The following is for the exclusive use of attorneys. This firm does not make any representations as to the accuracy or current status of any case cited herein.
What is a preferential payment?
Pursuant to section 547(b) of the United States Bankruptcy Code, a Trustee may avoid any transfer of an interest of the debtor in property:
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(a) on or within 90 days before the date of the filing of the petition; or
(b) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if —
(a) the case were a case under chapter 7 of this title;
(b) the transfer had not been made; and
(c) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b). It is the plaintiff’s burden to prove each and every one of these elements by a preponderance of the evidence. 11 U.S.C. § 547(g); Danning v. Bozek (In re Bullion Reserve of N. Am.), 836 F.2d 1214 (9th Cir. 1988). Failure to satisfy this burden on any one element precludes a finding that a transfer is a preference. Hood v. Brownyard-Sharon Park Center Inc. (In re Hood), 118 B.R. 417, 421 (Bankr. D.S.C. 1990); Norman v. Jirdon Agri Chemicals, Inc. (In re Cockreham), 84 B.R. 757, 761 (D.Wyo. 1988). Further, because the elements above are objective, the intent of the debtor is irrelevant. Marathon Oil Co. v. Flatau (In re Carig Oil Co.), 785 F.2d 1563 (11th Cir. 1986). Accordingly, it is the effect of the transfer which is controlling. Barash v. Public Fin. Corp., 658 F.2d 504, 510 (7th Cir. 1981).
In re Longview Aluminum, LLC, 10-2780 (7th Cir. 2011), the Seventh Circuit Court of Appeals held that members of an LLC are insiders for preferential transfer purposes under the Bankruptcy Code. Trustee makes demand for return of funds paid within 90 days of Petition: potential defenses available to your company. Some important defenses are:
- Substantially Contemporaneous Exchange. This is a flexible concept calling for a case by case inquiry. For example, one case held that a lien granted in exchange for a loan may be substantially contemporaneous even though the lien was not perfected for 16 days.
- Ordinary Course of Business. This is probably the most useful defense. If the payments are received in the ordinary course of business, the trustee cannot require repayment. Although the term ordinary course of business is not defined in the Bankruptcy Code, case law is reasonably clear as to its meaning. Determination as to ordinary course generally requires an analysis of the credit relationship between the parties for an extended period.
- Subsequent Advance Rule. Another useful defense is the subsequent advance of unsecured credit following receipt of the payment. In situations where there is an ongoing credit relationship, the analysis as to deliveries and application of payments can be quite complicated. Some cases require the subsequent advance to remain unpaid while others do not. The subsequent advance rule applies to both goods and services.
- Small Transfers. In business cases, transfers of an aggregate value of less than $5,475.00 cannot be recovered.
- Delivery of Goods Within 20 Days of Bankruptcy. Unpaid deliveries of goods within 20 days are entitled to payment as administrative (higher priority) claims. Creditors should always assert these claims as soon as they learn of the bankruptcy filing. However, in some cases where that has not been done, it may not be too late to do so toward the end of the case when the preference demand is received.
Whittle Dev. Inc. v. Branch Banking & Trust Co. (In re Whittle Dev. Inc.), Case No. 10-37084-HDH-11, Adv. No. 11-03150 (Bankr. N.D. Tex. July 27, 2011) (docket no. 21). A bankruptcy judge in Dallas recently issued an opinion2 that exposes foreclosing lenders who credit bid to possible attack. The court in Whittle ruled that a lender that credit bid to purchase its collateral at a foreclosure sale prior to the bankruptcy of the borrower could be sued for a preference to recover the purchased property, even though the debtor could not bring a fraudulent transfer suit regarding the foreclosure sale.
In re Hessco Industries, Inc.9th Cir. BAP 2003 ORDINARY COURSE DEFENSE AGAINST PREFERENCE ACTION REQUIRES EVIDENCE OF PREVAILING BUSINESS STANDARD. Court reverses the bankruptcy court’s conclusion that the ordinary course of business defense precluded judgment for the Trustee on the preference cause of action because appellees had failed to present evidence of prevailing business standards as required under Sulmeyer v. Suzuki (In re Grand Chevrolet, Inc.), 25 F.3d 728, 732 (9th Cir. 1994).
But the court recited with approval remarks from Ganis Credit Corp. v. Anderson (In re Jan Weilert RV, Inc.), 315 F.3d 1192 (9th Cir. 2003), amended by 326 F.3d 1028 (9th Cir. 2003): “[C]reditors are not required to prove a particular uniform set of business terms, rather “ordinary business terms” refers to the broad range of terms that encompasses the practices employed by those debtors and creditors, including terms that are ordinary for those under financial distress. Only a transaction that is so unusual or uncommon “as to render it an aberration in the relevant industry,” falls outside the broad range of terms encompassed by the meaning of “ordinary business terms.”
Batlan v. Transamerica Commercial Fin. Corp. (09/13/01 – No. 99-35946) (9th Cir. Ct App) Under 11 USC 547(b)(5), a bankruptcy trustee must still prove that a secured creditor received payments in excess of its secured interest during the 90 days before the debtor filed a petition, even if the creditor had a floating lien.
Ganis Credit Corp. v. Anderson (01/13/03 – No. 01-55455/56872) (9th Cir Ct Apps) Under 11 U.S.C. section 547(c)(2)(C), a court cannot limit “ordinary business terms” to the “average” transactions in the industry, but must consider the broad range of terms that encompasses the practices employed by similarly situated debtors and creditors facing the same or similar problems.
Frank v. Michigan State Unemployment Agency (06/06/01 – No. 00-1233) (6th Cir St App) Pre-petition liens on the bankruptcy debtor’s property do not reattach to post-petition preference proceeds recovered by a bankruptcy trustee because the proceeds are property of the estate to be distributed to the debtor’s creditors under the Bankruptcy Code.
Morehead v. State Farm Mut. Auto. Ins. Co. (05/03/01 – No. 99-6430) (6th Cir St App) A wage garnishment is an avoidable transfer where the garnishment is of wages earned during the 90-day preference period in bankruptcy under 11 USC 547(b)(4)(A).