Presenting a live 90 ‐ minute webinar with interactive Q&A Preference Defenses: New Value Ordinary Preference Defenses: New Value, Ordinary Course and Contemporaneous Exchange Managing the Audit Process, Mitigating Regulatory Sanctions, and Preserving Attorney ‐ Client Privilege WEDBES DAY, DECEMBER 14, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Today s faculty features: David M. Banker, Counsel, Lowenstein Sandler PC , New Y ork Robin Bicket White, Counsel, Frost Brown Todd , Nashville, Tenn. 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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Preference Defenses: New Value, Ordinary Course and Contemporaneous Exchange Leveraging Preference Defenses Regarding L Loan Workouts, Corporate Insiders, Credit W k C I id C di Bidding and More David M. Banker, Esq. Da id M Banker Esq Lowenstein Sandler PC dbanker@lowenstein.com 212.204.8692 4 Robin Bicket White, Esq. Frost Brown Todd LLC rwhite@fbtlaw.com hit @fbtl 615.251.5556 December 14, 2011 December 14, 2011 - 5 -
The elements of preference actions and what debtors and trustees need to prove debtors and trustees need to prove In a nutshell, a preference is: • Any Transfer of an Interest of the Debtor in Property; A T f f I f h D b i P – Trust fund payment (PACA, Builders Trust Fund) not from property of the Debtor – Earmarked payment not from property of the debtor – Letter of credit payment not from property of the debtor – Credit card payment are from property of the debtor per the majority Credit card payment are from property of the debtor per the majority of the courts that have ruled on the issue – Applied credits used to reduce a debtor’s obligations on invoices (such as chargebacks and credit memos) are not preferences. In re (such as chargebacks and credit memos) are not preferences. In re MicroAge Corp., 288 B.R. 855 (Bankr. D. Ariz. 2003). • To or for the Benefit of a Creditor; - 6 -
The elements of preference actions and what debtors and trustees need to prove (cont ) debtors and trustees need to prove (cont.) • For or on Account of an Antecedent Debt Owed by the y Debtor Before Such Transfer Was Made; – A cash in advance payment is not a preference – Granting of lien as security for principal due on promissory note Granting of lien as security for principal due on promissory note was preferential transfer because lien was granted on account of antecedent debt. In re Jones Truck Lines, Inc., 196 B.R. 483 (Bankr. W.D. Ark. 1995), aff’d 130 F.3d 323 (8th Cir. 1997) (Bankr. W.D. Ark. 1995), aff d 130 F.3d 323 (8th Cir. 1997) • Made While the Debtor was Insolvent – Balance sheet definition – liabilities exceed assets B l h d fi i i li bili i d – Presumption of insolvency within 90 days of bankruptcy filing - 7 -
The elements of preference actions and what debtors and trustees need to prove (cont.) debtors and trustees need to prove (cont ) • Made on or Within 90 days Before Bankruptcy Filing; or Within One Year Before Bankruptcy Filing for Transfers to Insider Creditors Y B f B k F l f T f I d C d – If paid by check, look at clear date and not check date. Barnhill v. Johnson, 112 S.Ct. 1386 (1992) • That Enables Such Creditor to Receive More Than Such Creditor • That Enables Such Creditor to Receive More Than Such Creditor Would Receive if: – The case were a Chapter 7 case – The transfer had not been made – Such creditor received payment to the extent provided by other provisions of Title 11 • Creditor fully secured by debtor’s assets not subject to preference risk • Creditor paid from collateral proceeds not subject to preference risk • C dit id f ll t l d t bj t t f i k • Creditor whose executory contract was assumed by debtor not subject to preference risk. Kimmelman v. Port Authority of N.Y. & N.J. (In re Kiwi Intl. Air Lines Inc.), 344 F.3d 311 (3d Cir. 2003) - 8 -
The burden of proof and statute of limitations The burden of proof and statute of limitations • The trustee or the debtor-in-possession has the burden of proving each of the elements of a preference by a preponderance of the evidence elements of a preference by a preponderance of the evidence • Any preference action is also limited by a statute of limitations, which requires the trustee or debtor-in-possession to commence the action as follows: • 11 U.S.C. § 546. Limitation on avoiding powers 11 U S C § 546 Li i i idi (a) An action or proceeding under section … 547 … of this title may not be commenced after the earlier of – 1. The later of - • 2 years after the entry of the order for relief; or • 1 year after the appointment or election of the first trustee under y pp section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or 2. the time the case is closed or dismissed - 9 -
Other Statutory Considerations Other Statutory Considerations • Section 547(c)(9) prevents a preference action • Section 547(c)(9) prevents a preference action from being commenced where: “in a case filed by a debtor whose debts are “i fil d b d bt h d bt not primarily consumer debts, the aggregate value of all property that constitutes or is value of all property that constitutes or is affected by such transfer is less than $5 850 00” $5,850.00 - 10 -
Other Statutory Considerations Other Statutory Considerations • 28 U.S.C. 1409(b) also acts to limits preference actions by requiring when such case is worth less $11 725 that a trustee or debtor bring a cause of such case is worth less $11,725 that a trustee or debtor bring a cause of action in the district court for the jurisdiction where the defendant resides. • At least five courts have directly addressed the question of whether §1409(b) encompasses preference actions. The majority held that preference recoveries are governed by the venue provisions of §1409(b). Muskin Inc. v. Strippit Inc. (In re Little Lake Indus. Inc., et al.), 158 B.R. 478 (BAP 9th Cir. 1993); Armstrong v. Rainier Fin. Servs. Co. (In re Greiner), 45 B.R. 715, 716 (Bankr. D. N.D. 1985); Dynamerica Manufacturing, LLC v. y g Johnson Oil Company, LLC (In re Dynamerica Manufacturing, LLC), 2010 WL 1930269 (Bank. D. Del. 2010). The minority held that §1409(b) does not apply to preference actions. Ehrlich v. American Expr. Travel Related Servs. Co. Inc. (In re Guilmette), 202 B.R. 9, 12-13 (Bankr. N.D.N.Y ( ) ( 1996); Van Huffel Tube Corp. v. A&G Indus. (In re Van Huffel Tube Corp . ), 71 B.R. 155, 156-57 (Bankr. N.D. Ohio 1987) - 11 -
Defenses Defenses - 12 -
Preference Defenses: Contemporaneous Exchange For New Value (COD) Exchange For New Value (COD) The Contemporaneous Exchange Defense p g (11 U.S.C. § 547(c)(1)) • Transfer was Intended by Debtor and Creditor to be Contemporaneous Exchange for New Value; and • Transfer was Substantially Contemporaneous Exchange - 13 -
Preference Defenses: Contemporaneous Exchange For New Value (COD) Exchange For New Value (COD) • A good way, from the preference defendant’s standpoint, g y, p p , of proving intent of the parties regarding the contemporaneous nature of the transaction is to have the debtor list COD on the invoice d bt li t COD th i i • Vendors should, however, beware of the risk of a bounced COD check especially where a lien right is being COD check, especially where a lien right is being unconditionally waived in return for the payment; replacement payments are not subject to the contemporaneous exchange defense - 14 -
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