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Bankruptcy | Case Law | Preferences

PREFERENCES § 547

1. Contemporaneous Exchange

2. Dishonored Check

3. Earmarking Doctrine

4. Insolvent Debtor

5. New Value

6. 90-Day

7. §547(b)(5)

8. §547(c)

9. §547(c)(1)

10. §547(c)(2) and Ordinary Course of Business

11. §547(c)(3)

12. §547(c)(4)

13. §547(e)(1)(A)

14. §550

15. Cal. CCP §488.500

16. Misc

1. Contemporaneous Exchange

In re Marino, 193 B.R. 907 (9th Cir. B.A.P. 1996), aff’d 117 F.3d 1425 (9th Cir. 1997)

§547(c)(1) - 14 day delay in perfection was contemporaneous exchange

In re Upstairs Gallery, Inc., 167 B.R. 915 (9th Cir. B.A.P. 1994)

Settlement of payment in 1990 on a debt created by a 1988 lease was transfer of an

antecedent debt. The debt arose in 1988, not 1990, thus no contemporaneous exchange

In re Laguna Beach Motors, Inc., 148 B.R. 317 (9th Cir. B.A.P. 1992)

Contemporaneous exchange - DePrizio rejected under these acts.

2. Dishonored Check

In re JWJ Contracting Co., Inc., 371 F.3d 1079 (9th Cir. 2004)

Creditor’s acceptance of what turned out to be dishonored check, in exchange for new

value given to debtor, transformed what would have been a contemporaneous exchange for new

value into an avoidable credit transaction.

In re Lee, 108 F.3d 239 (9th Cir. 1997)

No transfer of debtor’s property occurs at time of delivery of subsequently dishonored

personal check.

A cashier’s check that was used to replace a dishonored check and was received on the

90th day before the bankruptcy petition was filed was a preferential transfer. A transfer by a

cashier’s check occurs on the date of delivery unlike the transfer of other checks where the transfer

takes place when the bank honors the check.

1. Cashier’s check is property of the debtor

2. Cashier’s check is transferred upon delivery, not issuance

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3. §547(c)(1) - dishonor knocks a transfer out of this section - dishonor can mean a check

returned to maker

4. §547(c)(4) - where check dishonored, delivery of a check thereafter does not relate back

to that transaction

The payment was not a contemporaneous exchange, because that defense cannot involve a

dishonored check. Dishonor changes the nature of the transaction from one intended as a

contemporaneous cash exchange to a credit transaction.

Nor was the new value defense available. Such defense requires that new value be given

after the transfer occurs. Here, the transfer of the cashier’s check took place after the delivery of

the goods..

Earmarking doctrine discussed.

3. Earmarking Doctrine

In re Adbox, Inc., 488 F.3d 836 (9th Cir. 2007)

1. A trustee who has brought a preference action on behalf of the estate is not an “opposing

party,” and thus counterclaims that could have been brought against the debtor prior to its

bankruptcy were properly dismissed; 2. Trustee bears initial burden of proof to establish that

funds were part of the bankruptcy estate. the burden then shifts to the defendant to show that there

was an agreement with a lender to pay funds to a particular creditor.

In re Superior Stamp & Coin Co., Inc., 223 F.3d 1004 (9th Cir. 2000)

After debtor borrowed money to pay specific debt, bank's advancement of payments to

debtor rather than directly to creditor did not preclude application of earmarking doctrine to

prevent recovery by bankruptcy trustee.

In re Kemp Pacific Fisheries, Inc., 16 F.3d 313 (9th Cir. 1994)

Check that was honored was preference even though account may not have had sufficient

funds to cover check. Earmarking doctrine discussed.

4. Insolvent Debtor

In re DAK Industries, Inc., 170 F.3d 1197, 1199 (9th Cir. 1999)

To succeed in a preference action, a trustee must show, inter alia, that the debtor was

insolvent at the time of the contested transaction. 11 U.S.C. §547(b). The Bankruptcy Code

defines insolvency, for a corporation, as a “financial condition such that the sum of such entity’s

debts is greater than all of such entity’s property, at fair valuation...” 11 U.S.C. §101(32).

Although the Code does not define “fair valuation,” courts have generally engaged in a two-step

process of analysis. See, e.g., Matter of Taxman Clothing Co., 905 F.2d 166, 169-70 (7th Cir.

1990). First, the court must determine whether a debtor was a “going concern” or was “on its

deathbed.” Second, the court must value the debtor’s assets, depending on the status determined in

the first part of the inquiry, and apply a simple balance sheet test to determine whether the debtor

was solvent. Id. at 170.

In re Sierra Steel, Inc., 96 B.R. 275 (9th Cir. B.A.P. 1989)

Insolvency

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5. New Value

In re AEG Acquisitions Corp., 161 B.R. 50 (9th Cir. B.A.P. 1993)

New value; DePrizio; option contract

In re Nucorp Energy, Inc., 902 F.2d 729 (9th Cir. 1990)

‘New value’ exception to §547(b) applies to avoidance of preferential transfer if creditor

can show lien attached to property of value - property here found to be valueless

In re E.R. Fegert, Inc., 88 B.R. 258 (9th Cir. B.A.P. 1988), aff’d 887 F.2d 955 (9th Cir. 1989)

Release of lien - §547(c)(1) - new value

6. 90-Day

In re Smith's Home Furnishings Inc., 265 F.3d 959 (9th Cir. 2001)

Trustee required to show that creditor was under secured at some point during the

preference period in order to avoid payments made by debtor to floating lien creditor during 90-

day prepetition preference period.

In re Greene, 223 F.3d 1064 (9th Cir. 2000)

Rule 9006 does not apply to the 90 day preference period.

In re Bergel, 185 B.R. 338 (9th Cir. B.A.P. 1995)

Procedural bankruptcy rules do not extend 90-day period for voiding transfers when 90th

day falls on Saturday, Sunday, or legal holiday

In re Unicom Computer Corp., 13 F.3d 321 (9th Cir. 1994)

Funds which debtor had no right to which were transferred within 90 days held in

constructive trust for transferee and were not property of the debtor

In re Sufola, Inc., 2 F.3d 977 (9th Cir. 1993), superseded by statute as stated in In re Richmond

Produce Co., Inc., 195 B.R. 455 (N.D. Cal. 1996)

- DePrizio followed:

Lender who holds guaranty of an insider of a debtor company is subject to year-long

preference recovery period of § 547(b)(4)(B), rather than the 90 day period specified in

§547(b)(4)(A). Whether a waiver of the guarantor’s rights against the debtor suffices to

circumvent this rule is a question we leave for another panel and another day. U.S. National Bank

of Oregon saw fit to lend Sufola, Inc. A substantial amount of money on the strength of certain

collateral and the personal guaranties of Sufola insiders. The Bank received a preferential payment

of $4,332.05 within one year of Sufola’s bankruptcy, a payment which benefitted the insiders. The

Bank must now return the payment and seek its due from the collateral and the guarantors, the

precise recourse for which the Bank initially bargained.

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7. §547 (b)(5)

In re Powerine Oil Co., 59 F.3d 969 (9th Cir. 1995), cert. denied, 516 U.S. 1140 (1996)

Fact that defendant could have drawn on letters of credit, and thus received no more than it

would have received in a Chapter 7 is irrelevant. Only refer to what debtor would receive from the

estate, not some outside source. §547(b)(5)

8. §547(c)

In re National Lumber and Supply, Inc. 184 B.R. 74 (9th Cir. B.A.P. 1995)

1. §547(c) defenses must be pled specially or are waived

2. §547(c)(2) and (4) reviewed

9. §547(c)(1)

In re Walker, 77 F.3d 322 (9th Cir. 1996)

§547(c)(1) 10 day v. 30 days under Idaho law.

Bankruptcy code’s definition of when transfer perfected trumps state law

In re E.R. Tegert, Inc., 887 F.2d 955 (9th Cir. 1989)

Payment of subs by general to government project is covered by §547 (c)(1)

10. §547(c)(2) and Ordinary Course of Business

In re Healthcentral.com, 504 F.3d 775 (9th Cir. 2007)

Genuine issues of material fact precluded granting of motion for summary judgment as to

ordinary course defense under the pre-2005 versions of both § 547(c)(2)(B) and (C).

In re Ahaza Systems, Inc., 482 F.3d 1118, 1126 (9th Cir. 2007)

1. When there is no past debt between the parties with which to compare the challenged

one, the instant debt should be compared to the debt agreements into which we would expect the

debtor and creditor to enter as a part of their ordinary business operations. 2. When the debt has

been restructured, the court should look at both the original and revised agreement to determine

the nature of the debt.

Union Bank v. Wolan, 502 U.S. 151(1991)

Payments on long and short term debt may qualify for ordinary course of business

exception.

In re Hessco Industries, Inc., 295 B.R. 372 (9th Cir. B.A.P. 2003)

Defendants failed to prove the ordinary course defense, where there was no evidence

presented of “terms to which similarly situated parties adhere.”

In re Jan Weilert RV, Inc., 326 F.3d 1028 (9th Cir. 2003)

Under §547(c)(2)(C), a court cannot limit “ordinary business terms” to the average

transactions in the industry, but must consider the broad range of terms encompassing the practices

employed by similarly situated debtors and creditors facing the same or similar problems.

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In re Kaypro, 218 F.3d 1070 (9th Cir. 2000)

Whether restructuring agreements are a common industry practice and are thus subject to

the ordinary course of business defense was a triable issue of fact. Evidence established that the

debtor was insolvent.

In re Grand Chevrolet, Inc., 25 F.3d 728 (9th Cir. 1994)

§547(c)(1) and (c)(2) - sight draft and time automobile purchase drafts

To qualify of the ordinary course exception, a creditor must prove by a preponderance of

the evidence that (1) the debt and its payment are ordinary in relation to past practices between the

debtor and the creditor, and (2) the payment was ordinary in relation to prevailing business

standards. In re Food Catering & Housing, 971 F.2d at 398

Among the factors courts consider in determining whether transfers are ordinary in relation

to past practices are (1) the length of time the parties were engaged in the transactions at issue, (2)

whether the amount or form of tender differed from past practices, (3) whether the debtor or

creditor engaged in any unusual collection or payment activity, and (4) whether the creditor took

advantage of the debtor’s deteriorating financial condition, See In re Richardson, 94 B.R. 56, 60

(Bankr.E.D. Pa. 1988).

In re Food Catering & Housing, Inc. 971 F.2d 396 (9th Cir. 1992)

Ordinary course of business exception

In re Powerine Oil Co., 126 B.R. 790 (9th Cir. B.A.P. 1991)

1. ‘Debt’ arises upon shipment tor delivery of goods, not installation or acceptance

2. Where there was no evidence that late payments followed practice of parties, no ordinary

course of business

In re CHG International, Inc., 897 F.2d 1479 (9th Cir. 1990)

Long-term debt payment not included within ordinary course of business exception under

§547(c)(2).

In re Seawinds Ltd., 888 F.2d 640 (9th Cir. 1989)

§547(c)(2) - ordinary course of business

In re Loretto Winery, Ltd. 107 B.R. 707 (9th Cir. B.A.P. 1989)

Objective standard - ordinary course of business - §547(c)(2)

In re Pioneer Technology, Inc., 107 B.R. 698 (9th Cir. B.A.P. 1988)

Presumption of insolvency - summary judgment, ordinary course of business - hypothetical

liquidation - §547(c)(2)

11. §547(c)(3)

In re Taylor, 390 B.R. 654 (9th Cir. BAP 2008)

A security interest that was not perfected within 20 days was a preferential transfer, even

though the creditor attempted to perfect within the 20-day period of the statute but did not do so

until the 21st day. Idaho state statute that allowed a second 20-day period to correct mistakes was

trumped by § 547(c)(3).

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12. §547(c)(4)

In re IFRM, Inc., 52 F.3d 228 (9th Cir. 1995)

§547(c)(4) - complete review

13. §547(e)(1)(A)

In re Lane, 980 F.2d 601 (9th Cir. 1992)

§547(e)(1)(A) - Lis Pendens = transfer where underlying suit is for a fraudulent transfer

14. §550

In re Mill Street, Inc., 96 B.R. 268 (9th Cir. B.A.P. 1989)

Collection agency is an initial transferee from whom preference can be collected. §550

15. Cal. CCP §488.500

In re Wind Power Systems, Inc., 841 F.2d 288 (9th Cir. 1988)

Date of creation of lien - Cal. C.C.P. §488.500

16. Miscellaneous

In re Silverman, 616 F.3d 1001 (9th Cir. 2010)

Criminal restitution payments (here to the California State Compensation Insurance Fund)

are recoverable as preference payments. Allowing recovery of preferences will not interfere with

the state’s criminal proceedings, since the debtors will stay have to satisfy the restitution order as a

nondischargeable debt.

In re SNTL Corp., 380 B.R. 204 (9th Cir. BAP 2007)

A debtor’s previously released liability as a guarantor of an affiliate’s obligation is revived

when the creditor compromised a preference action against it.

In re Ahaza Systems, Inc., 482 F.3d 1118, 1126 (9th Cir. 2007)

1. When there is no past debt between the parties with which to compare the challenged

one, the instant debt should be compared to the debt agreements into which we would expect the

debtor and creditor to enter as a part of their ordinary business operations. 2. When the debt has

been restructured, the court should look at both the original and revised agreement to determine

the nature of the debt.

In re Incomnet, Inc., 463 F.3d 1064 (9th Cir. 2006)

Universal Service Administrative Company, to which all telecommunication providers

must contribute under the 1996 Telecommunications Act, was not a mere conduit, but instead met

the “dominion” and thus received preferential transfers.

In re Enterprise Acquisition Partners, Inc., 319 B.R. 626 (9th Cir. BAP 2004)

Corporation solely-owned by an insider of the debtor is not a per se insider under §

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101(31).

In re Superior Fast Freight, Inc., 202 B.R. 485 (9th Cir. B.A.P. 1996)

Voluntary renewal fee with professional listing service was not payment of debt and was

not subject to avoidance

In re Futoran, 76 F.3d 265 (9th Cir. 1996)

Bankruptcy debtor’s payment to ex-wife in exchange for cancellation of marital

termination agreement is preference recoverable by trustee.

Taylor Assoc. v. Dramant (In re Advent Management Corp.), 178 B.R. 480 (9th Cir. 1995), aff’d

104 F.3d 293 (9th Cir. 1997)

Transfer of property subject to a constructive trust as a preference

In an action to recover a preference, the court held that property subject to a constructive

trust is the property of the debtor until the beneficiary establishes the existence of the trust. The

court distinguished the Mitsui Mfg. Bank v. Unicom Computer Corp. (In re Unicorn Computer

Corp.), 13 F.3d 321 (9th Cir. 1994) by finding that it was limited to circumstances where, unlike

the case under review, the recipient of the transfer was also the beneficiary of the constructive

trust.

In re Loken, 175 B.R. 56 (9th Cir. B.A.P. 1994)

State’s extended perfection grace period not applicable to extend bankruptcy code’s tenday

grace period for perfecting security interest in property

Parker N. Am. Corp. v. Resolution Trust corp. (In re Parker N. Am. Corp.), 24 F.3d 1145 (9th Cir.

1994)

FIRREA’s impact on preference claims - financial institution reform, recovery and

enforcement act did not preclude jurisdiction by a bankruptcy court over a preference action

against an institution for which the RTC as receiver had filed a proof of claim arising out of the

same transaction as the alleged preference

In re LCO Enterprises, 12 F.3d 938 (9th Cir. 1993)

1. Date for determining preferences may take into account postpetition facts

2. No implied immunity for preference attack for prepetition rent settlement

3. Landlord’ rent concession incorporated into Chapter 11 plan precluded from recovery as

preferential transfers

In re Skywalker, Inc., 155 B.R. 526 (9th Cir. B.A.P. 1993), aff’d 49 F.3d 546 (9th Cir. 1995)

Deprizio and In re C-LCartage Co., 899 F.2d 1490 (6th Cir. 1990) followed

In re Mantelli, 149 B.R. 154 (9th Cir. B.A.P. 1993)

Payment of money to satisfy civil contempt order = preference. Criminal restitution and In

re Nelson, 91 B.R. 904 (N.D. Cal. 1988) discussed

Fact that debt was nondischargeable does not mean she received more than she would have

received under the distributive portions of the code.

In re Comark, 145 B.R. 47 (9th Cir. B.A.P. 1992)

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Repurchase agreement repayment treated as settlement payment to preclude avoidance of

transaction under §547

In re Jenson, 980 F.2d 1254 (9th Cir. 1992)

Perfection and priority attachment lien relates back to date writ issued

In re Bullion Reserve of No. America, 922 F.2d 544 (9th Cir. 1991)

Debtor - 1.5 million to personal account. K has money transferred to his account and uses

it to buy stock in K&M’s names. Stock then pledged to D as security for the loan - held

1. M is not an initial transferee therefore it is irrelevant that transfer was for his benefit

2. M is not an immediate or mediate transferee, because money never transferred to his

account.

In re California Trade Technical Schools, Inc., 923 F.2d 641 (9th Cir. 1991)

A debtor’s deposit of nontrust funds into a trust account by way of restitution may

constitute a preference

In re CHG Intern. Inc., 897 F.2d 1479 (9th Cir. 1990)

Antecedent debt - whether a debt is current or antecedent depends upon when it was

incurred. A debt is incurred when the debtor first becomes legally obligated to pay

In re R&T Roofing Structures and Commercial Framing, Inc., 887 F.2d 981 (9th Cir. 1989)

Prepetition seizure of bank out by IRS may be preference

In re Ehring, 91 B.R. 897 (9th Cir. B.A.P. 1988), aff’d 900 F.2d 184 (9th Cir. 1990)

Transfer occurred at time of perfection, not foreclosure sale

In re Nucorp Energy, 92 B.R. 416 (9th Cir. B.A.P. 1988) (see also 902 F.2d 729 (9th Cir. 1990))

Transfer occurred when check honored, not delivered

In re Lewis W. Shustleff, Inc. 778 F.2d 1416 (9th Cir. 1985)

Liquidation test

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