Can't You Hear Me Knocking? The Dreaded Preference Demand

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You are in your office finishing your morning espresso when you receive an email from the CFO of your companies' U.S. subsidiary. Attached to the email is a letter from a U.S. law firm. Instinctively, you know this can't be good news. You open it only to find a letter from counsel for a trustee in a Chapter 11 bankruptcy case. Dear creditor, the trustee demands you pay back the payments from the Chapter 11 debtor (you U.S. susidiaries' customer) over 2 years ago....the dreaded preference demand. But, if you pay 80% today, the letter offers, it will all go away.

The Dreaded Preference Demand -

Your U.S. CFO has mentioned this aspect of the U.S. Chapter 11 law, but this is the first time you have encountered it. Let me get this straight, under U.S. Bankruptcy law, a Chapter 11 debtor can force the return of money it paid to our U.S. Subsidiary within 90 days prior to the customer's Chapter 11 filing? Yes, I have seen articles written by American lawyers that my CFO forwarded me, but the former customer wants us to pay back $350,000, which will reduce the contribution from our American subsidiary, will materially alter our profit forecast for the year, and will require us to reserve for a potential loss on our books.

Originally published in The Credit and Financial Management Review - Volume 19, Number 1 - First Quarter 2013.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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