Southern California Bankruptcy Law Blog

Preferential Transfers IV: Defenses to Preference Avoidance Actions (Part VIII)

Posted in Chapter 11, Chapter 13, Chapter 7

small pile of penniesHere is the eighth defense against preference avoidance actions, the so-called de minimis transfer defense.  This defense has two versions.

Defenses To Preference Avoidance Actions, Part VIII:

The De Minimis Transfer Defense

A.        The De Minimis Transfer Defense, Part I

Suppose an individual with primarily consumer debt files a personal bankruptcy.  And suppose that debtor had $400 garnished during the ninety-day prepetition period.  Is it worth the Court’s time to entertain an adversary proceeding to avoid the garnishment pursuant to § 522(h)?  Congress answered that question in the negative by including § 547(c)(8):

The trustee may not avoid under this section 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.

Of course, in practical terms even $600 is too small an amount to justify the filing of a § 522(h) adversary proceeding.  The dollar amount warranting the action cannot be made precise.  A bankruptcy attorney with a client who can exempt wages that were garnished during the prepetition preference period and wants to avoid the garnishment using § 522(h), you will need to explain the costs associated with the action prior to committing to the representation.

B.        The De Minimis Transfer Defense, Part II

For cases in which the debtor’s debts are not primarily consumer debts, Congress included a larger de minimis cut-off:

The trustee may not avoid under this section a transfer — . . . if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $6,225.

You might be tempted to conclude that if the debtor’s debts are not primarily consumer debts, they must be business debts.  While that is undoubtedly true in many cases, an individual debtor without a business can file a personal bankruptcy in which the debts are not primarily consumer debts.

This frequently happens when the debts are primarily — i.e., more than 50% of the total debt — tax obligations.  See, e.g., In re Westberry, 215 F.3d 589, 591 (6th Cir. 2000)

Almost without exception, the bankruptcy courts that have addressed this question have determined that tax debt should not be considered consumer debt for purposes of the codebtor stay.  See, e.g., In re Stovall, 209 B.R. 849, 854 (Bankr.E.D.Va.1997); In re Dye, 190 B.R. 566, 567 (Bankr. N.D. Ill. 1995); In re Marshalek, 158 B.R. 704, 706 (Bankr. N.D. Ohio 1993); In re Greene, 157 B.R. 496, 497 (Bankr. S.D. Ga. 1993); Goldsby v. United States (In re Goldsby), 135 B.R. 611, 613-15 (Bankr. E.D. Ark. 1992); In re Reiter, 126 B.R. 961 (Bankr. W.D. Texas 1991); Harrison v. Internal Revenue Service (In re Harrison), 82 B.R. 557, 558 (Bankr. D. Colo. 1987); Pressimone v. Internal Revenue Service ( In re Pressimone ), 39 B.R. 240, 244 (N.D. N.Y. 1984).  We find the weight of these opinions and their reasoning persuasive.

Of course, the debtor may have consumer debts as well.  In such a case, the debtor will have to have had quite a bit garnished during the prepetition preference period to warrant filing a § 522(h) adversary proceeding.

If you’re facing a preference avoidance action, and need an analysis of your case and the possible application of the de minimis transfer defense to your case, contact a California board certified bankruptcy law specialist to help you.

 

Image courtesy of Flickr (Licensed) by John H Kleschinsky