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Forum: Bankruptcy Preference Question
May 2, 2008

I have been told by my controller that if a customer goes bankrupt, we need to return checks received from them in the 10 day period leading up to the bankruptcy. I have not been able to find this in any of my reference materials. Is this true?

Thanks,

Steve Mengel
Credit Manager
Godiva Chocolatier, Inc.

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90 days prior

Andrew Keefer

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No, any payments received 90 days prior to filing could be subject to preference but I would wait until the Trustee orders such return of those funds.

John S. Ransom
Manager, Corporate Credit Department
AboveNet, Inc.

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90 days, any payment received in that period is considered a preferential payment.

Robert Capra
Credit & Collections Manager
USAopoly

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Preference period is 90 days. You would only (in my opinion) return any funds after estate requests the funds returned due to preference and only after negotiation.

Best regards,

Kevin P. Green
Director of Finance
SEIKO Corporation of America

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Isn't the 90 days period preference payments? if so, i would not return anything until the Trustee requests it and then i would review my options. I have fought preference payments and won under "normal course of business". Best of luck.

Cindy

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I do not believe you need to return any checks. The preference period is 90 days prior to the filing but I would wait until I received the preference request and then challenge it. If this is considered 'normal course of business', and there are other defenses, you may not have to return any $'s.

Richard Grasso
Director of Credit
Ben E. Keith Company

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Steve:

There is a 90 day period prior to the bankruptcy filing date, that any money paid to you is considered a "Preference Payment."

I wouldn't voluntarily send back money to the Debtor/Bankrupt, until I receive a letter from the Bankruptcy Trustee. Even then, you may have defenses so as not having to return all, or a portion, of the money you received during the preference period. There is a defense called "Ordinary Course of Business" which in many cases will save you from having to return funds already paid to you.

If the payments you have received during the Preference period is substantial, I would recommend that you employ bankruptcy legal counsel, to assist you to traverse the snake infested waters of the bankruptcy process.

Good Luck,

Randy Randy Clark, CXBA/CLP
Assistant Division Manager/Credit
Young Electric Sign Company - Las Vegas

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Any amounts paid by your customer within 90 days is subject to preference, however do not send any money back to the customer, wait until the trustee requests the funds, and then never just sent what he asks for. You can always negotiate the amount down to some more agreeable amount. You may have other defenses also if the payments were made in the "normal course of business" or certain other circumstances, so talk with your attorney

Ronald L Johnson
Corporate Credit Manager
READY MIXED CONCRETE COMPANY

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Don't return any money. Preferential payments (90 day window) can be defended & negotiated.

John Henderson
Director of Credit
D&M Holdings, Americas

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There are also defenses against preferential transfer demands by the bankruptcy estate (new value, contemporaneous exchange, normal course of business are the main defenses). The new bankruptcy code does not allow any preferential transfer demands under $5,000. That does not mean you will not receive a demand. Point it out to the requester and they should withdraw it.

Demands between $5,000 and $10,000 are to be litigated in the creditor's court district not the debtor's. This can be a good negotiating point for those claims within the $5,000 to $10,000 range.

Check with your local NACM to see if they offer a seminar on preference defense or NACM national on a phone seminar.

Terry Nicholson
Credit Manager
Ashland Inc.

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Nothing should be done unless you are contacted by the Trustee.

Reply only after such notice has been received but it's prudent to investigate whether or not you have a defensible position sooner rather than later.

Harris Semegram,

Director of Credit
Prestige Brands Holdings.

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Thank you for the reminder of the new code for under 5K.. I have a question.. I deposited a check prior to the preference period. the check was returned NSF and redeposited during the 90 day preference period. the check is for exactly 5K.. so, what date would the Trustee go by? my original thought would be the 1st time i deposited the check because that was the date the check was written to be deposited? your thoughts? Thank you

Cindy

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Sorry to keep asking more questions.. another case we have here.. we received say 5 cks that fall under the preference period. however, each check in itself is under 5K but totalled well over the 10K mark. my initial thought was they would total all the checks together correct? can anyone confirm this? thank you

Cindy

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As my lawyer friends have explained to me the established precedent is 90 days goes from the CLEARING Date, so in your case, several days after the second time the check was deposited. I have been told that there was a case that went to the Supreme Court that decided this issue.

Robert G. Payne
Director - US Credit Operations
SC Johnson & Son, Inc.

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Cindy,

The date for preference purposes I am pretty sure will be the date the check was honored by the debtor's bank.

If this payment was the only payment during the 90 days I am not sure if it would fall in the no preference claim amount or the litigation in your court district .

Terry Nicholson
Credit Manager
Ashland Inc.

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I was involved in a preference situation several years ago. I contacted our in-house legal counsel who was able to reduce the preference repayment significantly but this was not done automatically. It involved offers and counter offers back and forth...

Joan Pitzer

ROOFING SUPPLY GROUP
Florida Regional Credit Manager

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The company I work for has had similar situations. For this reason, I would not automatically return all payments received 90 days prior, I would let it go through the courts. You may be able to get a reduction in what you need to return.

Thanks

Angie Paine
Credit Manager, CICP
Ingersoll Rand Industrial Technologies

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I would wait for the trustee to demand the funds, then work on a dollar amount agreement from that point.

Margret Goodson
Credit Manager
Affiliated Foods, Inc

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This is a totally different question regarding Bankruptcy.

In CANADA---If a Customer is on Consignment and he files who does the consignment merchandise legally belong to?

Barbara Consorti
Director Credit/Customer Relations
LVMH Perfumes & Cosmetics
Christian Dior, Givenchy, Guerlain, Kenzo, Fresh

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No such rule. As everyone has responded with, there is the 90-day "preference period" which creditor's may be subject to preference claims. Do not volunteer anything, including return of payments or information unless served with a formal preference claim from bankruptcy trustee handling such matters. Usually do not receive preference claims until the end of the two year statute of limitations and are given a short period of time to respond (usually 20-30 days at best). Always a good idea to confer with your legal counsel in these matters as the bankruptcy trustee attorneys are usually aggressive and uncompromising. I have yet to settle for $0 as decision often comes down to not "throwing good money after bad".

Creditor's have Ordinary Course of Business and New Value defenses to fight preference claims and the 2005 Bankruptcy Law changes generally favor the creditor's, although, I have not seen a noticeable impact in cases since 2005.

Keep in mind, the bankrupt debtor's attorney(s) usually do little or no analysis to determine which payments received during the 90-day preference period are actually viable preference payments prior to sending the formal claims to creditor's. The general practice is to "throw as much X against the wall and see how much sticks"....we all know the saying. Usually you can reduce the initial claim(s) substantially after doing analysis and employing the aforementioned defenses, however, will likely have to settle based on the cost/benefit rule. Every situation is different and case law and decisions are all over the board.

Good luck!!

Bruce B. Galletly
Director of Credit
Teknor Financial Corporation

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