Expert Witness Assistance in Bankruptcy Preference Defense Cases Due to Ordinary Course of Business Payments
Renowned expert witness Don Coker discusses nationwide industry standard practices and procedures in bankruptcy preference defense cases due to payments made in the ordinary course of business from the viewpoint of an expert witness who is a former banker experienced at corporate finance for all types of businesses.
Even in its most favorable light, bankruptcy is ugly and usually confrontational as creditors fight for a piece of the bankruptcy estate. The bankruptcy preference statutes are the legal system’s way of achieving equity between creditors.
It is not unusual for a creditor party that received payments from a debtor party that files bankruptcy to hear from the bankruptcy trustee, debtor-in-possession or some other official representative of the bankruptcy estate seeking to recover payments that were made within the ninety days leading up to the bankruptcy filing. Then it becomes the payment receiving creditor’s responsibility to convince the trustee, or whoever, that the payments were legitimate and not preferential and were received in the normal course of business.
While I am not an attorney, and this article should not be viewed as legal advice, my positions in banking and as an expert witness have provided me with opportunities to learn some critical facts regarding bankruptcy preference litigation.
There are two important elements to this process:
● Define which payments are the trustee claims are preferential. These should be cited in the complaint, letter, or whatever communication you receive from the Trustee.
● Collect and analyze all of the invoices that correspond to the alleged preferential payments.
● Collect and analyze all of the checks or other payments (wire transfers, ACHs, etc.) that correspond to the alleged preferential payments. Pay attention to the dates that the payments cleared the creditor’s bank.
● Collect and analyze all creditor agreements between the parties.
● Collect and analyze historical payment data from the debtor to the creditor to determine and support the creditor’s claim that the questioned payments were made in the normal course of business.
2. Expert Testimony
In addition to the above-cited documentation, some trustees and others – often including bankruptcy judges - need to hear what the industry standard practices are for payment in the particular field of business that was paid by the now bankrupt debtor. This is where expert witness testimony is especially helpful. As a banker who has financed all types of businesses over many years, it is easy to turn this firsthand experience into expert testimony that will support the position of the creditor that received the payments from the debtor.
Ordinary Course of Business
Of course, payments received in the ordinary course of business are the essence of overcoming a preference claim. It is important to show:
● The debt that is being paid was a normal and customary debt incurred in the ordinary course of business for both the debtor and the creditor.
● The payment was made in the ordinary course of business for both the debtor and the creditor.
● The payment was made according to ordinary business terms for the industry and that exist between the debtor and creditor.
● The payments were made within the terms of an existing and valid contract or invoice.
These factors are applicable to both short term and long term debt.
Other Payments that are Not Recoverable as Preferences
● Payments on a secured debt that produces new value for the debtor.
● Payments to a fully-secured creditor are not considered preference payments since the creditor would not be receiving more in the payment than they would receive in through the bankruptcy process since the creditor would receive the value of the collateral.
● Payments on subsequent credit extended.
Preferences that are Recoverable by the Trustee
● Trustees and debtors in possession are permitted to recover from creditors all payments that were made shortly before the bankruptcy filing where the payment resulted in one creditor receiving more than another similarly situated creditor would receive through the normal bankruptcy process.
● One goal of the managed and orderly bankruptcy process is to discourage a creditor or creditors from instituting litigation or other aggressive collection actions that could force the debtor into bankruptcy. That is an often-cited reason for classifying as “preferences” some payments that are paid by the debtor to the creditor.
● Payments made to insiders up to one year prior to the bankruptcy filing.
● Notwithstanding all of the above-stated, keep in mind that creditors still have to try to collect amounts that are legitimately owed to them. A creditor usually does not know if or when a debtor will file bankruptcy, and if the debtor does file, whether it will be a Chapter 7 or Chapter 11 bankruptcy.
Other Factors That Indicate a Payment Likely was a Preference
● Payments made while the debtor was insolvent but before it filed for bankruptcy.
● Payments made within ninety days before bankruptcy was filed automatically are under suspicion of being preferences.
● Payments on a transaction where a lien or security agreement was filed well after the debt was established.
● A payment to a creditor that is for past debts as opposed to current debts of the debtor.
● Any payment that pays a creditor more than it would receive as a result of the normal bankruptcy process.
● Payments to insiders are considered preferences if they were paid up to one year in advance of the bankruptcy filing.
If you are defending a creditor who received payments from a bankrupt debtor, seek experienced expert witness assistance that can issue a credible opinion that the questioned payments were within the normal course of business and thus, not preferential payments.
ABOUT THE AUTHOR: Banking and Lending Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ. Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC.
Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator. B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School. Called on by clients in 31 countries for work involving 61 countries.
Widely published, often called on by the media.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.