Reducing Your Exposure


When a creditor gets hit with a preference claim,
there may be a number of thoughts that occur to the credit manager responsible
for dealing with it. These could range from paralyzing terror, accompanied by
blood-curdling screams, to moderate displeasure, accompanied by an exasperated
sigh and a resignation to payment.

While the former option might be less likely, the latter could be
far more dangerous. Bankruptcy law includes a number of defenses for creditors
hit with preference claims and a number of credit professionals might not even
be aware of them. “The preference defenses are like gold,” according to Bruce
Nathan, Esq., partner in the Bankruptcy, Financial Reorganization and Creditors’
Rights Department of Lowenstein Sandler PC. Nathan, who will host an
NACM-sponsored teleconference on the matter, said that credit managers will
often debate whether they should go through the trouble of getting counsel
involved or just pay the claim.

When a creditor receives a demand letter, Nathan suggested “They
should never pay it, and they should never ignore it.” Upon receipt of the
demand, creditors should become like investigators to see if they ever received
the full amount of the demanded payment or whether or not the claim is invalid
due to a certain defense.

Nathan noted that a trustee will often use a check register to
find companies from which to draw money for preference claims. However, a
register doesn’t indicate if a check has bounced, meaning that a trustee will
send a demand letter for a larger amount that was actually ever received from
the debtor. Trustees also send claims to companies for amounts that they don’t
legally owe and Nathan pointed out that claims under $5,000 are ineligible under
bankruptcy law. Additionally, claims between $5,000 and $10,000 must be filed in
the state of the creditor, rather than the state of the debtor, otherwise they
are invalid.

A number of other defenses exist to reduce a creditor’s exposure
as well, including the new value defense, the contemporaneous exchange defense
and the ordinary course of business defense. For more information on how to
reduce your company’s exposure, be sure to attend Nathan’s teleconference,
“Preferences: Defenses that Can Reduce Exposure and Case Law Update,” on
February 12, 2007 from 3:00–4:00pm. Click here to register.

Source: Jacob Barron, NACM Staff Writer, and Bruce Nathan,

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