Preference Payments – Part 2: Initial Response to Demand

It is crucial to be proactive rather than bury the proverbial head in the sand after receiving a preference demand letter. Direct communication with the party asserting the preference early on in the case will aid in understanding both parties’ positions and increase the chances of an amicable resolution. For example, most parties asserting preferences are willing to extend the response time to the initial demand letter or enter into a tolling agreement to delay filing a formal lawsuit so long as the lines of communication are open and active.

The first step is to begin gathering all records showing the financial relationship and dealings between your company and the party asserting the preference. Evidence of ledgers, checks, work orders, wires, and other financial information dating back as far as you can gather can be important for asserting defenses to a preference claim. Having this information and records neatly organized will assist your attorney in determining whether applicable defense are available. It is important to organize the information prior to sending to your attorney as this will save both time and money.

The length of a financial relationship with the party asserting a preference is not outcome determinative. Gather the financial records you do have and send them to your attorney. Having no records or incomplete records may seriously impair your rights and defenses available to minimize preference exposure.

Information related to collection efforts will also need to be gathered and submitted to your attorney. The efforts your company exerted to collect receivables that are asserted as preference payments are equally important as the collection efforts used to collect previous accounts. Any specific notes, company collection practices or policies, or other information should be turned over to your attorney. This will assist in weighing all possible defenses and conversely, whether there is a greater chance that the payment could be founds as a preference.

Allen M. DeBard

Allen is a shareholder in Langley & Banack’s bankruptcy and workouts section. In all representations, Allen focuses on the details of each case and the client’s goals. This allows him to map out a course for the case and anticipate potential issues before they arise. This detailed analysi...