Counsel to Counsel - January 2008 - (Page 11) SPILMAN THOMAS & BATTLE, PLLC BANKRUPTCY PREFERENCE DEFENSE: Analyzing Your Options In an effort to treat all creditors equally, the Bankruptcy Code permits the debtor-inpossession, trustee or other party acting on behalf of the bankruptcy estate to recover from creditors certain payments made on or within 90 days before the bankruptcy filing. In a large case, there are typically hundreds of potentially preferential payments, and opposing counsel rarely can examine all of them closely. As a result, any creditor that received payments within the preference period may receive demand letters or be served with a complaint by mail seeking a return of the allegedly preferential payments. situation implementation • • • • • steps Gather and list recent invoices and payments. Determine product and service delivery dates. Assemble all credit or other agreements with the customer. Determine the limits of your liability. If it makes sense to settle, make an early offer below your liability limit. A preference recovery letter or complaint and summons arrive from a trustee managing a key customer’s bankruptcy proceedings. Inside counsel must quickly evaluate the merits of the demand and determine whether it’s more cost-effective to litigate or settle. in-house counsel challenge Quickly determining the limits of your preference liability may provide an opportunity to settle for less than the costs of defending the preference suit, including outside counsel fees. measuring success future issues to consider Pay attention to current customer payment habits and review the contractual or historical terms governing your payment arrangements. Ensure those handling receivables understand the implications of allowing customers to stretch out payments. If a customer is in distress, try to get paid quickly and limit the likelihood that payments will fall within the 90-day preferential recovery window. If you take a large payment on an older debt, be prepared to pay some back if the customer ends up in bankruptcy. Assemble all information related to the allegedly preferential payments, including all invoices and checks. Create a list showing the dates of all invoices and payments, including the dates any checks were honored by the bank. Gather all credit or similar agreements as well as historical payment data to establish the ordinary payment terms between the parties. approach adopted Consider the following questions: • Were the payments made contemporaneously with the provision of the goods or services your organization provided? • Were the payments made according to the historical “ordinary course” of payment arrangements between your company and the customer or according to established terms within your industry? • Did your company provide more goods or services after the payments were made so as to receive the benefit of the “new value” defense? • Was the complaint filed within the later of (a) two years after the filing of the bankruptcy case or (b) one year after the appointment of the trustee? Think about your preference liability and weigh the impact of your options on your organization. What can you afford to pay? What would be a reasonable settlement? If the customer is in Pennsylvania and you’re in Texas, litigating a $50,000 claim in the Pennsylvania bankruptcy court may be too expensive, even if you’re on solid legal ground. Determine your position and reach out to the trustee or other party asserting the claim. Trustees don’t want to litigate either, especially over small amounts, but they want to recover something; so sometimes they will accept a low offer to avoid costly litigation. Counsel M. Mallory Mantiply’s primary practice areas are trials and litigation of all types and defense of adversary proceedings, including preference actions, in bankruptcy cases. He can be reached at mmantiply@spilmanlaw.com. W. Calvin Smith’s primary practice areas are commercial litigation, creditors’ rights and bankruptcy. He can be reached at csmith@spilmanlaw.com. Both practice in the firm’s Roanoke, Va., office. martindale.com/c2c JANUARY 2008 best practices 11 http://www.martindale.com/c2c
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