Watch Out for Preferences Presented by: Presented by Elaine Dowling, Esq. (Oklahoma, OK) and the Hon. Margaret Mahoney, U.S. Bankruptcy Court (Mobile, AL), this program will discuss what preferences are, when they can be avoided, and how to defend preference actions. Friday, February 22, 2013 Copyright (c) 2012 NACBA

PREFERENCES

WHAT IS A PREFERENCE? A transfer of an interest in the debtor’s property

WHAT IS A PREFERENCE? A transfer of an interest in the debtor’s property To or for the benefit of a creditor

WHAT IS A PREFERENCE? A transfer of an interest in the debtor’s property To or for the benefit of a creditor For or on account of an antecedent debt

WHAT IS A PREFERENCE? A transfer of an interest in the debtor’s property To or for the benefit of a creditor For or on account of an antecedent debt Made while the debtor was insolvent

WHAT IS A PREFERENCE? A transfer of an interest in the debtor’s property To or for the benefit of a creditor For or on account of an antecedent debt Made while the debtor was insolvent Within 90 days before the bankruptcy filing (or one year if the creditor is an insider)

WHAT IS A PREFERENCE? A transfer of an interest in the debtor’s property To or for the benefit of a creditor For or on account of an antecedent debt Made while the debtor was insolvent Within 90 days before the bankruptcy filing (or one year if the creditor is an insider) That enables the creditor to receive more than the creditor would in a chapter 7 case

A TRANSFER – WHAT IS IT?

INSOLVENCY At the time of the transfer Not based on hindsight

INSOLVENCY Presumption of insolvency if transfer is within 90 days prebankruptcy

WHO HAS THE BURDEN OF PROOF? The trustee has to prove all 6 elements

WHO IS AN INSIDER? Section 101(13) Includes relatives, partners, partnerships, corporations, affiliates, managing agents, etc. Anyone who has a close enough relationship with the debtor so as to not deal with the debtor at arm’s length Must be insider on date of transfer

New Case

Manera v. Butcher (In re Alekson) Bankruptcy Court, District of Arizona Judge Charles Case Adv. Case No. 2:11-ap CGC

STATUTE OF LIMITATIONS 2 years after filing of case or 1 year after appointment of trustee if appointment occurs before the expiration of 2 years

DEFENSES TO A PREFERENCE CLAIM

DEFENSES Contemporaneous exchange for new value – 547(c)(1) Ordinary course of business – 547(c)(2) Purchase money security interest – 547(c)(3) Subsequent new value – 547(c)(4) Inventory or receivables financing – 547(c)(5) Unavoidable statutory lien – 547(c)(6) Domestic support obligation – 547(c)(7) Consumer debt of less than $600 – 547(c)(8) Nonconsumer debt of less than $5850 – 547(c)(9)

CONTEMPORANEOUS EXCHANGE The statute states no time period 1 st, 6 th, and 7 th Circuits have a bright line test – 10 days

ORDINARY COURSE OF BUSINESS One of two tests must be met Subjective test Made in the ordinary course of business or financial affairs of the debtor and transferee Objective test Made according to ordinary business terms

PURCHASE MONEY SECURITY INTERESTS PMSI must be perfected within 30 days after debtor receives possession of the property

SUBSEQUENT NEW VALUE Value given AFTER the preferential transfer Must be unsecured Usually involves revolving credit

DOMESTIC SUPPORT OBLIGATION Must be part of a separation agreement or divorce decree Not just a payment that is given to an ex-spouse

CONSUMER AND NONCONSUMER DEBTS Consumer debt – less than $600 Nonconsumer debt – less than $5850 Aggregation may be an issue

NONSTATUTORY DEFENSES Not property of the debtor Escrowed funds Constructive trust Bare legal title

NONSTATUTORY DEFENSES Earmarking Personal jurisdiction Jury demand Limited jurisdiction of the Bankruptcy Court

OTHER CONSIDERATIONS Guaranties Payment of bank debt Transfers to children’s trust Lis pendens Recordation issues Restitution – a preference? Checks

OTHER CONSIDERATIONS Offsets Control of funds Estimated Tax Payments Trustee’s Fees Retirement Contributions Insufficient funds checks

ETHICS Can you represent both the transferee and the debtor? What can you advise a debtor to do before filing?

STANDING Trustee can bring a preference action Creditors may seek permission to bring an action Debtor can bring action in certain circumstances

LIABILITY OF TRANSFEREES Section 550 A transfer to a non-insider made more than 90 days prepetition may only be recovered from the insider – the ANTI-DEPRIZIO RULE Good faith transferees are protected

PLEADING PREFERENCES Twombly and Iqbal The trustee must plead his/her case with more than conclusory statements If the pleadings are inadequate, file a motion to dismiss for failure to state a claim under Fed.R.Bank.P. 7012(b)(6)

DISCUSSION TOPICS The Refrigerator Case

THE REFRIGERATOR CASE Debtor decides to buy refrigerator from Best Buy 6 months before filing Refrigerator is repayment of a loan from Debtor’s father-in-law Debtor borrows $1200 from his/her 401(k) Debtor deposits money in his/her checking account Debtor buys refrigerator and pays in full

EXAMPLES

THE FRIENDLY LOAN CASE Debtor borrows $10,000 from an old friend Papered with a note and payment schedule 10% interest Secured by Debtor’s paid for car worth $5000 Lien is not perfected Debtor begins paying friend at $500/month About 1 year later, Debtor comes to see you about a bankruptcy filing

THE NEW CAR CASE

Debtor buys car on 12/01/2011 Car is financed through local bank Local bank does not record its lien until 1/29/2012 Debtor needs the car Debtor cannot wait to file

THE FAMILY LOAN CASE

Debtor owns 100% of a small corporation Debtor guaranteed all of its debt of more than $1,000,000 Corporate assets total about $60,000 Debtor has $300,000 in personal debt Corporation closes when debtor files bankruptcy

THE FAMILY LOAN (CONT.) While in operation, debtor’s business paid debtor’s father, who was the company lawyer, $1000/month for 4 months more than 3 months before the bankruptcy case (but less than 1 year before) Payments were for legal fees – defense of corporation and son