What Is The Preference Action?Ī preference action is essentially an adversary proceeding that would be brought either by a chapter 7 trustee or a debtor in possession who is also obligated as a fiduciary for its creditors to bring actions in the bankruptcy court to try to collect payments from creditors that fit within the definition of the preference statute 11 USC 547. A trustee’s duty as a fiduciary for creditors or debtors in possession’s duty is to look to investigate and potentially challenge any transactions, especially transactions that occur shortly before a bankruptcy filing as potentially preferential or fraudulent payments that can be challenged and recovered from a recipient known as a transferee for the benefit of all creditors. Can Bankruptcy Affect A Payment Paid Before Filing? Some cases have even resulted in preference liability under the extended one-year payment period concluding that the payment recipient was an insider. Just because a transfer is to a related entity, it may or may not precisely fit within the meaning of insider and can still be challenged. However, the definition of an insider remains subject to case law. If the debtor is a corporation, insiders are considered directors of the debtor, officers of the debtor, persons in control of the debtor, partnership in which the debtor is a general partner, general partners of the debtor or a relative of a general partner, director, officer or person in control of the debtor. For individuals who file bankruptcy, an insider would be included in the definition of a relative of the debtor or general partner of the debtor, a partnership in which the debtor is a general partner, a general partner of the debtor or a corporation of which a debtor is a director, officer, a person in control. Insider is a defined term in the bankruptcy code.
How Far Back Can The Bankruptcy Trustee Look For Preferential Transfers?Īs described in 11 USC 547, the preference statute is 90 days for general creditors and one year for insiders. The main issues that come up in a preference case often deal with the timing of the payment, which is 90 days as calculated from the date a check is honored, not when drafted. A creditor who doesn’t prove all six elements of the case will not establish liability. The six elements of a preference case are, 1) a transfer 2) to or for the benefit of a creditor 3) on account of an antecedent debt owed by the debtor before the transfer was made 4) made while the debtor was insolvent 5) made within 90 days before the date of the filing of a petition or between 90 days and one year before the date of the filing of the petition if the creditor was an insider and 6) that enables the creditor to receive more than if the case was not a chapter 7 case and the transfer had not been made, and the creditor received payment to the extent provided the provisions of the bankruptcy code. Before filing the preference case, the trustee, based upon some recent changes to the bankruptcy code, must proceed with reasonable due diligence understanding the circumstances of the case and take into account a party’s known or reasonably known defenses. A trustee must meet all six elements to pursue a preference case. As a result of a trustee’s due diligence, the transfer payments will likely be something that a trustee would investigate. They are transfers must be affirmatively be disclosed on the debtor’s bankruptcy petition within specific dollar amounts and within certain time periods of the bankruptcy. Preferential payments arise under 11 USC 547 of the Bankruptcy Code.