In the vast majority of cases, the process of initiating the bankruptcy preference claim process starts with an initial demand letter, which if ignored, usually is followed by a second demand letter. Each of these two demand letters are intended to motivate the creditor to repay the claimed preference payments. To this end, the tone and tenor of the first demand letter and the second demand letter are different – the first being a firm demand and the second being an all out threat of litigation.
These demand letters usually come from a law firm that has been hired by the entity that has taken over the responsibility of collecting preference claims. We describe the various bankruptcy players that might end up holding the right to pursue preference claims in the article The Preference Recovery Decision.
The samples provided below are real demand letters received by our clients. The cases have long since been settled, and we have removed all identifying information.
The First Demand Letter
Although every case is different, the following example of the first demand letter illustrates a relatively standard approach. The threat of litigation is mooted. The objective is to get the preference claim paid without having to deal with bankruptcy creditor counsel.
Most demand letters will have a schedule attached that list the purported preference payments. Some of these demand letters purport to already give “credit” for certain defenses or explain that the defenses have been considered and are not applicable. If “credit” for defenses is given, most often the credit is based on the subsequent new value defense.
A demand letter that purports to have already give “credits” should never be taken at face value. The calculation of these “credits” almost always will be under the most favorable interpretation possible for the trustee – i.e. result in the lowest possible reduction of the preference claim.
Ignoring a bankruptcy preference demand letter is a very bad idea. Seldom to these claims just go away. As illustrated by the second demand letter, ignoring the first demand letter may provoke the filing of a bankruptcy preference adversary proceeding. This limits the amount of time available to negotiate a resolution.
If you have received a demand letter for recovery of a bankruptcy preference a good starting point is the article “A Three Question, Preliminary Self Assessment of a Bankruptcy Preference Claim“, which provides a practical approach to an initial assessment of an avoidable transfer claim under Section 547 of the Bankruptcy Code.
Sample First Demand Letter for Bankruptcy Preference Recovery
POSER, MOSER & BICKER
Attorneys at Law
666 Bankruptcy Street
Any City, Any State
January 1, 2010
AAA Supply
Hard Rock Street
Manufacturing, State USA
RE: Preference Demand In re: Customer Liquidating, Inc., f/k/a Your Customer, Inc. Case No. 10-00001
Dear Creditor:
The undersigned represents Tom A. Lookin (“Lookin” or the “Trustee”), not individually but solely as the chapter 7 trustee of the bankruptcy estate of Customer Liquidating, Inc., f/k/a Your Customer, Inc. (the “Debtor”).
As you may know, on June 29, 2009 (the “Petition Date”), the Debtor filed a petition for relief pursuant to chapter 11 of the Bankruptcy Code and operated its business as a chapter 11 debtor and debtor in possession until the closing of sale of substantially all of its operating assets to a third party on September 7, 2009. The Debtor’s bankruptcy case was subsequently converted to a case pursuant to chapter 7 of the Bankruptcy Code and Lookin was appointed the Trustee of the Debtor’s bankruptcy estate.
Pursuant to sections 547 and 550 of the Bankruptcy Code, 11 U.S.C. §§ 547 and 550 and subject to certain defenses, transfers of the Debtor’s property to or for the benefit of a creditor, for or on account of an antecedent debt, while the Debtor was insolvent, during the ninety-day period preceding the Petition Date (i.e. March 31, 2009, through June 29, 2009, the “Preference Period”) and which enables that creditor to receive more than it would have in a chapter 7 bankruptcy case, is avoidable and recoverable.
The Debtor’s records indicate that you received payments identified on Exhibit A totaling $105,000.00 (the “Preferential Transfers”) from the Debtor during the Preference Period that appear to be recoverable by the Trustee. These Preferential Transfers will then be returned to the Debtor’s bankruptcy estate and distributed to creditors pursuant to chapter 7 of the Bankruptcy Code.
The Trustee is preparing to initiate lawsuits to recover any avoidable transfers, including the Preferential Transfers. In order to avoid any adverse legal action against you based on the Preferential Transfers, the Trustee hereby demands the return of all of the Preferential Transfers you received from the Debtor during the Preference Period within 30 days of your receipt of this letter. Checks should be made payable to Tom A. Lookin, not individually but solely as the Trustee of the Bankruptcy Estate of Customer Liquidating, Inc., f/k/a Your Customer, Inc. and mailed to the address provided in the letterhead.
We have sent this letter directly to you, because no attorney has entered an appearance on your behalf in the Debtor’s bankruptcy case. If you have any questions or believe that you have any relevant defenses to an action to recover the Preferential Transfers, please contact the undersigned at (888) 555-1212 or via e-mail at customerpreferences@posermoserbicker.corn.
Very truly yours,
______________________________
Low Lee Associate, Esq.
The Second Bankruptcy Preference Demand Letter
The following is an example of a fairly aggressive second demand letter. It was sent with a complaint and an initial set of discovery requests. While second demand letters may not go this far, all second demand letters include a serious threat of litigation.
Sample Second Bankruptcy Preference Demand Letter
POSER, MOSER & BICKER
Attorneys at Law
666 Bankruptcy Street
Any City, Any State
January 14, 2010
AAA Supply
Hard Rock Street
Manufacturing, State USA
Re: FRCP 26(f) – [Bankrupt Customer] v. [Supplier/Unsecured Creditor]; Adv. Pro. No. [___________]
Dear Madam/Sir:
This firm represents the Plan Administrator, the plaintiff in the captioned matter. As indicated below the [Delaware] Bankruptcy Court has entered a General Order requiring the parties in preference actions to promptly proceed to mediation and thereafter trial. We believe it is in our mutual interest to attempt to resolve this matter before the initial case conference to be held on [Date and Time] and, by reason thereof, it is requested that you contact this office to discuss your defenses and a settlement.
In compliance with the General Order of the United States Bankruptcy Court, District of Delaware dated [Date] (the “General Order”) the parties to the above referenced Adversary Proceeding are required to have the discovery planning conference required by Federal Rule Civil Procedure 26(f) no later than thirty (30) days after the first answer is filed or sixty (60) days after the Adversary Proceeding is commenced.
This letter is being sent pursuant to F.R.C.P. 26(f) to propose that in lieu of the conference the following schedule be adopted by the parties for discovery in this matter. To begin the process, enclosed herewith is Plaintiff’s Initial Disclosures pursuant to Rule 26(a)(1) and Plaintiffs Request for Admissions, First Set of Interrogatories and First Request for Production of Documents served on 30 days notice. We propose that the Defendant serve discovery, if desirable, on the Plaintiff no later than [_____________] with the prospect that all document discovery be completed by [______________]. Tn the event that any depositions are required, we propose that such deposition requests be served no later than [_____________].
The Plaintiff proposes that all discovery requests be limited in scope to the following:
a. All information relating to the monetary claim and timing of the alleged preferential payments and returns, if applicable.
b. All information relating to any defenses asserted by Defendant in the Answer to the Complaint filed in the above captioned action.
Pursuant to the General Order, the parties are required to exchange their initial disclosures required under F.R.C.P. 26(a)(l) no later than [_____________].
If the foregoing is not acceptable, please indicate any objections thereto in writing no later than ten (10) days from the date of this letter. If no written objection to the proposed schedule is received by that time you shall be deemed to have agreed to such discovery schedule and shall be bound thereby.
This letter does not constitute a waiver by the Plaintiff to seek additional information, including, but not limited to, any information relating to any further defenses asserted by the Defendant or to discover any necessary information to rebut any other evidence or allegations by the Defendant.
Lastly, please note that the General Order specifically provides that any extension of time to file a responsive pleading is not effective unless approved by order of the Court. The Bankruptcy Judge has indicated that he will only grant extensions upon cause shown. Please keep this in mind when requesting an extension of time. Although we are amenable to executing stipulations extending the time to file a responsive pleading, please be advised that we believe it is incumbent upon the respective defendant to obtain Court approval of such extension.
As a result of the foregoing, and as indicated above, we are ready, willing and able to initiate settlement discussions with respect to this matter. Therefore, I urge you to contact us as to explore such a consensual resolution.
Very truly yours,