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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).

Reference article:

Preferences and Selected Bankruptcy Issues (12/2017)

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.

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.

New Jersey Tax Foreclosures Can Be Preferences

Hackler v. Arianna Holdings Co. (In re Hackler), 18-15650 (3d Cir. Sept. 12, 2019) Unlike mortgage foreclosures, which can be immune from attack in bankruptcy court, a tax foreclosure in New Jersey may be set aside as a preference because the process does not entail a public auction related to the value of the property, the Third Circuit held.

Upholding the bankruptcy and district courts, Circuit Judge Jane R. Roth reasoned that BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), was not controlling. In BFP, the Supreme Court ruled that a regularly conducted mortgage foreclosure sale cannot be avoided as a fraudulent transfer under Section 548.

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 opinion 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.”

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.

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.

Matter of Prescott, 805 F.2d 719 (7th Cir. 1986).  7th Circuit has held that the issue with payments on secured debt is whether or not it is fully secured.  If debt was fully secured, then the creditor didn’t recover more than it otherwise would have and the trustee can’t satisfy 547(b)(5).  But if it is undersecured, then the payment would be avoidable to the extent of the unsecured portion.  (of course there may be other defenses, but that’s how the issue regarding secured status plays out).

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).

Zazzali v. United States (In re DBSI, Inc.), 2017 U.S. App. LEXIS 16817 (9th Cir. Aug. 31, 2017)  Avoiding a fraudulent transfer to the Internal Revenue Service (“IRS”) in bankruptcy has become easier, or at least clearer, as a result of a unanimous decision by the Ninth Circuit Court of Appeals.


U.S. Bank NA v. The Village at Lakeridge, LLC, 814 F.3d 993, (9th Cir., March 5, 2018)Under the Ninth Circuit’s test, a creditor qualifies as a non-statutory insider if two conditions are met: (1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications in the Bankruptcy Code; and (2) the relevant transaction is negotiated at less than arm’s length.


In re Witt, In Bankruptcy Case No. 06-70503 (Bankr. C.D. Ill. 2/25/2008) (Bankr. C.D. Ill., 2008) In re Witt, In Bankruptcy Case No. 06-70503 (Bankr. C.D. Ill. 2/25/2008) (Bankr. C.D. Ill., 2008)

That court found, inter alia in deciding on a MSJ:

“The Trustee’s failure to set forth the details of the relationship of the Debtor and the Defendant may have been based on the Trustee’s misunderstanding of the law. The Trustee asserts in his argument that there is a per se rule that a “boyfriend” or “girlfriend” is an insider. This is not, however, a correct statement of the law.
An “insider” is defined by the Bankruptcy Code as including “a relative of the debtor or a general partner of the debtor.” 11 U.S.C. § 101(31)(A)(i). “Boyfriends” and “girlfriends” do not fall within that statutory definition. The statutory list is not, however, exhaustive. The Seventh Circuit has stated that, in determining whether a person not specifically included in the statutory definition is an insider, courts should focus on two factors: (i) the closeness of the relationship between the debtor and the transferee, and (ii) whether the transaction between the debtor and the transferee was conducted at arm’s length. In re Krehl, 86 F.3d 737, 742 (7th Cir. 1996). Thus, the inquiry is fact specific and, absent the presentation of undisputed facts about the relationship and the transaction, summary judgment cannot be granted.”


If the friend is not among the enumerated relations in Section 101(31), then the issue is whether the friend is a non-statutory insider.  The test in the Ninth Circuit is as stated by Justice Kagan in Village at Lakeside:

“The decisions are not entirely uniform, but many focus, in whole or in part, on whether a person’s ‘transaction of business with the debtor is not at arm’s length.’’ U.S. Bank Nat. Ass’n ex rel. CW Capital Asset Management LLC v. Village at Lakeridge, LLC, 138 S. Ct. 960, 963-64 (quoting 2 A. Resnick & H. Sommer, Collier on Bankruptcy ¶ 101.31, p. 101-142 (16th ed. 2016) and In re U.S. Medical, Inc., 531 F.3d 1272, (10th Cir. 2008)).


“The Ninth Circuit here, as noted earlier, endorsed a two-part test for non-statutory insider status, asking whether the person’s relationship with the debtor was similar to those of listed insiders and whether the relevant prior transaction was at “less than arm’s length.” U.S. Bank Nat. Ass’n ex rel. CW Capital Asset Mgmt. LLC v. Vill. at Lakeridge, LLC, 138 S. Ct. 960, 96 (2018).

The four concurring justices (Justices Sotomayor, Kennedy, Thomas, and Gorsuch), however, raised the issue of whether that is the correct standard.

“First, it could be that the inquiry should focus solely on a comparison between the characteristics of the alleged nonstatutory insider and the enumerated insiders, and if they share sufficient commonalities, the alleged person or entity should be deemed an insider regardless of the apparent arm’s-length nature of any transaction.”  U.S. Bank Nat. Ass’n ex rel. CW Capital Asset Management LLC v. Village at Lakeridge, LLC, 138 S. Ct. 960, 971 (2018) (Sotomayor, J, concurring).

Or:   “it could be that the test should focus on a broader comparison that includes consideration of the circumstances surrounding any relevant transaction. If a transaction is determined to have been conducted at less-than-arm’s length, it may provide strong evidence in the context of the relationship as a whole that the alleged non-statutory insider should indeed be considered an insider. Relatedly, if the transaction does appear to have been undertaken at arm’s length, that may be evidence, considered together with other aspects of the parties’ relationship, that the alleged non-statutory insider should not, in fact, be deemed an insider.” U.S. Bank Nat. Ass’n ex rel. CW Capital Asset Management LLC v. Village at Lakeridge, LLC, 138 S. Ct. 960, 971-72 (2018) (Sotomayor, J, concurring).

Notes by: Prof. Bruce A. Markell, Northwestern Pritzker School of Law

In re Alekson, 2:09-bk-33881-CGC – Debtor repaid friend in full outside 90 day pre-petition period. It is undisputed here that Alekson andButcher were friends; however, friendship alone is not sufficient to establish insider status in absence of evidence that the friend dominated the debtor. See Pfeiffer v.
Reinbold (In re Reinbold), 182 B.R. 244, 246 (Bankr. D.S.D. 1995).

A “friend” or other individual that exerts control over the debtor may be a non-statutory insider.  Apart from statutory insiders, an insider can also be someone “who has a sufficiently close relationship with a debtor that his conduct is made subject to closer scrutiny than those dealing at arm’s length with the debtor.” See Miller v. Schuman (In re Schuman), 81 B.R. 583, 586 (B.A.P. 9th Cir. 1987); MCA Fin. Group, Ltd. v. Hewlett-Packard (In re Fourthstage Tech., Inc.), 355 B.R. 155, 159 (Bankr. D. Ariz. 2006).  There are many factors that a court will consider.