Practical Advice for Creditors in Preference Defense

Practical Advice for Creditors

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

In the last several issues, we have covered the definition of a preference, as well as the explanation of defenses to preference actions. This week’s installment will cover some practical advice for creditors who are faced with that “double whammy.”

When you get that letter (or pleading) from someone representing the bankrupt estate and asking for return of a preferential payment, DO NOT SEND A CHECK! Stop and think. First, make sure you have some time to review the facts. If the document gave a deadline that is coming close, call the writer and ask for another few days or weeks to gather the facts. If it was an actual Complaint that was filed, you probably should have your lawyer involved in getting the extension of time. Make sure you know the exact payments they are complaining of. Then, start to get your information together.

Did you actually get the payments? Did they clear the bank? Remember, there is no preference if the check didn’t clear. Were the payments within terms for the invoice paid? Was there anything unusual about the payment stream? If there wasn’t, there may not have been a preference at all!

Look at the customer’s history for the year prior to the bankruptcy filing. Compare invoice dates, payment terms and actual payments. Calculate the number of days from invoice/shipment date to when payment was actually received. Even if out of terms, was there a narrow range of days late? Were the suspect payments late but within that range? [Ordinary Course of Business Defense] Did you ship to the debtor after the suspect payment and not get paid for that shipment? [Subsequent New Value Defense].

If you feel comfortable with what you know and what the facts are, you may want to call the person demanding the repayment and lay out your defenses. Remember, they don’t want to spend a tremendous amount of time or money on the collection. If you can make a good argument and have facts to support it, you should be able to settle it. Most trustees and others will be willing to settle a preference claim at 80% without batting an eyelash. To get further, you need to show some reasonable defense.

When negotiating a settlement, it is helpful to estimate what your cost of defense would be, even if you think you have a “slam dunk.” Depending on the amount at stake, your lawyer, the local Court, distance, etc., your cost could be anywhere from $750 on up into the tens of thousands. You should also recognize that the claimant (Trustee, Debtor, Committee) needs to get something out of a settlement.

Based upon all of this, it would not be unreasonable to offer $500-$1000 to settle a $10,000 claim, where there are arguable defenses. Of course, each settlement situation is different, but this may give you an idea. When in doubt, it is a good idea to ask a lawyer knowledgeable about the bankruptcy process. While it may help to get the advice of a lawyer familiar with the Court and the players in the locale where the case would be filed, any knowledgeable bankruptcy lawyer can help you analyze the case and discuss settlement options.

One of the proposals from the National Bankruptcy Review Commission is that no preference claim of less than $5,000 can be brought at all and that claims under $10,000 must be filed in the Court where the CREDITOR is located. If those pass, it will make life a bit easier for creditors on those nuisance preference claims. It will change the inconvenience factor and, therefore, the settlement leverage. It remains to be seen what Congress will do with the NBRC recommendations.

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