Class 10 Bankruptcy, Spring, 2000 Preferences 4/21/2019 Class 10 Bankruptcy, Spring, 2000 Preferences Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

547(b): The Prima Facie Case 4/21/2019 547(b): The Prima Facie Case Preferences (b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property - (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 547(b) (cont.) Preferences (cont.) (4) made - (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety 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; and April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 547(b) (cont.) Preferences (cont.) (5) that enables such creditor to receive more than such creditor would receive if - (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. April 21, 2019 Copyright © 2005-09 Randal C. Picker

547(c): Contemporaneous Exchange 4/21/2019 547(c): Contemporaneous Exchange Preferences (cont.) (c) The trustee may not avoid under this section a transfer - (1) to the extent that such transfer was - (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange; April 21, 2019 Copyright © 2005-09 Randal C. Picker

547(c)(2): Ordinary Course 4/21/2019 547(c)(2): Ordinary Course Preferences (cont.) (2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was— (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; and (B) made according to ordinary business terms; April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 547(c)(3): PMSIs Preferences (cont.) (c)(3) that creates a security interest in property acquired by the debtor - (A) to the extent such security interest secures new value that was - (i) given at or after the signing of a security agreement that contains a description of such property as collateral; (ii) given by or on behalf of the secured party under such agreement; (iii) given to enable the debtor to acquire such property; and (iv) in fact used by the debtor to acquire such property; and (B) that is perfected on or before 30 days after the debtor receives possession of such property; April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 547(c)(4): New Value Preferences (cont.) (c)(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor - (A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor; April 21, 2019 Copyright © 2005-09 Randal C. Picker

547(c)(5): Two-Point Net Improvement Test 4/21/2019 547(c)(5): Two-Point Net Improvement Test Preferences (cont.) (c)(5) that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of - April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 547 (cont.) Preferences (cont.) (c)(5) (cont.) (A)(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or (ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or (B) the date on which new value was first given under the security agreement creating such security interest; April 21, 2019 Copyright © 2005-09 Randal C. Picker

547(e): Timing of Transfers 4/21/2019 547(e): Timing of Transfers More in a bit April 21, 2019 Copyright © 2005-09 Randal C. Picker

No Antecedent Debt, No Preference 4/21/2019 No Antecedent Debt, No Preference Debtor Finco 2/1 SA: Machine FS: Machine $10,000 4/1 Has Finco received a preference under BC 547(b)? Machine = $10,000 4/1 Debtor files for bankruptcy April 21, 2019 Copyright © 2005-09 Randal C. Picker

Answer No antecedent debt, so no preference April 21, 2019 4/21/2019 Answer No antecedent debt, so no preference Debtor Finco 2/1 SA: Machine FS: Machine $10,000 4/1 Has Finco received a preference under BC 547(b)? Machine = $10,000 4/1 Debtor files for bankruptcy April 21, 2019 Copyright © 2005-09 Randal C. Picker

Antecedent Debt, Preference 4/21/2019 Antecedent Debt, Preference Debtor Finco 2/1 $10,000 3/1 SA & FS Machine Machine = $10,000 5/1 Debtor files for bankruptcy 5/1 Has Finco received a preference under BC 547(b)? April 21, 2019 Copyright © 2005-09 Randal C. Picker

Answer b(1): transfer to or for the benefit of a creditor 4/21/2019 Answer b(1): transfer to or for the benefit of a creditor Yes b(2): on account of an antecedent debt The 2/1 debt of $10K b(3): made while the debtor was insolvent Presumed insolvent for 90 days prior under 547(f) Debtor Finco 2/1 $10,000 5/1 Has Finco received a preference under BC 547(b)? Machine = $10,000 5/1 Debtor files for bankruptcy 3/1 SA & FS Machine April 21, 2019 Copyright © 2005-09 Randal C. Picker

Answer b(4): for non-insiders, made within 90 days of filing 4/21/2019 Answer b(4): for non-insiders, made within 90 days of filing Yes b(5): does better with transfer than without in hypo Chap 7 With transfer: collect in full Without: pro rata Debtor Finco 2/1 $10,000 5/1 Has Finco received a preference under BC 547(b)? Machine = $10,000 5/1 Debtor files for bankruptcy 3/1 SA & FS Machine April 21, 2019 Copyright © 2005-09 Randal C. Picker

Payments to Fully Secured Creditors 4/21/2019 Payments to Fully Secured Creditors Debtor Finco 2/1 SA: Machine FS: Machine $10,000 4/2 Has Finco received a preference under 547(b)? 2/2 $10,000 Machine = $10,000 4/1 Debtor sells machine for $10,000 Gives money to Finco Bank 4/2 Debtor files for bankruptcy Assets = $5,000 April 21, 2019 Copyright © 2005-09 Randal C. Picker

Answer Two transfers to Finco within preference period 2/1 Transfer 4/21/2019 Answer Two transfers to Finco within preference period 2/1 Transfer No problem as before 4/1 Transfer b(1) to b(4): yes Bank Debtor Finco 2/2 $10,000 2/1 SA: Machine FS: Machine 4/2 Has Finco received a preference under BC 547(b)? 4/1 Debtor sells machine for $10,000 Gives money to Finco Machine = $10,000 4/2 Debtor files for bankruptcy Assets = $5,000 April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 Answer b(5) Prior security interest fully protects this payment Would have collected $10K in bankruptcy Better off? April 21, 2019 Copyright © 2005-09 Randal C. Picker

Synergies and Fully Secured Creditors 4/21/2019 Synergies and Fully Secured Creditors Debtor Finco 2/1 SA: Machine 1 FS: Machine 1 $10,000 4/2 Has Finco received a preference under 547(b)? Machine 1 = $10,000 Machine 2 = $5,000 Both = $17,000 2/2 $10,000 4/2 Debtor files for bankruptcy Assets = Machine 2 4/1 Debtor sells Machine 1 for $10,000 Gives money to Finco Bank April 21, 2019 Copyright © 2005-09 Randal C. Picker

4/21/2019 Answer No preference issue, but note harm done to other creditors from sale of first machine Bank Debtor Finco 2/2 $10,000 2/1 SA: Machine 1 FS: Machine 1 4/2 Has Finco received a preference under BC 547(b)? 4/1 Debtor sells Machine 1 for $10,000 Gives money to Finco Machine 1 = $10,000 Machine 2 = $5,000 Both = $17,000 4/2 Debtor files for bankruptcy Assets = Machine 2 April 21, 2019 Copyright © 2005-09 Randal C. Picker

11 USC 547(e): Timing Transfers 4/21/2019 11 USC 547(e): Timing Transfers (e)(1) For the purposes of this section – (A) a transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale of real property, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee; and April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 11 USC 547(e)(1) Cont. (B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 11 USC 547(e) Cont. (2) For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made – (A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after, such time except as provided in subsection (c)(3)(B); April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 11 USC 547(e)(2) Cont. (B) at the time such transfer is perfected, if such transfer is perfected after such 30 days; or (C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of – (i) the commencement of the case; or (ii) 30 days after such transfer takes effect between the transferor and the transferee. April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 11 USC 547(e) Cont. (3) For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred. April 21, 2019 Copyright © 2005-09 Randal C. Picker

Late Filings and Secured Creditors 4/21/2019 Late Filings and Secured Creditors Debtor Finco 2/1 SA: Machine $10,000 4/2 Has Finco received a preference under 547(b)? 3/15 FS: Machine 2/2 $10,000 4/1 Debtor sells Machine 1 for $10,000 Gives money to Finco Bank 4/2 Debtor files for bankruptcy Assets = $5,000 April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 Answer Two Transfers SI The Sale Proceeds The SI Under 547(e)(2)(B), the transfer of the SI took place on 3/15, the date it was perfected This creates antecedence, so avoidable The 4/1 Sale Proceeds Can’t be supported under 547(b)(5) given absence of underlying SI April 21, 2019 Copyright © 2005-09 Randal C. Picker

New Property and Secured Creditors 4/21/2019 New Property and Secured Creditors Debtor Bank 2/1 SA: All Prop, TE & TA Article 9 filing $10,000 2/12 Debtor acquires machine 3/1 Debtor files for bankruptcy 4/2 Has Bank received a preference under 547(b)? April 21, 2019 Copyright © 2005-09 Randal C. Picker

Answer Two Transfers 2/1 2/12 2/1 Transfer 2/12 Purchase of Equipment 4/21/2019 Answer Two Transfers 2/1 Transfer 2/12 Purchase of Equipment 2/1 Fine 2/12 Under 547(e)(3), transfer takes place at time debtor acquires equipment Problem as before Bank Debtor 2/1 SA: All Prop, TE & TA Article 9 filing $10,000 4/2 Has Finco received a preference under BC 547(b)? 3/1 Debtor files for bankruptcy 2/12 Debtor acquires machine April 21, 2019 Copyright © 2005-09 Randal C. Picker

11 USC 547(c)(5): Two Point Net Improvement Test 4/21/2019 11 USC 547(c)(5): Two Point Net Improvement Test (c) The trustee may not avoid under this section a transfer - (5) that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest April 21, 2019 Copyright © 2005-09 Randal C. Picker

11 USC 547(c)(5): Two Point Net Improvement Test 4/21/2019 11 USC 547(c)(5): Two Point Net Improvement Test exceeded the value of all security interests for such debt on the later of – (A)(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or (ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or (B) the date on which new value was first given under the security agreement creating such security interest; April 21, 2019 Copyright © 2005-09 Randal C. Picker

Floating Collateral and Secured Creditors 4/21/2019 Floating Collateral and Secured Creditors Debtor Bank 2/1 SA: INV, TE & TA Article 9 filing $10,000 Debtor already has $10,000 in INV 3/1 Debtor files for bankruptcy 3/1 Debtor has $10,000 in INV all acquired after 2/1 3/1 Has Bank received a preference under 547(b)? April 21, 2019 Copyright © 2005-09 Randal C. Picker

Answer Bottom Line Step by Step 4/21/2019 Answer Bottom Line No improvement in position, so one hopes no preference 547(c)(5) protects this Step by Step Bank Debtor 2/1 SA: INV, TE & TA Article 9 filing $10,000 3/1 Has Finco received a preference under BC 547(b)? 3/1 Debtor files for bankruptcy Debtor already has $10,000 in INV 3/1 Debtor has $10,000 in INV all acquired after 2/1 April 21, 2019 Copyright © 2005-09 Randal C. Picker

Floating Collateral and Secured Creditors 4/21/2019 Floating Collateral and Secured Creditors Debtor Bank 2/1 SA: INV, TE & TA Article 9 filing $10,000 Debtor already has $8,000 in INV 3/1 Debtor files for bankruptcy 3/1 Debtor has $10,000 in INV all acquired after 2/1 3/1 Does that change your answer? April 21, 2019 Copyright © 2005-09 Randal C. Picker

Answer Bottom Line Step by Step 4/21/2019 Answer Bottom Line $2K improvement in position, so should be preference Step by Step Bank Debtor 2/1 SA: INV, TE & TA Article 9 filing $10,000 3/1 Debtor files for bankruptcy Debtor already has $8,000 in INV 3/1 Debtor has $10,000 in INV all acquired after 2/1 3/1 Does that change your answer? April 21, 2019 Copyright © 2005-09 Randal C. Picker

Guarantees and Preferences I 4/21/2019 Guarantees and Preferences I Owner 4/1: Debtor files; is there a preference under 547(b)? 2/1: Guarantees Debt 3/1: Debtor pays $10,000 Debtor Bank 2/1: $10,000 loan April 21, 2019 Copyright © 2005-09 Randal C. Picker

Guarantees and Preferences II 4/21/2019 Guarantees and Preferences II Owner 8/1: Debtor files; is there a preference under 547(b)? 2/1: Guarantees Debt 3/1: Debtor pays $10,000 Debtor Bank 2/1: $10,000 loan April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 550 Liability of transferee of avoided transfer (a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from - (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 550 (cont.) Liability of transferee of avoided transfer (cont.) (b) The trustee may not recover under section (a)(2) of this section from - (1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or (2) any immediate or mediate good faith transferee of such transferee. April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 550 (cont.) Liability of transferee of avoided transfer (cont.) (c) If a transfer made between 90 days and one year before the filing of the petition— (1) is avoided under section 547(b) of this title; and (2) was made for the benefit of a creditor that at the time of such transfer was an insider; the trustee may not recover under subsection (a) from a transferee that is not an insider. (d) The trustee is entitled to only a single satisfaction under subsection (a) of this section. April 21, 2019 Copyright © 2005-09 Randal C. Picker

Guarantees and Preferences III 4/21/2019 Guarantees and Preferences III Owner 8/1: Debtor files; is there a preference under 547(b)? 2/1: Guarantees Debt 3/1: Debtor grants perfected SI in property worth $10,000 Debtor Bank 2/1: $10,000 loan April 21, 2019 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 4/21/2019 2005 Adds 547(i) 547(i) If the trustee avoids under subsection (b) a transfer made between 90 days and 1 year before the date of the filing of the petition, by the debtor 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 under this section only with respect to the creditor that is an insider. April 21, 2019 Copyright © 2005-09 Randal C. Picker

Bergner I Swiss AMC Bergner Bank 4/21/2019 Bergner I 8/23/91: Debtor files; is there a preference under 547(b)? Swiss AMC 7/19/91: Wires $31mm to Bergner operating account 90, 91: Bank issues LCs 5/91: Bank announces won’t renew LCs, induces 7/19/91 draw $ Bergner Bank 7/89: LC Facility April 21, 2019 Copyright © 2005-09 Randal C. Picker

Bergner II Liberty Bergner Bank 4/21/2019 Bergner II 8/23/91: Bank segregates funds from operating account to cover LC; Bergner files; is there a preference under 547(b)? Liberty 90, 91: Bank issues LCs 8/2/91: Bergner puts funds in operating account to cover Liberty LC 5/91: Bank announces won’t renew LCs Bergner Bank 7/89: LC Facility April 21, 2019 Copyright © 2005-09 Randal C. Picker