A Discussion of
Claims and Preference Examination
OPEN
LETTER
TO ALL BANKRUPTCY PROFESSIONALS
March 1, 2005
RE: Preference
Action Protection
At the SBLI last Spring,
a well-researched presentation by the
Weil, Gotshal & Manges folks raised
questions regarding a Debtor possibly
losing the right to bring a preference
action. This could occur if a Creditor's
claim had been settled without reference
to a potential subsequent Preference
Action - the question being one of the
applications of res judicata.
There is little
case law on this matter, and what exists
is divided. However, based on this
question, defenses against preferences
will probably start including an
assertion that previously settled claims
were all inclusive. And creatively
crafted claims may make the acceptance
of those claims tantamount to a waiver
of subsequent preference recovery. Of
course if you represent a creditor, this
would be great. As a minimum, however,
we
believe this means we will need to read
the claims much more closely.
Typically, the
Claims Examination is performed as one
step relatively early in the case in
order to facilitate the move toward the
development and filing of a Plan. The
Preference Examination comes much later,
as a second step often after the Plan
itself is filed. It seems to us that
Disclosure Statements with unasserted
and undisclosed future preference action
potential lacking a total dollar
estimate that is minimal, will be an
easy target for the general unsecured
creditors.
Minimally it would
seem prudent to protect a Debtor against
the possibility of the loss of this
recovery potential. In any event, a
single step integrated approach to the
Claims and Preference Examination
functions could set the stage for
all-inclusive settlements with Creditors
and could eliminate the problem.
It should be noted
that a preference is settled on a 100%
dollar level, whereas a trade balance is
settled at an amount, which is the basis
for a distribution generally at a much
lower level. So settle them together,
but don't try to resolve a net
settlement unless you are sure of your
numbers.
As one might
suspect, our firm is deeply involved in
these matters - thus our concern over
this issue. We have undertaken to
integrate the claims and preference
examinations into one step and have
adapted our methodologies and software.
In this way we can accelerate the
determination of the validity and/or
correctness of a claim and at the same
time establish the related potential
preference recovery -- then let the
settlement discussions begin.
Following
is the Weil, Gotshal material referred
to above (taken from the SBLI red book
for 2004). They did a great job in
bringing this subject to our attention
last year, but we have not seen any
action or even concern for the issue in
practice.
Our purpose for this letter is to merely
call this potential and early stage
problem to you again. Maybe we are overly
concerned, but we don't want any of us to
be blindsided if it can be prevented.
