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Preferences and Defenses Under Section 547

Section 547 of the Bankruptcy Code allows a trustee or debtor-in-possession the ability to avoid (recover) transfers occurring in the 90 days prior to the filing of a bankruptcy petition, provided the transfers meet certain criteria. 
A preferential transfer is any transfer to or for the benefit of the creditor during the 90 days prior to the date of the bankruptcy petition. A transfer is anything of value tangible or intangible value that the bankrupt debtor gave any creditor.

Preferential transfers are usually made in cash or cash equivalents (actual cash, check, wire transfer, money order) or other property.  Sometimes, the transfers take other forms, such as the return of goods for credit that results in the reduction of the obligation.

The following criteria have to be met in accordance with Section 547(b) in order for the trustee or debtor in possession to be able to attempt recovery:

  • The transfer was made to or for the benefit of the creditor (Section 547(b)(1))
  • The transfer was made for or on account of an antecedent debt owed by the debtor before such transfer was made (Section 547(b)(2))
  • The transfer was made while the debtor was insolvent (Section 547(b)(3))
  • The transfer was made on or within 90 days before the date of filing of the petition or between 90 days and one year before the date of the filing of the petition if such creditor at the time of such transfer was an insider (Section 547(b)(4))
  • The transfer enables the creditor to receive more than the creditor would receive if:  the case were a chapter 7; the transfer had not been made and the creditor received payment of such debt to the extent provided by the provisions of the title (Section 547(b)(5))

Section 547(f) states: “For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.”

The creditor/transferee has several defenses under Section 547(c) against potential preference transfers that may allow him to retain the transfers in question.

The most common defenses are:

  • Contemporaneous Exchange for New Value
    Under Section 547(c)(1) the debtor cannot avoid transfers to the extent the transfers were intended to be a contemporaneous exchange for new value given to the debtor and in fact a substantially contemporaneous exchange.
  • Ordinary course of business defense
    Under Section 547(c)(2) the trustee or debtor in possession cannot avoid the alleged preferential transfers to the extent the transfers were made in the  ordinary course of business of the debtor and the transferee or according to ordinary business terms in the creditor’s and debtor’s respective industries.
  • New value defense
    Under Section 547(c)(4) the debtor cannot avoid the alleged transfer to the extent that after such transfer the creditor gave new value to or for the benefit of the debtor that was not secured by an otherwise unavoidable security interest and on account of which new value the debtor did not make an otherwise unavoidable transfer.

Example of a potential preference transfer where the new value defense applies:

Assume the trustee of Debtor D is seeking to recover $15,000 from Creditor C.

The clear date of transfer made by Debtor D to Creditor C is 5/1/2013 (during the 90 days prior to the filing of the bankruptcy petition by Debtor D on account of an antecedent debt owed by Debtor D to Creditor C)

 Invoice
Number

 Invoice
Date 

 Amount
Paid

Clear Date of
Payment 

New
Value Date 

 New
Value

Net
Preference

 123456 

2/15/2013

 15,000

5/1/2013 

 

 

15,000

789101

 

 

 

5/5/2013 

10,000 

5,000

891112

 

 

 

5/10/2013 

5,000

0

   
A creditor must rebut the presumption of insolvency in order to raise that issue as a defense against Section 547(b)(3).

Conclusion and key points of Section 547:

The trustee has the burden of proving the avoidability of a transfer under Section 547(b) and the creditor/transferee against whom avoidance/recovery is sought has the burden of proving the non-avoidability of a transfer under Section 547(c).

The debtor is presumed to have been insolvent on and during the 90 days immediately prior to the date of the filing of the petition.

The aggregate value of the transferred property must not be less than $6,225 in a case filed by a debtor whose debts are not primarily consumer debts.

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