Preference Actions, Part 6: Preference Time Periods: The Beginning and the End

Part 6: Preference Time Periods: The Beginning and the End

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

The fourth element a Bankruptcy Trustee must prove in order to avoid a preference transfer seems to be the most commonly remembered by creditors because it defines the time periods for which a transfer can considered a preference. Section 547(b)(4) of the Code provides that, in order to be deemed a preference, a transfer must be “made on or within 90 days before the date of filing of the petition or between 90 days and one year before the filing of the petition, if such creditor at the time of the transfer was an insider.”

Determining the scope of the preference period is simply a matter of counting back 90 days from the bankruptcy petition date. This holds true in involuntary bankruptcy cases where creditors file a petition to have the debtor placed into bankruptcy. In involuntary cases, there is a “gap” period between the filing of the petition and the date which the bankruptcy court holds a hearing and makes a decision whether to enter an order for relief. The petition date and order for relief date in an involuntary case are usually different and should not be confused.

Sometimes a debtor files an emergency petition for bankruptcy, but the petition has a defect such as failing to include the required schedules. Bankruptcy courts will usually dismiss the case if the debtor does not cure the defect in the time allowed under the Bankruptcy Rules (15 days). See, Bankr. R. of P. 1007(c). If the debtor then files a motion to reopen the case proposing to cure the defect, the court may enter an order reopening the case. When this occurs, the petition date is considered to be the date the order to reopen is entered, and not the date when the petition was initially filed. For example, if a debtor files an emergency petition on January 1, but fails to complete the filing and the court dismisses the case on January 16, the debtor then files a motion to reopen on January 17 and the court holds a hearing and enters an order reopening the case on February 15. Unless the order expressly states otherwise, the preference period begins to run from the reopening date, February 15 as opposed to January 1.

With respect to “insider” preferences, the term insider is defined under the Code and includes, but is not limited to, relatives, general partners, directors, officers, persons in control, managing agents and affiliates of the debtor. See, 11 U.S.C. Section 101(31).

A bankruptcy trustee may avoid an insider transfer if it is made within one year before the filing of the petition and ending 90 days before the filing, and the creditor to whom or for whose benefit the transfer was made is an “insider” at the time of the transfer. However, if the transfer is made to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be considered to be avoided only with respect to the creditor that is an insider.

The insolvency presumption which was addressed in the prior article will not apply to transfers occurring more than 90 days before the filing of the petition. Therefore, the trustee will have to prove the debtor was insolvent when the insider transfer was made. If the transfer was made within 90 days before the date of the petition, creditors who are “insiders” are treated like creditors who are non-insiders (i.e. trade creditors, etc.).

Leave a Reply

Your email address will not be published. Required fields are marked *