Defending Preference Payment Demands

1. Defending Preference Payment Demands Real Life Examples Cheryl Gilbert APPA B&F Conference September, 2005 Portland, Oregon

2. Introduction • What to do when you receive a demand for return of a preference payment • Cases filed before October 17, 2005 • Cases filed on or after October 17, 2005 (Identified by NEW!) • Formulating a response • Sample letters • When to yell for help!

3. Disclaimer • I am not an attorney and nothing expressed during this presentation constitutes legal advice. • You should consult your attorney for legal advice.

4. What to do when you receive a preference demand • Don’t ignore it! • You may make your situation worse if you ignore it. • Don’t just give the money back! • You have several avenues of defense open to you- use one!

5. What to do when you receive a preference demand (contd.) • First- Determine if you received a payment within 90 days of the bankruptcy filing. • If you didn’t, that is your defense! (See letter #1). • If you did, determine your best defense. Was the payment: • Less than $5,000? NEW! • Made in the ordinary course of business? • Made according to ordinary business terms? NEW!

6. What to do when you receive a preference demand (contd.) • If the payment was under $5,000 it is not subject to a preference demand. (See letter #2). NEW!

7. Which Defense to Use? • If the “preference” payment was not unusual when compared to this customer’s payment history, the “ordinary course of business” defense will probably apply • If the “preference” payment was unusual for this customer, the “ordinary business terms” defense may apply

8. Ordinary Course of Business Defense • To determine if the “ordinary course of business” defense applies, the court will consider the past payment history between you and this customer. • The test of “ordinary course of business” is- did the customer pay in the same manner as they have in the past? • If the payment was late, have they paid late before? • Keep this in mind when making payment arrangements with a customer you suspect may be headed for bankruptcy!

9. Ordinary Course of Business Defense (Contd.) • If the customer changed their payment habits in the 90 days prior to the bankruptcy, “ordinary course of business” may not apply. • Things to look out for: • A payment in full when the customer normally made partial payments • A late payment when they normally paid on time, or an on-time payment when they normally paid late

10. Ordinary Course of Business Defense (Contd.) • If “ordinary course of business” doesn’t seem to apply, “ordinary business terms” may.

11. Ordinary Business Terms Defense NEW! • The “ordinary business terms” defense takes into consideration the payment terms of creditors in the same or similar industry; it is not specific to the payment history of this customer. • Use of this defense may require a demonstration that early or late payments are “ordinary” in the industry.

12. What’s Next? • After deciding which defense to use, send the attorney or trustee a letter • Enclose copies of statements to support your defense • Wait and see what happens!

13. When to “Holler for Help”! • You need to consult your attorney when: • You’re not sure which defense to use • You don’t think you have a defense • Your defense is challenged by the trustee or the debtor’s attorney • You may want to consult an attorney even if you feel confident of your defense if a significant amount of money is involved

14. Where to Get More Information • The “Bankruptcy Code” is United States Code Title 11 • http://www.ncwb.uscourts.gov/opinions/codeindx. html • An abbreviated version of the Code is available • (Bankruptcy) Mini Code, Mini Rules • Published by AWHFY, L.P. • 3950 Doniphan, Ste. E • El Paso, Tx. 79922

15. Defending Preference Payment Demands Real Life Examples Cheryl Gilbert Anaheim Public Utilities Cgilbert@anaheim.net 714 765-5133