By: Harry Greenfield
September 8, 2023
When examining asset protection, there should be a discussion about preferences. In Ohio, there is a preference statute that defines preferences as those that are made in contemplation of insolvency or are a fraudulent conveyance, however, a creditor or receiver can only recover a transfer of property and not a transfer of money. Obviously, there is §547 of the Bankruptcy Code, which allows a trustee to recover transfers made within 90 days of bankruptcy or one year if made to an insider. Since preferences are a pretty easy way for a creditor or a trustee to avoid a transfer, if the transferor is the Debtor, then a Debtor’s counsel needs to pay specific attention to transfers made within the applicable period. The policy behind this provision is to prevent aggressive collection activities that often force the debtor into bankruptcy.
A “preference” is defined by Section 547 of the Bankruptcy Code as:
- Payment on an “antecedent” (meaning a previously incurred as opposed to current) debt;
- Made while the debtor was insolvent (meaning its assets are less than its liabilities);
- To a non-insider creditor, within 90 days of the filing of the bankruptcy;
- That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceedings.
Section 550 of the Bankruptcy Code allows the trustee to avoid and recover any preference payments by filing a lawsuit against the creditor.
To succeed in preference litigation, the transferee must be a creditor (or that the transfer be for the benefit of a creditor). If there is no money or debt owed by the transferor to the transferee, then transfer might never become a preference. (However, if the transfer has no discernable reason, then it might be a fraudulent conveyance.) The prerequisites need to be carefully examined.
There are some standard defenses, which counsel should review to determine if the transfers made in contemplation of asset protection fall within these defenses or not. If the transfers do, then it is less concerning if there is a bankruptcy within the 90-day (or one year) period. If they don’t fall into the defenses, then it might be more important to plan to avoid a bankruptcy filing if possible until the 90 days (or one year) has expired.
Years ago, I was contacted by a Canadian Corporation to file a Chapter 11 on behalf of their American subsidiary. After reviewing the company’s transactions, I saw that the parent company had received over a $1,000,000 repayment of an advance within 90 days of the contemplated bankruptcy. In consultation with the company, it was decided to defend various lawsuits until the preference period had passed. Both Debtor and Creditor counsel need to be aware of potential preferences. As a creditor’s counsel if a transfer has occurred, it may behoove the creditor to commence an involuntary bankruptcy to recover the funds so transferred.
There are many defenses to a preference. Those defenses will be covered in an upcoming post.
We have more to say about Asset Protection Planning in our next post or podcast. Stay tuned…