Avoidance Powers -- Preferences, Statutory Liens, Postposition Transactions, Preferential Offsets, Limitations
| C. PREFERENCES [§ 547]
a) Preference avoidance provisions are not directed at wrongdoing per se on anyone's part; instead, they work to promote equality of treatment among creditors [See Sampsell v. Imperial Paper Corp., 313 U.S. 215 (1941); Barash v. Public Finance Corp., 658 F.2d 504 (7th Cir. 1981)] and discourage dismemberment of the debtor [see In re Caso Products, Inc., 23 B.R. 245 (Bankr. E.D. Mich. 1982)].
b) While many transactions (such as liens not sufficiently perfected to be valid against trustee) can be attacked as preferences, the more stringent requirements for preference avoidance often require attack on some other ground (e.g., § 544(a)).
2. Definition of Voidable Preference [§ 547(b))
The trustee may avoid:
a) any transfer
b) of property of the debtor
c) to or for the benefit of a creditor
d) for or on account of an antecedent debt
e) made while the debtor was insolvent
f) made within 90 days before filing or, if the transferee creditor was an insider, within one year before filing [NOTE: old requirement, that insider have had reasonable cause to believe that the debtor was insolvent at the time of the transfer, eliminated by the 1984 Act]
g) that enables such creditor to receive more than the creditor would receive in a Chapter 7 liquidation.
3. Elements of Voidable Preference
(1) § 101(50) definition: ". . . every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest."
(2) Examples: IRS seizure of debtor's bank account pursuant to tax lien, In re R&T Roofing, 79 B.R. 22 (D. Nev. 1987); seizure of property pursuant to writ of execution, In re Veteran Plate Glass Co., 71 B.R. 74 (Bankr. N.D. Ohio 1987); reclamation of rugs from debtor by entity who supplied them on "consignment" or "sale or return" basis but took no security interest, In re A.J. Nichols, Ltd., 21 B.R. 612 (Bankr. N.D. Ga. 1982); a judgment lien obtained against debtor, In re Underwood, 24 B.R. 503 (Bankr. N.D. Miss. 1982); bond redemption, In re De Feo Fruit Co., 24 B.R. 220 (Bankr. W.D. Mo. 1982); early repayment of loans held by CEO of debtor, In re Gold Coast Concepts, Inc., 23 B.R. 228 (Bankr. S.D. Fla. 1982); perfection of security interest, In re Merritt, 7 B.R. 876 (Bankr. W.D. Mo. 1980); creditor's setoff, In re Mims, 33 B.R. 95 (Bankr. M.D. Fla. 1983); certificate of deposit pledged as collateral for letter of credit, First Interstate Credit Alliance, Inc. v. American Bank of Martin County, 845 F.2d 293 (11th Cir.), cert. denied, 109 S. Ct. 557 (1988).
b) Of Property Of The Debtor
(1) Code provides no definition of "property" but § 541 expansively delineates what is "property of the estate."
(2) Property must belong to the debtor. Begier v. IRS, 110 S.Ct. 2258 (1990) (trust fund tax payments from debtor's general accounts were transfers of property held in trust and therefore cannot be avoided as preferences). A payment by a third party on behalf of debtor does not qualify. See Building Dynamics, Inc. v. Grisope Elec. Co., 134 B.R. 715 (Bankr. W.D. N.Y. 1992)(debtor contractor's payment of contract proceeds to subcontract not voidable because, under state law, proceeds were held in trust for the subcontractor and, hence, were not "property of the estate"); In re M.J. Sales & Distribution Co., 25 B.R. 608 (Bankr. N.Y. 1982)(payment by surety of debtor's judgment creditor); In re Rector, 14 B.R. 1008 (Bankr. E.D. Tenn. 1981) (payment by debtor's ex-spouse of debtor's attorneys fees). Nor do funds held in trust by the debtor; Bethlehem Steel Corp. v. Tidwell, 66 B.R. 932 (M.D. Ga. 1986); see also In re Momentons Computer Systems Int'l, 66 B.R. 512 (N.D. Cal. 1986)(funds owed to debtor but paid to sheriff pursuant to writ of execution which, under state law, never became property of debtor).
(3) Cases split on whether IRS pre-petition levy upon a taxpayer's bank account terminates the taxpayer-debtor's interest in the funds and removes them from the bankruptcy estate. Compare E. John Vito, Inc. v. First American Bank, 1991 Bankr. LEXIS 306 (Bankr. D. Md. Feb. 22, 1991)(Adv. No. 90A-0178-PM) (estate's interest extinguished) with West Aire, Inc. v. United States, 131 B.R. 871 (Bankr. D. Nev. 1991)(estate's interest not extinguished).
c) To Or For the Benefit Of A Creditor [§ 547(b)(1)]
(1) A creditor and, therefore, a credit transaction, must be involved.
(2) A guarantor, surety or endorser is a creditor (holding a contingent claim). See In re Church Building & Interiors, Inc., 14 B.R. 128 (Bankr. W.D. Okla. 1981) (release of guarantees in exchange for a security interest in debtor's property benefitted guarantor); In re Jet Florida, Inc., 69 B.R. 83 (Bankr. S.D. Fla. 1987)(airline ticket clearinghouse to which payments were made deemed not to be a creditor).
d) For Or On Account Of An Antecedent Debt
Owed By The Debtor [§ 547(b)(2)]
(1) The transfer must follow the creation of debt.
(2) Examples: Compare In re Kelly, 3 B.R. 651 (Bankr. E.D. Tenn. 1980) (loan extended on June 12, 1979, deemed antecedent debt where security interest was not perfected until August 15, 1979) with In re Martella, 22 B.R. 649 (Bankr. D. Colo. 1982) (lapse of 6 weeks between extension of loan and perfection of security interest, held no antecedent debt); see also In re Camp Rockhill, Inc.,12 B.R. 829 (Bankr. E.D. Pa. 1981) (lapse of 56 weeks between perfection of security interest and extension of loan, held antecedent debt) [see "contemporaneous exchange" exception in § 547(c)(1) discussed infra]. See Lewis v. Diethorn, 893 F.2d 648 (3rd Cir.), cert. denied, 111 S. Ct. 369 (1990)(debtor's payment under settlement agreement in return for dismissal of state court suit and removal of lis pendens is not "for or on account of an antecedent debt" and thus not voidable as a preference).
e) Made While Debtor Insolvent [§ 547(b)(3)]
(1) Balance sheet test of whether debts exceed assets, at fair value, excluding exempt or fraudulently transferred property. § 101(29); H.R. Rep. No. 95-595 at 312.
(2) Determined as of date of transfer. In re Camp Rockhill, Inc., supra.
(3) Method of valuation not clear. Compare Constructora Maza, Inc. v. Banco de Ponce, 616 F.2d 573 (1st Cir. 1980) (liquidation value) with In re Taxman Clothing Co., 905 F.2d 166 (7th Cir. 1990)(for purpose of determining whether debtor was solvent during the preference period, appraisal may be higher "going concern" retail value an not value after store closed); Edward R. Bacon Co. v. Grover, 420 F.2d 678 (9th Cir. 1970) (going concern value); Tennessee Chemical Co. v. Shell Canada, Inc., 143 B.R. 468 (Bankr. E.D. Tenn. 1992)("going concern" value); In re Utility Stationary, 12 B.R. 170 (Bankr. N.D. Ill. 1981) (unless company is on its "death bed," use going concern value).
(4) Insolvency is presumed during 90 days prior to bankruptcy. Creditor's lack of knowledge of insolvency is no defense. E.g., In re Anders, 20 B.R. 468 (Bankr. M.D. Fla. 1982).
(a) Transferee must first introduce some evidence of debtor's solvency. Compare In re Thomas Farm Systems, Inc., 18 B.R. 541 (Bankr. E.D. Pa. 1982) (debtor's letter indicating solvency shortly after transfer sufficient to rebut presumption) with In re Eichorn, 11 B.R. 81 (Bankr. D. Mass. 1981) (same facts found insufficient to rebut presumption); see In re Maytag Sales and Service, Inc., 23 B.R. 384 (Bankr. N.D. Ga. 1982) (where creditor offers no evidence on solvency, trustee not required to present evidence).
(b) Once presumption of insolvency rebutted, trustee must prove insolvency. See Rule 301, Fed. R. Evid.
f) Made Within The Preference Time Periods Of Ninety Days Or, For Insiders, One Year [§ 547(b)(4)]
(1) Transfers made within ninety day period preceding filing may be avoided as preference. (If outside 90 day period but state law provides for preference avoidance, use § 544(b).) (If post-petition, use § 549; see In re Walter's Disposal Service, Inc., 73 B.R. 6 (Bankr. W.D. Mo. 1986). For an involuntary case, preference period is counted from the date involuntary petition is first filed. E.g., In re Baker & Getty Financial Services, Inc., 98 B.R. 300 (Bankr. N.D. Ohio 1989). See Committee of Unsecured Creditors v. Mellon Bank N.A., 945 F.2d 635 (3rd Cir. 1991), cert. denied, 112 S. Ct. 1476 (1992) (refiling within 90-day preference period of financing statement in new state to which debtor relocated not voidable as it was mere continuation of previously perfected interest).
(2) Insider Transferee -- preference period extends back one year. [NOTE: old requirement, that insider transferee must have had "reasonable cause" to believe that debtor was insolvent when transfer occurred, eliminated by 1984 Act.]
(a) "Insider" defined in § 101(30); in general, someone having a "sufficiently close relationship with the debtor that his conduct is made closer than those dealing at arm's length with the debtor." H.R. Rep. No. 95-595 at 312. See "Preferences, Post-Petition Transfers, And Transactions Involving A Debtor's Downstream Affiliate," 5 Bank. Dev. Journal 1 (1988); Holloway v. Browning Interests, 955 F.2d 1008 (5th Cir. 1992)(factors in determining "insider" status include closeness of relationship and whether transctions were conducted at arms length; former wife deemed "insider"); In re Hollar, 100 B.R. 892 (Bankr. S.D. Ohio 1989)(debtor's girlfriend was not "insider").
(b) Section 101(30)'s definition of "insider," insofar as it encompasses a "person in control" of a debtor cannot apply to the government since it is expressly excluded from the definition of "person" in 101(33). In re Yonkers Hamilton Sanitarium, Inc., 22 B.R. 427 (Bankr. S.D. N.Y. 1982).
(c) Payments to creditors who dealt at arm's length with a debtor can nevertheless be subject to the one-year preference recovery period applicable to "insider" creditors when the payments benefit the insiders. Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir. 1989); see also In re Southwest Equipment Rental, 137 B.R. 263 (Bankr. E.D. Tenn. 1992); but cf. In re Arundel Housing Components, Inc., 126 B.R. 216 (Bankr. D. Md. 1991).
(3) Date of Transfer
(a) How is period computed