The Bankruptcy Preference Defense & Prevention Program

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1 The Bankruptcy Preference Defense & Prevention Program

2 The financial crisis that began in 2008 precipitated a wave of bankruptcy cases that numbers in the millions and continues to grow. Reversing previous trends, an increasing percentage involve business failures that included some of the largest bankruptcy cases in the country s history. In each bankruptcy proceeding there is the potential for hundreds, if not thousands of preference claims being asserted against unsuspecting unsecured-credit grantors who received payments on accounts prior to the bankruptcy filing. Historically, preference claims were brought only by trustees in failed cases. Recently, we have seen these recovery rights transferred to secured creditors, liquidating trusts, creditors committees or other third parties to effect recoveries as part of a plan of reorganization or liquidation. This trend has the potential to greatly increase preference demands, claims and litigation in the coming years.

3 The Need for Prevention In this environment, creditors who fail to take preventive steps to insulate themselves and reduce exposure from preference claims do so at their peril. The risk is not only the preference recovery demand itself, but also the enormous cost of a response and defense that is solely reactive. While it may be well-worn and trite, the expression an ounce of prevention is worth a pound of cure is still valid when it comes to preference claims. The Bankruptcy & Creditors Rights Practice Group of Hinshaw & Culbertson LLP has the experience and demonstrated success to handle these activities for all types of entities and individuals. We have created and implemented programs for both national and local businesses that have reduced the respective clients risk of exposure in this area. We have also successfully defended clients against such claims. Without a structured program addressing both prevention and defense however, a creditor increases both its risk of loss and cost of defense. Working with our clients credit, financial, sales and corporate legal staffs, we have developed and implemented comprehensive cost-savings programs to identify and reduce areas of exposure. The programs, which are based upon the particular client s individual and unique needs, include: A combination of sales and credit document review and modification Establishing appropriate record retention policies Developing necessary bookkeeping protocols Continuing education for all involved in the process It is only through such an integrated program that a business can maximize its potential to take advantage of the legal defenses to preference actions. This creates significant cost savings by helping to eliminate or successfully resolve preference claims before expensive and protracted litigation ensues. These integrated programs work best when there is a spirit of teamwork between the client s personnel and outside counsel. Our experience is that a negotiated fixed fee for the prevention component of such a program fosters the unrestricted environment necessary for this type of teamwork to flourish. We work with various elements of our client s business organization to identify and reduce potential preference exposure.

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5 The Successful Defense Even the best prevention program cannot eliminate all exposure in the area of preference claims. Should a preference claim or demand be made, it is therefore critical to pursue pre-litigation resolution to control the expense, danger and exposure of a protracted court case that may occur thousands of miles away from corporate headquarters. If a preference case is filed, formal discovery can be one of the most time-consuming and costly components of the litigation process. Accordingly, formal discovery should be avoided if at all possible. When preference plaintiffs are initially made aware of valid defenses that can and will be asserted by knowledgeable and experienced bankruptcy trial counsel, it creates an environment for resolution short of protracted discovery and a full trial on the merits. Additionally, where we have worked with our clients in developing the preference prevention program, there has been no time-consuming and costly learning curve needed to assert and communicate defenses prior to commencing the litigation. This proactive method of dealing with preference issues has successfully created synergies that have resulted in effective and early resolution of preference demands against our clients. Where litigation cannot be avoided, experienced counsel is necessary to avoid the consequences of adverse court rulings. Our Bankruptcy & Creditors Rights Group attorneys have trial experience in bankruptcy courts throughout the United States and have effectively defended and favorably resolved preference cases. Hinshaw s Bankruptcy & Creditors Rights Group attorneys are national leaders in the field. They include: an attorney certified as an expert in business bankruptcy by the American Board of Certification; a lawyer who developed the National Association of Credit Management s acclaimed bankruptcy preference Certified Expert Witness Program; an adjunct professor of bankruptcy law at Loyola University of Chicago School of Law; the co-directors of William Mitchell College of Law s consumer bankruptcy clinic; and the developers of the University of St. Thomas Law School s bankruptcy clinic. This experience has enabled the group s attorneys to develop substantive knowledge and procedural techniques for preference resolution not readily available elsewhere.

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7 Our Clients Cost Savings As noted, our preference-claim-related programs have produced substantial cost savings for our clients in resolving preference claims and demands. Recognizing the need to respond to our clients individual needs, we have developed nontraditional and individualized billing and fee arrangements for our clients in order to control the overall cost of dealing with problems in this area. We are committed to collaboratively working with our clients to increase success while focusing on the client s finances. An integrated, custom-tailored program of prevention and defense is the foundation for the positive results experienced by our clients. Hinshaw s Bankruptcy & Creditors Rights Practice Hinshaw s Bankruptcy & Creditors Rights Group attorneys represent secured and unsecured creditors, creditors committees, bankruptcy trustees and other parties affected by financial insolvency issues. We afford forceful and resourceful counsel regarding the varied issues that arise under the unique circumstances of each case. Drawing upon our bankruptcy lawyers broad experience, as well as the diverse legal specialties of colleagues throughout the firm, we provide our clients creative and practical solutions. We represent banks, companies, credit unions, individuals, insurers and other financial institutions with regard to matters occurring before, and after, the commencement of a bankruptcy case. Our clients also include lessors and lessees of commercial properties, partnerships and other parties involved in bankruptcy matters.

8 About Hinshaw Hinshaw & Culbertson LLP is a full-service law firm with approximately 500 attorneys providing coordinated legal services across the United States and in London. Hinshaw lawyers partner with businesses, governmental entities and individuals to help them effectively address legal challenges and seize opportunities. Founded in 1934, the firm represents clients in complex litigation and in regulatory and transactional matters. Contact Us Hinshaw & Culbertson LLP info@hinshawlaw.com Arizona California Florida Illinois Indiana Massachusetts Minnesota Missouri New York Rhode Island Wisconsin London 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.