THERE ARE TWO GOALS OF THE UNITED STATES BANKRUPTCY CODE. THE FIRST IS TO PROVIDE A DEBTOR WITH A “FRESH START.” THE SECOND IS TO ENSURE THAT SIMILARLY SITUATED CREDITORS ARE TREATED FAIRLY AND EQUALLY IN A TRANSPARENT PROCESS.
Knowing the elements of a preference case and these affi r- mative defenses can serve to better protect a creditor from preference exposure. A creditor examining its trade dealings
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and credit policies should consider the following: • Establish a credit limit for each of your customers, that is, without exception, not exceeded. T is will limit your poten- tial preference exposure because you will never receive a payment greater than the amount of the capped receivable.
• Explore your rights to become a secured creditor. If you are selling inventory and your customer has uncertain or questionable fi nancials, sell that inventory on a consign- ment basis and establish a security interest in the goods.
• Obtain a letter of credit. Drawing on a letter of credit to pay for the goods and services sold to a customer will not be subject to preference attack.
• Explore your lien rights if you are in an industry that allows you to establish liens to enforce payment.
• Take a security deposit. Holding a security deposit will off set against any balance that might be owed and is certainly helpful. While there are rules about when you can and cannot setoff funds when you hold the security deposit, holding a security deposit will certainly provide leverage in a preference case.
• Consider dealing on a cash-only basis. To the extent that you receive checks from a customer, deposit the checks immediately. Holding checks risks greater preference exposure as courts look to the date that the checks cleared the debtor’s account to determine whether the payment fell within 90 days of the bankruptcy fi ling.
• Keep your dealings with customers ordinary. Explore whether the payment terms you have extended to your customers are ordinary in the industry.
• Take prepayments. Prepayments cannot be subject to preference exposure because there is no antecedent debt
DIVERSITY & THE BAR® JULY/AUGUST 2013 on which they are made.
• Watch you customer’s fi nancials. Most importantly, keep on top of your customers and apprised of their fi nancial situation. If their receivables start to climb, ask for the company’s fi nancials. If they are distressed, limit their abilities and ask them to prepay accounts. T ese are only a few of the many issues that arise in
connection with a preference defense. We encourage you to speak to your bankruptcy professional on how to tailor your own business dealings so that you are dealing with these issues on the front end as opposed to facing a lawsuit on the back end, as “an ounce of prevention is worth a pound of cure.” D&B
1 11 U.S.C. §§101 et seq. 2 This question – “[w]hy is there a preference law” was analyzed at length
opinion for an easy primer on preference law and its purposes. 3
See id. Additional Information
For more information, please contact Jennifer R. Hoover at 302.442.7006 or
jhoover@beneschlaw.com or Michael J. Barrie 302.442.7068 or
mbarrie@beneschlaw.com.
For more information about our fi rm’s diversity eff orts, please contact Diversity & Inclusion Committee Chair E. Mark Young at
myoung@beneschlaw.com or 216.363.4518 or Co-Chair James L. Ervin, Jr. at
jervin@beneschlaw.com or 614.223.9325.
MCCA.COM
in an opinion issued by Judge Sontchi in In re Sierra Concrete Design, Inc., 463 B.R. 302 (Bankr. D. Del. 2012). The Sierra decision serves as a primer on preference law, with the Court ultimately finding that the answer to the foregoing question “lies in the answer to another question—why is there a bankruptcy law?” Sierra, 463 B.R. at 304. The reader is directed to the Sierra
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