 2011) (dismissing complaint that had “only conclusory allegations parroting the statutory language of section 547” but granting leave to amend) – Mervyn’s LLC v. Lubert Adler Group IV, LLC (In re Mervyn’s Holdings, LLC), Adv. No. 08-51402 (Bankr. D. Del. Mar. 12, 2010) (denying leave to amend after dismissing a complaint under Twombly/Iqbal standards; complaint was facially implausible and certain allegations therein where “patently untrue”) - 10 -

  11. Pleading Requirements and Motions to Dismiss • Despite the factual specificity required in pleading, courts may grant plaintiffs leave to amend complaints to include additional facts and allow the amendment to relate back to the date of filing. – Courts have held that if a complaint indicates an intention to pursue all preference period transfers, an amended complaint with additional transfers will relate back. ) - In re Circuit City Stores, Inc. , 515 B.R. 302 (Bankr. E.D.Va. 2014). - 11 -

  12. Pleading Requirements and Motions to Dismiss • In a jointly administered case, is the debtor that paid each transfer identified? • In a jointly administered case, is the debtor that incurred the debt paid for by each transfer identified? • Is each transfer identified by check number or identified as a wire? Is the check date and clear date listed? • Is the actual antecedent debt identified? In many cases the invoice number and invoice date can provide this information. In other cases other documents may have to be identified to connect the transfer to antecedent debt. – Examples: Shipping documents, contracts - 12 -

  13. Pleading Requirements and Motions to Dismiss • In addition to referencing the presumption of insolvency for non- insider cases, is there other information on insolvency that may be included? – Example: Allegations about a debtor’s financial difficulties • When alleging that the transfers allowed the defendant to receive more than it would have under a Chapter 7 liquidation, are there schedules and proofs of claims that can be referenced that can provide support for this element? - 13 -

  14. Pleading Requirements and Motions to Dismiss • Motions to dismiss can provide for potential settlement – Consider a motion to dismiss if the actual payments are not detailed – Complaint should specify which debtor made the payment – cross reference for party that had antecedent debt – Creditor will generally have better understanding of facts regarding relationship than the plaintiff – Opportunity to assert defenses and separate suit from other preference suits. – Were causes of action retained in a plan? – Is the motion to dismiss worth the time/money - 14 -

  15. Stern v. Marshall (as it relates to preference actions) • In Stern, the Supreme Court held that a bankruptcy court lacked the constitutional authority to enter a final judgment on a state law counterclaim that was not resolved in the process of ruling on a creditor's proof of claim. • Courts are split on the issue of whether Stern applies to preference actions in cases where the defendant has not filed a proof of claim. – Courts favoring the application of Stern to preference actions have reasoned that, when a creditor who has not filed a proof of claim is sued in a preference action, it is a matter of private right that requires the exercise of the judicial power of the United States, a power that cannot be exercised by a non-Article III judge. – Courts disfavoring the application of Stern to preference actions have reasoned that, the public rights exception applies to preference actions, Stern does not remove the bankruptcy courts' authority to enter final judgments on core bankruptcy matters, and the entire purpose of the preference actions is to enforce the Bankruptcy Code's equality of distribution. - 15 -

  16. Statutory Defenses to a Preference - 16 -

  17. Ordinary Course of Business Bankruptcy Code § 547(c)(2) The Ordinary Course of Business Defense 11 U.S.C. 547 § (c)(2) • Transfer must be for a debt incurred in the ordinary course of business or financial affairs of the debtor and the transferee AND either: • Made in the ordinary course of business or financial affairs of the debtor and transferee (Subjective Test) OR • Made according to ordinary business terms (Objective Test) - 17 -

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