58. Avoidance Powers -- Preferences, Statutory Liens, Postposition Transactions, Preferential Offsets, Limitations
C. PREFERENCES [§ 547]
(a) How is period computed
Nelson Co. v. Amquip Corp., 128 B.R. 930 (E.D. Pa. 1991) (90-day preference period is counted backward from petition date, not forward from transfer date -- which in this case would have resulted in 90th day falling on a Sunday and,under Bankr. Rule 9006(c), being extended to the Monday petition date).
(b) Deed Recordation
In re Chenich, 100 B.R. 512 (BAP 9th Cir. 1989) (transfer of grant deed occurred on recordation date); accord In re Freedlander, Inc., 107 Bankr. 88 (E.D. Va. 1989) (recordation of deed of trust within 90 days of bankruptcy filing resulted in preferential transfer).
In re Lucas, 107 Bankr. 332 (D.N.M. 1989) (attachment was perfected upon service of writ of garnishment and any profits subsequently distributed were attached at same time, and thus, transfers were not preferential).
(d) Check cases
Barnhill v. Johnson, 112 S. Ct. 1386 (1992)(transfer occurs when check is honored by drawee bank, and not when check is delivered).
(e) Judgment Liens
Sterling Die Casting Co. v. Local 365 UAW Welfare and Pension Fund, 126 B.R. 673 (Bankr. E.D.N.Y.), aff'd, 132 B.R. 99 (E.D.N.Y. 1991)(lien against debtor's property arises when a federal court judgment is docketed in county where the property is located, not when judgment is entered).
g) Enables Such Creditor To Receive More Than In A Liquidation [§ 547(b)(5)]
(1) "Greater percentage test": transfer is preferential if it enabled a creditor to receive a greater percentage of his claim than he would have received if the transfer had not occurred and he had participated in the distribution. H.R. Rep. No. 95-595 at 177; Barash v. Public Financial Corp., 658 F.2d 504 (7th Cir. 1981).
(2) Transfers to fully secured creditors generally are not preferential since creditor generally would not receive more than in a liquidation. Compare In re Pineview Care Center, Inc., 142 B.R. 677 (D.N.J. 1992) (prepetition transfers fully secured creditor not preferential even if debt was guaranteed by insider); Miller v. Rausch-Alan Inc., 129 B.R. 179 (Bankr. D. Minn. 1991) (payment to fully secured creditor not voidable); In re Ken Gardner Ford Sales, Inc., 10 B.R. 632 (Bankr. E.D. Tenn. 1981), aff'd, 23 B.R. 743 (E.D. Tenn. 1982), with In re Robinson Drilling, Inc., 877 F.2d 32 (10th Cir. 1989) (debtor's payment to creditor in excess of amount of the mechanic's liens constituted preference).
(3) Transfers to undersecured creditors are credited first to the unsecured portion of the debt. E.g., In re Kudford Fruit Products, Inc., 99 B.R. 18 (Bankr. C.D. Cal. 1989).
4. Exceptions [§ 547(c)]
a) Substantially Contemporaneous Exchange For New Value § 547(c)(1)
(1) Elements: transfer
(a) intended by both debtor-transferor and creditor-transferee to be a contemporaneous exchange for new value [subjective element]; see In re Silver, 1991 WL 155484 (Bankr. D.N.M. 1991) (exception could not apply even though recipient of transfer released an unavoidable judgment lien after receiving payment, when debtor had no knowledge of the lien);
(b) was in fact substantially contemporaneous [objective element]. See In re Hersman, 20 B.R. 569 (Bankr. N.D. Ohio 1982) (use of credit card by debtor, held that contemporaneous exchange not intended) (but see exception found in § 547(c)(2)).
(2) Preserves rules of Dean v. Davis, 242 U.S. 438 (1917) (mortgage signed when loan made but, through inadvertence, not recorded until seven days later; held, no preference), and National City Bank v. Hotchkiss, 231 U.S. 50 (1913) (unsecured loan made at 10:00 a.m.; creditor, after learning of debtor's financial problems, obtained collateral at 2:00 p.m.; held, transfer for antecedent debt and preference). See Pine Top Ins. Co. v. Bank of America, 1992 U.S. App. LEXIS 16212 (7th Cir. July 22, 1992)(No. 91-1175/1361)(follows Dean, collateral exchange held contemporaneous even though delayed 3 weeks, where parties fully intended provision of collateral when loan made); Drewes v. Vatnsdal, 139 B.R. 472 (Bankr. D.N.D. 1991)(mortgage recorded ten months after loan to brother-in-law, even though mortgage executed at time of loan, was not substantially contemporaneous). In re Hartwig Poultry, Inc., 70 B.R. 748 (Bankr. N.D. Ohio 1987) (45 day period too protracted to be contemporaneous exchange for new value); In re Damon, 34 B.R. 626 (Bankr. D. Kan. 1983) (transfer of security interests in vehicles more than 25 days after funds advanced to purchase them held not substantially contemporaneous); 4 Collier on Bankruptcy ¶ 547.37 (15th ed. 1982). See also cases discussed supra at C(3)(d) with respect to "antecedent debt."
(3) "New value" is defined in § 547(a)(2). Creditor must prove with specificity that the measure of new value was given in direct return for an equivalent measure of property transferred by debtor. In re Arrow Air, Inc., 940 F.2d 1463 (11th Cir. 1991). See In re F & S Central Mfg. Corp., 13 C.B.C. 805 (Bankr. E.D.N.Y. 1985) (agreement to partially subordinate an existing obligation is "new value"); In re Duffy, 3 B.R. 263 (Bankr. S.D.N.Y. 1980) (forbearance by car lessor from repossessing rented vehicle did not enhance value of debtor's estate; therefore, no "new value" given). See generally, Note, "New Value and Preference Avoidance In Bankrputcy," 69 Wash. U.L.Q. 875 (summer 1991).
b). Payment In The Ordinary Course Of Business [§ 547(c)(2)]
(1) Elements: Transfer is:
(a) Payment of debt incurred in ordinary course of business or financial affairs of both debtor and transferee; AND
(b) Made in ordinary course of business or financial affairs
of both debtor and transferee; AND
(c) Made according to ordinary business term
[NOTE: 1984 Act eliminated earlier requirement that "ordinary course of business" transfer be made within 45 days after the debt was incurred.]
- See Union Bank v. Wolas, 112 S. Ct. 527 (1991)(interest payments on eight-month revolving line of credit, although long term debt, could be made in the "ordinary course of business" and thus could be protected from recovery as a preference under § 547(C)(2)(which was held not to distinguish between long- and short-term debt)); In re American Continental Corp., 142 B.R. 894 (D.Az. 1992)(payments of principal and interest to purchasers of debtor's subordinated debentures fall within ordinary course of business exception).
- See Logan v. Basic Distribution Corp., 957 F.2d 239 (6th Cir. 1992)(subsections (B) and (C), respectively, comprise subjective and objective components; subjective prong requires proof that payment was ordinary as between debtor and creditor, objective prong requires proof payment is ordinary in the industry).
- In re Food Catering & Housing, Inc., 1992 WL 179442 (9th Cir. 1992)(payment of 20 invoices, some 96 days overdue, which was twice the number and 4 times the dollar amount of any prior single payment was not excepted under "ordinary course of business exception"); In re Seawinds, Ltd., 888 F.2d 640 (9th Cir. 1989) (otherwise preferential transfers did not fall within ordinary course of business exception where creditor used economic pressure to obtain payment as soon as possible); In re Fulghum Constr. Corp., 872 F.2d 739 (6th Cir. 1989) (debtor's repayment of short-term advances by its sole stockholder found to be in ordinary course of business); Lawson v. Ford Motor Co., 127 B.R. 722 (Bankr. W.D.N.Y. 1991)(even if done according to formal agreement, payments on delinquent debt were not made in accordance with objective industry practices). In re Four Winds Enterprises, Inc., 100 B.R. 24 (Bankr. S.D. Cal. 1989)(untimely filing of second UCC financing statement after its perfection lapsed was not in "ordinary course of business").
(2) Requirement Of Satisfying All Three Criteria
- Compare Logan v. Basic Distribution Corp., 957 F.2d 129 (6th Cir. 1992)(because all three criteria must be satisfied, late payments, even if in the ordinary course as between debtor and that creditor, are not ordinary in the industry and thus do not qualify); WJM, Inc. v. Massachusetts Dep't of Public Welfare, 840 F.2d 996 (1st Cir. 1988)(same); J.P. Fyfe, Inc. v. Bradco Supply Corp., 891 F.2d 66 (3rd Cir. 1989)(same) with In re Kahn & Associates, Inc., 135 B.R. 251 (Bankr. W.D. Pa. 1991)(late payment, even if slightly later than usual, was in ordinary course of business where payments were ordinarily late); In re Matters, 99 B.R. 314 (Bankr. W.D. Va. 1989) (fact payment is late does not necessarily mean it is not in accordance with "ordinary business terms"); Sicherman v. Mass. Mutual Life Ins. Co., 97 B.R. 892 (Bankr. N.D. Ohio 1989) (commercial conduct between debtor and creditor established that they consensually ignored policy's payment due dates and instead engaged in late payments mode, so that late payments were made in accordance with ordinary business terms and hence not avoidable).
(3) Purposes: validate and encourage ordinary credit transactions handled on a current basis with troubled debtors to forestall rather than hasten bankruptcy. See H.R. Rep. No. 95-595 at 373; Logan v. Basic Distribution Corp., 957 F.2d 239, 243 (6th Cir. 1992); In re Fulghum Constr. Co., 872 F.2d 739 (6th Cir. 1989). Kallen v. Litas, 47 B.R. 977 (N.D. Ill. 1985).
c) Enabling Loans [§ 547(c)(3)]
Purpose: essentially to validate properly perfected purchase money security interests. See In re Kelley, 3 B.R. 651 (Bankr. E.D. Tenn. 1980); cf. In re Tressler, 771 F.2d 791 (3rd Cir. 1985) ["contemporaneous exchange" exception may not be used to validate purchase money security interest perfected outside 10-day period of § 547(c)(3)].
d) Preference Offset By Unsecured New Value [§ 547(c)(4)]
Rule: New value given after the preferential transfer, to the extent it is unsecured and goes unpaid, is offset. See Reigle v. Mahajan, 906 F.2d 942 (3rd Cir. 1990) (limited partner's guarantee of new loan is "new value," so payment made by debtor on pre-existing debt in exchange is not voidable after a preference); In re Check Reporting Services, Inc., 140 B.R. 425 (Bankr. W.D. Mich. 1992); In re Bishop, 17 B.R. 180 (Bankr. N.D. Ga. 1982).
e)Perfected Security Interests In Receivables And Inventory ("After Acquired Property Clauses" and "Floating Liens") [§ 547(c)(5)]
(1) Rule: No preference recognized unless and only to the extent creditor improves its position during the preference period [90 days or, for insider, 1 year] or the date during the preference period on which value was given.
(2) Purpose: Prevents creditor with a security interest in receivables or inventory from improving its position at the expense of unsecured creditors.
(3) Application: Compare deficiency at commencement of preference period (or when value given) with deficiency on filing date to determine improvement
Value Given on June 1 Petition filed on September 1 Debt
Receivables 40,000 50,000 Deficiency 10,000 $10,000
[Undersecured [Now Fully by $10,000] Secured]
Improvement (and therefore preference):
Value Given on June 15 Petition filed on September 1 Debt
Receivables 45,000 50,000 Difference 0 $10,000
[Fully Secured] [Still Fully Secured]
Improvement (preference): $0
See In re Lacklow Bros., 19 B.R. 601 (Bankr. S.D. Fla. 1982) (fully secured creditor cannot "improve" its position; therefore, no preference).
f) Statutory Liens [§ 547(c)(6)]
(1) A statutory lien [defined in § 101(47)] which is not avoidable under § 545 is not preferential.
(2) Examples: holder of a mechanic's lien, even if perfected within preference period, will not have received a preference because this statutory lien is not voidable under section 545. See 4 Collier on Bankruptcy ¶ 547.42 (15th ed. 1982); see In re Debmar Corp., 21 B.R. 858 (S.D. Fla. 1982) (dicta) (discussion of whether § 547(c)(6) applies to IRS lien within preference period).
g) Transfers Of Less Than $600 By Consumers [§ 547(c)(7)]
The trustee may not avoid as a preference a transfer, "if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600." § 547(c)(7). See In re Holyfield, 50 B.R. 695 (Bankr. D.Md. 1985).
5. When Is A Transfer Made?
See § 547(e) for applicable rules; Nelson Co. v. Amquip Corp., 117 B.R. 813 (Bankr. E.D. Pa. 1990), aff'd, 128 B.R. 930 (E.D. Pa. 1991), aff'd 959 F.2d 1260 (3rd Cir. 1992)(90-day preference period is counted backward from petition date, not forward from transfer date -- which in this case would have resulted in 90th day falling on a Sunday and,under Bankr. Rule 9006(c), being extended to the Monday petition date).6. Procedure(1) Burden Of Proof: § 547(g) provides the trustee has the burden of proving the avoidability of a transfer under 547(b) and the creditor has the burden of proving an exception under 547(c).(2) Jury Trial: Seventh Amendment does not require jury trial in a preference action where creditor files a claim; it does if no proof of claim is filed, Langenkamp v. Culp, 111 S.Ct. 330 (1990) (per curiam); cf. In re Newman Companies, 76 B.R. 135 (Bankr. E.D.Wis. 1987).7. Sovereign Immunity
See United States v. Nordic Village, Inc., 112 S. Ct. 1011 (1992) (§ 106(c) does not waive sovereign immunity for action seeking avoidance of post-petition payment to IRS where no proof of claim filed). Hoffman v. State of Connecticut, 109 S. Ct. 2818 (1989) (section 106(c), which binds sovereigns to determinations made under Code provisions containing one of three triggering terms ("creditor," "entity" or "governmental unit"), does not waive Connecticut's Eleventh Amendment sovereign immunity to a money judgment sought under Code provisions containing trigger words (the turnover provisions of § 542(b) and preference provisions of § 547(b)) where Connecticut did not otherwise waive immunity by filing a proof of claim); See Rebel Coal Co., Inc. v. United States, 944 F.2d 320 (6th Cir. 1991)(action to recover as an avoidable preference a garnishment to collect civil penalties for mine safety violations not permitted under § 106(a) because it was deemed not to have a "logical relationship" to, and hence did not arise out of the same transaction or occurrence as, the civil penalties for which a proof of claim was filed; see also Hannau v. United States, 130 B.R. 294 (Bankr. S.D. Iowa 1991); In re Lile, 96 B.R. 81 (Bankr. S.D. Tx. 1989).
D. STATUTORY LIENS [§ 545]1. Statutory liens [defined in § 101(47)] are recognized but only if they (1) are enforceable against a bona fide purchaser and (2) do not become effective simply upon insolvency. See 4 Collier on Bankruptcy ¶ 545.01 (15th ed. 1982)2. Examples: mechanic's lien, warehouseman's lien.3. Rule: trustee can avoid a statutory lien if:a) the lien first becomes effective on insolvency; orb) the lien is not perfected or enforceable on the date of filing against a bona fide purchaser (whether or not one exists); orc) the lien is for rent; ord) the lien is for distress for rent.4. Special Rules For Chapter 7 Liquidations Only: For liquidation (but not reorganization) cases, the trustee has two special powers:a) § 724(a) permits avoidance of any lien securing governmental or private penalty.b) § 724(b) provides that statutory tax liens are subordinated to administrative expenses and certain priorities.
E. POSTPETITION TRANSACTIONS [§ 549]1. Rule: Postpetition transfers that are not authorized are generally voidable. [§ 549(a)] E.g., In re Bob Grissett Golf Shoppes, Inc., 50 B.R. 598 (Bankr. E.D. Va. 1985) (unauthorized payments to landlord for both pre-petition and post-petition rent obligation voidable).2. Exceptions:a) Transfers occurring during the gap between an involuntary petition and an order for relief to the extent postpetition value is given. [§ 549(b)]b) Transfers of real property located outside county where case commenced, either at judicial sale or by good faith purchaser without knowledge of bankruptcy for fair value, are valid until copy of petition is recorded in appropriate county. [§ 549(c)] See In re Dennis, 14 B.R. 125 (Bankr. E.D. Pa. 1981)(sale set aside notwithstanding § 549(c) where mortgagee had not perfected title on date of filing and, therefore, was not yet bona fide purchaser)3. Sovereign ImmunityUnited States v. Nordic Village, Inc., 112 S. Ct. 1011 (1992) (§ 106(c) does not waive sovereign immunity for action seeking avoidance of post-petition payment to IRS where no proof of claim filed).
F. PREFERENTIAL OFFSETS [§ 553(b)]1. Rule: offsets occurring within 90 days of filing which improve creditor's position (i.e., decrease creditor's insufficiency) avoided.2. Discussed in outline/lecture on offsets.
G. LIMITATIONS ON AVOIDANCE POWERS1. Statute of Limitations: § 546(a) provides that an avoidance action under §§ 544, 545, 547 or 548 "may not be commenced after the earlier of (1) two years after appointment of a trustee . . .; and (2) the time the case is closed or terminated." In re Cardullo, 142 B.R. 138 (Bankr. E.D. Va. 1992) (two year limitation period does not apply to debtor-in-possession); In re Schraiber, 141 B.R. 1008 (Bankr. N.D. Ill. 1992)(period in which chapter 11 trustee could file preference claim ran from date order appointing trustee was signed--not date it was docketed); See In re One Marketing Co., 17 B.R. 738 (Bankr. S.D. Tx. 1982) (limitations do not apply to debtors in possession exercising powers of trustee in chapter 11 under § 1107).2. Delayed Perfection: § 546(b) makes trustee's powers under §§ 544, 545 and 549 subject to generally applicable law that permits perfection to be effective against an entity that acquires rights in the property before perfection (e.g., ten day filing period for purchase money security interests under § 9-301(2) of the U.C.C.).3. Reclaiming Seller: § 546(c) insulates statutory or common law rights to reclaim goods sold in the ordinary course of business from trustee's powers under §§ 544(a), 545, 547 and 549a) Consistent with § 2-702(2) of U.C.C., must demand reclamation in writing within 10 days of debtor's receipt of goods.b) Court may deny reclamation if it grants administrative expense or a lien. See In re Metal Tech Mfg., Inc., 5 B.R. 859 (Bankr. D. Utah 1979) (must give adequate protection).