February 2014

This is the second post devoted to defenses against preference avoidance actions.  It covers the so-called ordinary course of business defense.

Defenses To Preference Avoidance Actions, Part II:

The Ordinary Course Of Business Defense

Suppose a corporate debtor in Chapter 11 has a lease on the building in which it conducts its business.  Suppose the debtor has lease payments of $25,000 per month.  If it makes its usual on-time payments during the ninety-day prepetition period — i.e., a total of $75,000 — will the DIP (the Debtor-in-Possession, who is the debtor serving as a quasi-trustee) successfully avoid those payments?  Based on 11 U.S.C. § 547(c)(2), the answer is “no”:

The trustee may not avoid under this section a transfer — . . . to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was —

(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or

(B) made according to ordinary business terms.

Although this Code subsection appears to have two possible conditions ((A) and (B)), each of which focuses on the nature of the payments, there is a third crucial requirement embedded in the introductory language:  the underlying debt itself must have been incurred in the ordinary course of business.  Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part II)

In my last post I looked at avoidance of preferences.  I now turn to defenses against such actions.  This will be a multi-part series because some of the defenses are a bit complicated and hard to understand.

Defenses To Preference Avoidance Actions:  Part I

The recipient of a prepetition transfer is not without defense against a preference avoidance action.  The defenses are given in § 547(c) and (h).  Once the trustee has met the burden of proving avoidability, “the creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the nonavoidability of a transfer under subsection (c) of this section.”  11 U.S.C. § 547(g).

Keep in mind however, if any of the five requirements of the definition is not satisfied, then the transfer is not avoidable because it is not a preference.  Therefore, if you are asked to defend against a preference avoidance action, first determine whether the transfer really fits within the definition.  If it does not, then you have a defense by proving that the transfer wasn’t a preference in the first place.  Of course, you should also appeal to any applicable § 547(c) defenses as well, since you won’t know, a priori, whether your defense based on the definition will succeed.

This and the next several posts will deal with the § 547(c) defenses.  Continue Reading Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part I)

In my last post I looked at the definition of a preference.  I now turn to its consequences.

Avoiding Preferences

The reason preferences are significant for the recipients is found in beginning of § 547(b):  “. . . the trustee may avoid any transfer of an interest of the debtor in property . . .”  (In case you don’t speak legalese, this use of the word “avoid” means to make void or of no effect; to invalidate.)

This means that if the case is one under Chapter 7, 12, or 13, the chapter trustee can undo the transfer and seize the asset.  And in a Chapter 11, the Debtor-In-Possession (“DIP”) has the same power.  See 11 U.S.C. § 1107(a).

By the way, in most Chapter 11 cases there is no Chapter 11 Trustee.  Instead, the debtor serves as a quasi-trustee known as the debtor-in-possession.  This doesn’t mean that the fox is guarding the henhouse:  the U.S. Trustee and the judge keep the DIP on a fairly tight leash.  And if things get out of hand, the Court can appoint a Chapter 11 Trustee pursuant to 11 U.S.C. § 1104.

The trustee will learn of the transfer because the debtor is required to report it in item 10 of the Statement of Financial Affairs.  Failure to report the transfer is perjury that can afford free room and board for the debtor. Continue Reading Preferential Transfers III

I’m back.  I have been busy writing a book on Chapter 13 bankruptcy — I was asked to do so by a publisher.  I should have it completed in a few months, so watch for it.  In any event, I am ready to start posting again.

Some time ago I posted on preferential transfers (a.k.a. preferences).  Since I will be speaking on preferential transfers (and on fraudulent transfers) in May these topics have been on my mind.  Today’s post will look at the statutory definition of a preference.  It’s complicated, which is why the post a bit long.  However, it’s worth the read.  Subsequent posts will look at preference avoidance and defenses to preference avoidance.

I.          Introduction

There are two main goals of bankruptcy.

The first goal is to give the debtor a fresh financial start .  This goal has a laudable pedigree that has its origins in the Bible, ancient Roman law, and the U.S. Constitution .

The second goal is to ensure that all creditors who are similarly situated are treated equally and fairly.  There are two ways in which debtors sometimes violate this second big goal:  (1) They don’t list all of their creditors in their bankruptcy papers, and (2) They make preferential payments to certain creditors in anticipation of bankruptcy.

If a debtor omits a creditor from the list, then the debt to that creditor will not be discharged at the conclusion of the case.  (See 11 U.S.C. §§ 523(a)(3) and 1328(a)(2). But see In re Beezley, 994 F. 2d 1433 (9th Cir. 1993) (Unscheduled debt is discharged in a no-asset Chapter 7 case if the debt would have been discharged if it had been listed).)  If the debtor purposely omitted the creditor, and thus “made a false oath,” i.e., committed perjury, the debtor may either be denied a discharge, or have a discharge revoked.  (See 11 U.S.C. §§ 727(a)(4)(A), 1144, 1230, and 1328(e)(1).)  However, there can be a bright side to this scenario:  the debtor may end up receiving free room and board at government expense, which could greatly reduce any stress over finances .

The focus of these posts is on the other way debtors violate the second big goal:  preferential transfers.  We begin with the definition. Continue Reading Preferential Transfers II

I will be covering the topics of :  1) Preferential Transfers: Preference Actions and Substantive Defenses, 2) Fraudulent Transfers: Actual Intent and Affirmative Defenses, and 3) Appellate Procedure and Strategies: Appeals from Final Orders and Interlocutory Appeals.  I will present this talk at the National Business Institute’s “Bankruptcy Litigation 101” seminar in Orange, CA on May 8, 2014 and the “Bankruptcy Litigation 101” seminar in Pasadena, CA on May 15, 2014.  Learn how to:  spot potential adversary issues, draft complaints and resolve/defend them; confidently handle preference and fraudulent transfer actions; get tips on what bankruptcy judges expect and how to avoid common mistakes when you bring or defend an adversary proceeding; understand how the Federal Rules of Civil Procedure have been altered in the Bankruptcy Rules and by local court rules; and examine appellate procedure and rules so you’re prepared to take your case to the next level.

If you have some experience filing bankruptcies and would like to expand your practice into bankruptcy litigation, I hope to see you there.