# Question 15: The Preference Demand

## Your role

You represent Pinion Fasteners, a component supplier, after receiving a demand letter from the chapter 7 trustee of its former customer, Gearwright Assembly. The trustee demands $612,000 within 30 days. Pinion's CFO wants to know what it truly owes, what leverage it holds, and what to do about a deposit it is holding.

## Governing law

1. A trustee may avoid a transfer of the debtor's property made to a creditor, on account of an antecedent debt, while the debtor was insolvent, within 90 days before the bankruptcy petition, that lets the creditor receive more than it would in a chapter 7 distribution. Insolvency during the 90 days is presumed.

2. A transfer is not avoidable to the extent it was made in the ordinary course of business or financial affairs of the debtor and the transferee, or was made according to ordinary business terms in the industry. Either showing suffices.

3. Payments extracted through unusual collection pressure, threats to withhold shipment, or changed payment patterns are ordinarily outside the ordinary course.

4. A transfer is not avoidable to the extent that, after the transfer, the creditor gave new value not secured and not paid for by an otherwise unavoidable transfer.

5. A creditor holding a claim for the value of goods received by the debtor in the ordinary course within 20 days before the petition holds an administrative-expense claim for that value, payable ahead of general unsecured claims.

6. The filing of the petition operates as a stay of setoff of prepetition debts. A creditor may not effect a setoff without relief from the stay. Willful violation exposes the creditor to damages.

7. Preference liability and defenses are computed transfer by transfer.

8. A trustee's settlement of a preference claim requires court approval, and trustees commonly resolve claims at a discount reflecting defense strength.

## Facts

Gearwright filed its chapter 7 petition on March 10. In the 90 days before filing, Pinion received four payments on past-due invoices:

* December 14: $148,000, paid 41 days after invoice.
* January 9: $171,000, paid 47 days after invoice.
* February 3: $139,000, paid 49 days after invoice.
* February 27: $154,000, paid 66 days after invoice, five days after Pinion's credit manager emailed Gearwright: "Pay the open balance this week or the next two shipments do not leave our dock."

Over the two years before the preference period, Gearwright paid Pinion between 38 and 52 days after invoice, averaging 45 days. Industry credit terms for fastener suppliers run net 30 to net 60, with actual payment commonly 35 to 65 days.

After each payment, Pinion continued shipping. Between December 15 and March 10, Pinion delivered $228,000 of goods that remain unpaid. Of that amount, $95,000 was delivered between February 18 and March 10, the final 20 days before the petition.

Pinion also holds a $60,000 security deposit that Gearwright posted two years ago under the supply agreement. Pinion's CFO proposes "just applying the deposit" against the unpaid invoices now.

The trustee's letter demands the full $612,000, describes the payments as "textbook preferences," and offers a 30-day window before suit.

## Assignment

Analyze:

* Which of the four payments are prima facie preferences.
* The ordinary-course defense payment by payment, using the historical baseline and industry terms, and the effect of the February 27 dock-hold email.
* The new-value defense: compute the amount and show how it applies against the exposure.
* The $95,000 of final-20-day deliveries: what claim it supports, its priority, and how it interacts with the new-value math. State whether the same dollars can do double duty under the supplied rules, and choose the allocation most favorable to Pinion.
* The deposit: whether the CFO's proposed setoff is lawful now, what the correct procedure is, and the risk of doing it anyway.
* A defensible net-exposure number and the settlement range Pinion should target.
* The response strategy: pay, assert defenses and counter, or force suit, with the concrete first letter you would send the trustee.

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