Whoa! Watch Out For Preferences

Elaine Dowling, Esq. (Oklahoma, OK)
Hon. Margaret Mahoney, U.S. Bankruptcy Court (Mobile, AL)

For the record, this was my favorite of the Friday sessions.

What is a transfer?  Very broad.

Insolvency is based on the time of the transfer, not based on hindsight.  What the parties knew at the time of the transfer.  Strict balance sheet analysis – no exemptions taken into account.  Look at those juicy retirement accounts.

Presumption of insolvency is only within 90 days; trustee needs to prove insolvency if outside the 90 days window.

Trustee has the burden of proof of all six elements of preference.

Insiders are longer than 90 day window.  Section 101(13) governs.  Includes relatives, partners, corporations, etc.  Pretty much anyone who’s got a close enough relationship with the debtor so as not to deal with the debtor at arm’s length.

Elements of an insider outlined by Manera v. Butcher (In re Alekson, Adv. Case No. 2:11-ap-01538-cgc (District of Arizona)).  Outlines 11 elements of being an insider.

SOL for preference.  2 years after filing of a case or 1 year after appointment of trustee if appointment happens within those 2 years.

9 defenses to preference claims.

  • contemporaneous exchange
    • no time period in statute
      • 1, 6, 7 = 10 days
  • ordinary course of business
    • subjective test: made in ordinary course of business or financial affairs of debtor and transferee
    • objective test: made according to ordinary business terms
  • PMSI
    • PMSI must be perfected within 30 days after debtor receives possession of the property or no preference.
  • Subsequent new value
    • value given after transfer
  • DSO
    • payment must be part of separation agreement or divorce decree
  • consumer and nonconsumer debts
    • aggregation may be an issue


Non-Statutory Defenses

  • not property of the debtor
    • escrowed funds
    • constructive trust
    • bare legal title
    • Earmarkeing
    • personal jurisdiction
    • jury demand
    • limited jurisdiction of bankruptcy court


Other Considerations

  • Prizio – bank was paid on a debt; as bank was paid by company, each payment was a preference as to the debtor
  • payment of a bank debt – if you make regular payments on a bank debt, that’s not a preference
  • transfers to children
  • lis pendens
  • recordation issues
  • restitution can be a preference if it’s a civil penalty rather than a criminal one
  • checks – date it’s passed is the date to watch


Ethics

  • Representing the debtor and transferee … can you do it ethically?  If there’s any way that it’s against debtor’s interests.


Standing

  • trustee can bring it
  • creditors need permission
  • debtors can bring them … sometimes


Transferees

  • Section 550 protects only good-faith transferees


Pleadings

  • Twombly and Iqbal
  • Pleadings inadequate?  7012(b)(6)


Elaine discusses the refrigerator case.

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