The negotiation of preference claims is the most critical step in the bankruptcy preference resolution process. Based on our experience, more than 9 out of every 10 bankruptcy preference claims are resolved through negotiations prior to the filing of an answer in an adversary proceeding. Despite its importance, many creditors fail to appreciate the multi-discipline complexities of the negotiation process.
The 3 Steps of the Negotiation Process
The negotiation process can be broken down into 3 steps:
1. Correcting mis-information and completing incomplete information;
2. Presenting information (both additional and information already held by the preference collector) in a way that effectively establishes one or more defenses to the bankruptcy preference claim;
3. the exchange of settlement offers and counter-offers.
As a general rule, these steps should be taken in the above order. As discussed below, one of the biggest mistakes make by the novice bankruptcy preference negotiator is to skip around in this process.
Before discussing these steps, we must emphasize 2 points:
KEY BURBAGEWEDDELL POINTS:
1. Any substantial bankruptcy preference claim (i.e. any claim above $15,000) deserves involving bankruptcy creditor counsel before starting the negotiation process.
We see too many instances in which the negotiation process actually has been harmed by creditors who make arguments and provide information adverse to their positions. A well crafted response to a demand letter by bankruptcy creditor counsel can be enough to resolve a claim. In most instances, this initial response can be provided on a reasonable, fixed fee basis.
To see the wide range of settlement results that can be achieved through the negotiation process go to our article discussing bankruptcy preference settlements in the Cadence Innovation bankruptcy in 2009: Cadence Innovation – Second Round of Bankruptcy Preference Settlements
2. The negotiation process needs to start as early as possible. There may be opportunities before bankruptcy preference claims are brought to reduce and even eliminate the risk of bankruptcy preference exposure. We provide a further discussion of this critical point at the end of this article.
Step 1 – Correcting Mis-Information, Completing Incomplete Information
The first step in the negotiation process is establishing common ground as to the information on which the preference collector has brought the bankruptcy preference claim. This sounds like a very simple step, and in most instances it is. However, it is often overlooked until substantial costs and expenses have been incurred.
In most instances, the bankruptcy preference collector will attach to the demand letter (or complaint) a list consisting of the delivery dates of goods or the dates of provision of services in the 90 day preference period along with the charges for such goods or services and the payments made during the preference period. Sometimes, the preference collector will only list the payments made in the 90 day preference period. In either case, the first step is to confirm that the accuracy of the information that the preference collector is relying upon.
For example, if the preference collector has listed incorrect payment or delivery dates or amounts that adversely affects the creditors exposure, that information needs to be corrected. One area where we routinely see omissions by the preference collector regards shipments that were made during the preference period. These shipments may constitute subsequent new value.
Step 2 – Presenting Information Effectively to Establish Defenses
The collection of bankruptcy preferences usually is handled by lawyers skilled in both the art of litigation and negotiation. These preference collectors will evaluate both the information provided and the manner in which it is presented to determine the viability and value of the defenses being raised. Although these lawyers usually will consider all the information provided, they will not act as the creditors counsel in putting the information together in a way that is most favorable to the creditor.
A great deal of what bankruptcy preference defense counsel does to earn his or her fee is putting the information the creditor provides into a forceful and persuasive presentation of the defenses.
For a creditor seeking to negotiate its own bankruptcy preference resolution, presenting information in a coherent fashion with correct references to the defenses is important. In the simplest terms, a creditor needs to demonstrate an understanding of bankruptcy preference law and how the information fits within that law.
Step 3 – The Exchange of Settlement Offers and Counteroffers
Unlike the other two steps, this step involves more art than law. For example, understanding when the negotiation process has come to an end versus leaving money on the table can be a “touch and feel” question. Knowing the sequence of arguments so that the creditor can get the most out of the “Multiple Payments Multiple Defenses” concept.
Most creditors simply do not have enough experience negotiation bankruptcy preference claims to “win” against a very experienced opposition in this last step of the negotiation process.
A Final Note on Negotiation Timing
On a final note, the issue of the timing of negotiations must be addressed. Some people think that the process of negotiating bankruptcy preference claims starts at the time of the initial demand letter from the Customer’s bankruptcy representative. Actually this is the latest possible time for starting the negotiation process.
One key aspects of bankruptcy preference negotiation is taking the first opportunity to negotiate a potential bankruptcy preference claim. What are these opportunities? They are highly varied depending on the facts of each bankruptcy. In some bankruptcy cases, there may be no opportunity to address a preference claim prior to the first demand letter. In other cases, their may be just one, fleeting opportunity. Still in others, there may be several opportunities.
Here are a few possible opportunities to negotiate a preference claim:
1. When the debtor wants to negotiate terms for post bankruptcy shipments;
2. Resolution of Reclamation claims;
3. Resolution of 503(b)(9) claims; and
4. Resolution of state lien law claims.
Lets be clear, if the case is a chapter 11 reorganization, counsel for the debtor in possession is going to kick and scream about any effort to negotiate a bankrupt preference claim in connection with the resolution of any other issue. But there are opportunities to push – resolution of a reclamation claim, resolution of an administrative claim under section 503(b)(9), negotiation of credit terms post petition. Don’t expect this to be easy. However, if you can resolve preference claims early, you can save thousands of dollars in preference liability.
In the case of a Chapter 7 liquidation, the Chapter 7 trustee probably is going to be more agreeable to negotiate but reluctant to be distracted from his or her primary responsibility of liquidating the debtor’s assets. So once again, trying to work up in the time frame for preference resolution is going to be difficult. Once again, it is not impossible and success can bring substantial rewards.
Because of the complexity and skill required to resolve a preference claim out of the ordinary sequence, we are not including any post to address this critical opportunity. However, be advised that it is there. Look for it. Push for it. Don’t let it get away should it arise.