# MEMORANDUM: Gearwright Chapter 7 Preference Demand ## 1. Prima facie preferences All four payments are prima facie avoidable unless a defense applies: | Date | Amount | Payment timing | Prima facie? | |---|---:|---:|---| | Dec. 14 | $148,000 | 41 days after invoice | Yes | | Jan. 9 | $171,000 | 47 days after invoice | Yes | | Feb. 3 | $139,000 | 49 days after invoice | Yes | | Feb. 27 | $154,000 | 66 days after invoice | Yes | Each was a transfer of Gearwright’s property, on account of an antecedent debt, within 90 days before the petition, while insolvency is presumed, and Pinion received more than it would in a Chapter 7 distribution. But the demand is not remotely worth $612,000. --- ## 2. Ordinary-course defense, payment by payment Pinion’s historical baseline: Gearwright paid Pinion 38–52 days after invoice, average 45 days. Industry baseline: net 30–60, with actual payments commonly 35–65 days. | Payment | Days | Analysis | Ordinary course? | |---|---:|---|---| | Dec. 14 | 41 | Within historical range and industry range | Likely protected | | Jan. 9 | 47 | Within historical range and industry range | Likely protected | | Feb. 3 | 49 | Within historical range and upper end of industry range | Likely protected | | Feb. 27 | 66 | Outside historical range, at/outside upper industry range, and paid five days after threat to withhold shipments | **Not ordinary course** | The Feb. 27 email is critical. Pinion’s credit manager said: > “Pay the open balance this week or the next two shipments do not leave our dock.” That is unusual collection pressure and a changed payment pattern. It takes the Feb. 27 payment outside the ordinary-course defense. But because preference defenses are transfer-by-transfer, the email cannot be used by the trustee to taint the Dec. 14, Jan. 9, or Feb. 3 payments. Those three are independently ordinary-course protected. **After ordinary course, only the Feb. 27 transfer is realistically exposed: $154,000.** --- ## 3. New-value defense Pinion delivered $228,000 of unpaid goods between Dec. 15 and Mar. 10. Those shipments were new value given after the preference period began, they remained unpaid, and they were not secured by an otherwise unavoidable transfer. The new-value defense reduces preference exposure dollar-for-dollar. But the $95,000 of final-20-day goods cannot be used twice. If Pinion reserves the $95,000 as its § 503(b)(9) administrative claim, then the non-overlapping new-value amount is: $228,000 – $95,000 = **$133,000** Applied to the remaining exposed transfer: $154,000 – $133,000 = **$21,000** So, after the new-value defense, the realistic remaining preference exposure is: **$21,000** If Pinion instead used the $95,000 final-20-day goods as new value, the preference exposure could be reduced to **$0** — but Pinion would give up its $95,000 administrative priority claim. --- ## 4. The $95,000 final-20-day deliveries The $95,000 of goods delivered between Feb. 18 and Mar. 10 supports an administrative-expense claim under the 20-day goods rule: - It is a claim for goods received by Gearwright in the ordinary course within 20 days before the petition. - It is an administrative-expense claim. - It is payable ahead of general unsecured claims. The $95,000 is part of the same $228,000 new-value pool. **The same dollars should not do double duty:** Pinion should not both reduce the preference claim by $95,000 and also assert a $95,000 administrative priority claim for the same goods. **Allocation most favorable to Pinion:** preserve the $95,000 as a § 503(b)(9) administrative claim. Why? After using the other $133,000 of new value, only $21,000 of preference exposure remains. The $95,000 administrative claim is likely worth more to Pinion—or is at least powerful settlement leverage—than using it to eliminate the last $21,000 of preference exposure. If the trustee later shows that the estate will not pay administrative claims at any meaningful level, Pinion can reallocate: use the $95,000 as new value and take the preference exposure to zero. But in the response letter, Pinion should plead both in the alternative and not make a final election. --- ## 5. The $60,000 deposit The CFO’s proposal to “just apply” the deposit is **not lawful now**. The bankruptcy filing operates as a stay of setoff of prepetition debts. Pinion may not unilaterally set off the deposit against Gearwright’s unpaid invoices without court relief. Willful violation of the stay can expose Pinion to: - actual damages, - costs and attorneys’ fees, and - potentially punitive damages. ### Correct procedure Pinion should: 1. Treat the deposit as property of the estate. 2. Not apply it unilaterally. 3. File a motion for relief from the stay, or obtain the trustee’s stipulation/agreed order, to set off the deposit under the setoff rules. 4. If the deposit is cash collateral, comply with cash-collateral rules and establish adequate protection. The deposit should also be part of any global settlement. Pinion can agree to resolve the deposit, the preference demand, and the § 503(b)(9) claim together in one court-approved settlement. --- ## 6. Defensible net exposure and settlement range Pinion’s true exposure is not $612,000. Working number after defenses: - Ordinary course: reduces exposure by $458,000. - Remaining exposed transfer: $154,000. - New value outside the 20-day goods: reduces exposure by $133,000. - Remaining preference exposure: **$21,000**. So Pinion’s defensible settlement target is: - **Open at $0.** - **Realistic settlement range: $0–$25,000.** - **Do not pay more than $25,000 without further discovery** or without preserving the $95,000 administrative claim and the deposit setoff. The trustee’s $612,000 demand is a settlement opener, not a realistic assessment. A trustee will typically settle preference claims at a discount reflecting defense strength. Pinion’s defenses are strong. --- ## 7. Response strategy **Do not pay the demand. Do not unilaterally apply the deposit. Assert defenses and counter.** If the trustee files an adversary proceeding, Pinion should: - Answer and assert: - § 547(c)(2) ordinary course for the Dec. 14, Jan. 9, and Feb. 3 payments; - § 547(c)(4) new value; - § 503(b)(9) administrative claim; - deposit setoff rights, subject to stay relief. - Demand discovery on the trustee’s distribution assumptions and Pinion’s shipping/invoice records. - Be prepared to litigate rather than pay an inflated settlement. ### First letter to the trustee > **Re: Demand for $612,000 in alleged preferences** > > Dear Trustee: > > We represent Pinion Fasteners, Inc. Pinion rejects the demand. > > The Dec. 14, Jan. 9, and Feb. 3 payments were made within the parties’ historical payment range of 38–52 days and within industry ordinary terms. They are protected by § 547(c)(2). > > The Feb. 27 transfer, even if challenged, is offset by new value. After Dec. 14, Pinion delivered $228,000 of goods to Gearwright that remain unpaid, including $95,000 of goods received within 20 days before the petition, which is an administrative-expense claim under § 503(b)(9). Pinion also holds a $60,000 deposit and will seek authority to set it off. > > After applying these defenses, Pinion does not owe the amount demanded. Pinion is willing to discuss a prompt, court-approved resolution of any genuinely disputed amount, but will not make a payment based on the demand as written. > > Please provide the documentation underlying your demand, including the Chapter 7 distribution assumptions and any transfer-by-transfer analysis you intend to rely on. > > Sincerely, > Counsel for Pinion Fasteners, Inc. --- ## Bottom line Pinion should not pay the trustee $612,000. - First three payments are ordinary-course protected. - The Feb. 27 payment is the only real exposure. - The new-value defense and the § 503(b)(9) administrative claim reduce that exposure to a small number. - The deposit cannot be applied unilaterally. - Pinion’s realistic settlement range is **$0–$25,000**, and Pinion should force the trustee to prove anything more.