Preference Actions, Part 3: Just What Do They Mean?

Part 3: Just What Do They Mean?

Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.
Creditworthy News

Last time, we outlined the five elements of a preference claim that must all be met by the Trustee (or the one seeking to recover the preference claim). In the next few issues, we’ll look at the elements themselves and what they mean.

(1) To or for the benefit of a creditor. This one might be obvious. But, there is always more to the Bankruptcy Code (and interpretations) than meets the eye. This test means that the transfer (remember that a preference can be more than just a payment, but a transfer of any kind) must be either to a creditor directly or one that benefits a creditor.

The simple case is a check paid by the debtor to you, the creditor. Once cashed and paid by the debtor’s bank, the debtor has made a transfer to you of the amount debited from his account. Pretty simple. Let’s complicate it a lot. Say you have a corporate customer and have obtained the personal guarantee of the principal shareholder. Suppose further that the guarantee agreement (or the state law) gives the guarantor the right to recover from the customer any amount the guarantor pays on the guarantee. The guarantor would be subrogated (not subordinated–a completely different concept) to the rights of the creditor to the extent the guarantor made payment. The fact that the guarantor has a contingent claim against the customer probably makes the guarantor a creditor (whose claim is contingent) of the customer.

If that customer makes a payment on the account, who has benefited? Obviously, the customer has benefited. The guarantor has also benefited by having her liability and, therefore, her contingent claim, diminished. There, the payment was a transfer (by the customer) for the benefit of a creditor. In the proper circumstances a claim may be made against the guarantor for the return of a preference, to the extent the other elements are met. Not quite so obvious, heh? Next time, we’ll explore the meaning of “antecedent debt.” Don’t miss it!

Next – Part 4: Trustee Burden for Preference Transfers For or On Account of an Antecedent Debt

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