Avoidance Actions in Bankruptcy
Avoidance actions allow the estate to recover certain pre-petition transfers and obligations, the estate can be administered by either a US Trustee (Chapter 7s) or a "Debtor in Possession" (in Chapter 11 and 13s). Avoidance Actions can include fraudulent transfers under 11 USC §544 and 548. As well as, the authorization of avoided transfers found in 11 USC §550.
Generally, Trustees and Debtors in Possession bring avoidance actions. However, courts may allow the creditor's committee (CH.11) or individual creditors (CHs.7,11,13) to pursue avoidance action as well.
Preference actions allow for the avoidance of debtor payments made to creditors within 90 days preceding the bankruptcy filing. The policy objective is to prevent the debtor from preferring some creditors over others leading up to a bankruptcy. The criteria for bring a preference action can be found 11 USC §547.
Requirements for a Preference Action
The debtor must establish that the payment was:
- a transfer of the debtor's interest in property;
- made to or for the benefit of a creditor
- for or on an account of an antecedent debt*
- made while the debtor was insolvent
- made within 90 days before the date of filing the petition (or within one year if the creditor is an insider of the debtor)
- one that resulted in the creditor receiving a greater distribution than it otherwise would have received in a Chapter 7 liquidation.
* A debt is antecedent if it is incurred before the transfer in question.
Preferences have several affirmative defenses. Here are a couple of the most common.
Debtor's cannot avoid a transfer received from the debtor that;
- was intended by the debtor and the creditor to be contemporaneous exchange of new value*, and
- was in fact substantially contemporaneous exchange. 11 USC §547(c)(1)
*"New value" is broadly defined to include money or money's worth in goods, new credit, services, or release of unavoidable previously transferred property.
Ordinary Course Payments
Debtors cannot avoid a transfer to the extent that the transfer;
- was used to pay a debt incurred in the course of business or financial affairs of the debtor or creditor,
- was made in the ordinary course of business or financial affairs of the debtor or the creditor, or
- was made according to ordinary business terms. 11 USC §547(c)(2).
Courts look to consistency between the transactions during the preference period (usually 90 days) and before the preference period.
These are just some of the examples a debtor may face in regards to preference and avoidance powers. Preference payments can have a big influence on an estate in Bankruptcy. It is important to consult with a bankruptcy attorney and to disclose everything to that attorney prior to filing of the bankruptcy. The Smith Law Firm can help you navigate these complex and convoluted rules.