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

Part 4: Trustee’s Burden for Preference Transfers for or on Account of an Antecedent Debt

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

The second element the Trustee must prove in order to avoid a preference transfer is set forth in Section 547(b)(2) of the Code. This Code Section requires that the transfer made by the Debtor within 90 days of the bankruptcy be “for or on account of an antecedent debt owed by the Debtor before such transfer was made.” See Section 547(b)(2).

The term “antecedent debt” is not defined by the Code, but a common sense definition applies. A debt is antecedent if it is incurred before the transfer or payment from the Debtor. The most simple example is the Debtor orders goods and is invoiced on February 1. The Debtor later pays the invoice on July 30th, which is within 90 days of a bankruptcy filing.

As straightforward as it may appear, this element can become problematic when the debt and payment are nearly contemporaneous. Generally, a contemporaneous exchange of equal value will not be considered an antecedent debt. But take for example a secured financing creditor (such as an equipment financier) who intends a contemporaneous transaction. If, however, the financing creditor does not perfect immediately or within the statutory grace period, then the transfer may be deemed for or on account of an antecedent debt owed by the debtor before the transfer was made. Therefore, it is advisable for secured creditors to immediately perfect their security interests so that this potential problem is averted.

Next – Part 5: Preference Transfers Made While Debtor was Insolvent

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