Secured Transactions Assignment 31 Trustees vs. Secureds: Preferences

The Big Picture Part Two: The Creditor Third Party Relationship Chapter 9: Competitions for Collateral Assignment 28: Lien Creditors vs Secureds: The Basics Assignment 29: Lien Creditors vs Secureds: Future Advance Assignment 31: Trustees vs Secureds: Preferences Assignment 32: Secureds vs. Secureds: Basics Assignment 36: Buyers vs. Secureds Land, Fixtures, Agriculture, and Minerals

The policies Petition State: the race of diligence Bankruptcy: equality is equity

The policies Petition State: the race of diligence Bankruptcy: equality is equity 90 day preference period

The policies Petition State: the race of diligence Bankruptcy: equality is equity 90 day preference period

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . .

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32)

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . .

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . . (B) between 90 days and one year before the date of the filing . . . if such creditor . . . was an insider, §101(31)

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . . (B) between 90 days and one year before the date of the filing . . . if such creditor . . . was an insider, §101(31) (5) That enables such creditor to receive more than such creditor would receive if the case were . . . under chapter 7 . . . [and] the transfer had not been made . . .

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . . (B) between 90 days and one year before the date of the filing . . . if such creditor . . . was an insider, §101(31) (5) That enables such creditor to receive more than such creditor would receive if the case were . . . under chapter 7 . . . [and] the transfer had not been made . . .

When is a security interest transfer made? §547(e) (2). 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 . . . (B) At the time such transfer is perfected, if such transfer is perfected after such 30 days . . . (1). For purposes of this section -- (A) A transfer of real property . . . is perfected when a bona fide purchaser . . . cannot acquire an interest that is superior . . (B) A transfer of a fixture or property other than real property is perfected when a creditor . . . cannot acquire a judicial lien that is superior . . .

Problem 31.1, page 518 Convert to Ch 7 Ch 11 Now Sep 1 Dec 30 We represent the trustee in bankruptcy in a case filed under Chapter 11 on September 1 and converted to Chapter 7 on December 30.

Problem 31.1, page 518 Convert to Ch 7 Ch 11 Now Sep 1 Dec 30 We represent the trustee in bankruptcy in a case filed under Chapter 11 on September 1 and converted to Chapter 7 on December 30. We are deciding whether to attack transactions as preferences

Problem 31.1, page 518 Convert to Ch 7 Ch 11 Now Sep 1 Dec 30 We represent the trustee in bankruptcy in a case filed under Chapter 11 on September 1 and converted to Chapter 7 on December 30. We are deciding whether to attack transactions as preferences From what date does the preference period run?

Problem 31.1, page 518 Convert to Ch 7 Jun 3 Ch 11 Now Sep 1 Dec 30

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 Now Aug15 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15.

Problem 31.1, page 518 SA FS loan FS filed Convert to Ch 7 Ch 11 Now Aug15 Aug16 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day.

Problem 31.1, page 518 SA FS loan FS filed Convert to Ch 7 Ch 11 Now Aug15 Aug16 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable?

The Statute §547(b). The trustee may avoid any transfer of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . . (B) between 90 days and one year before the date of the filing . . . if such creditor . . . was an insider, §101(31) (5) That enables such creditor to receive more than such creditor would receive if the case were . . . under chapter 7 . . . [and] the transfer had not been made . . .

The Statute §547(b). The trustee may avoid any transfer of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . . (B) between 90 days and one year before the date of the filing . . . if such creditor . . . was an insider, §101(31) (5) That enables such creditor to receive more than such creditor would receive if the case were . . . under chapter 7 . . . [and] the transfer had not been made . . .

Problem 31.1, page 518 SA FS loan FS filed Convert to Ch 7 Ch 11 Now Aug15 Aug16 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2).

Problem 31.1, page 518 Unsecured loan Convert to Ch 7 Ch 11 Now Feb 7 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7.

Problem 31.1, page 518 Unsecured loan Convert to Ch 7 SA FS filed Now Feb 7 Jul 11 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed.

Problem 31.1, page 518 Unsecured loan Convert to Ch 7 SA FS filed Now Feb 7 Jul 11 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed. When was transfer? §547(e)(2)(A).

Problem 31.1, page 518 Unsecured loan Convert to Ch 7 SA FS filed Now Feb 7 Jul 11 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed. When was transfer? §547(e)(2)(A). Avoidable?

Problem 31.1, page 518 Unsecured loan Convert to Ch 7 SA FS filed Now Feb 7 Jul 11 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed. When was transfer? §547(e)(2)(A). Avoidable? Yes.

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 Now Feb 7 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed. When was transfer? §547(e)(2)(A). Avoidable? Yes. Wooden borrows $300K secured from 3rd Bank Feb 7.

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Feb 7 Jul 11 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed. When was transfer? §547(e)(2)(A). Avoidable? Yes. Wooden borrows $300K secured from 3rd Bank Feb 7. FS lost in mail, filed July 11.

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Feb 7 Jul 11 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed. When was transfer? §547(e)(2)(A). Avoidable? Yes. Wooden borrows $300K secured from 3rd Bank Feb 7. FS lost in mail, filed July 11. Avoidable?

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Feb 7 Jul 11 Sep 1 Dec 30 Wooden borrows $300K secured from 1st Bank Aug 15. 1st Bank files the next day. Avoidable? No, 547(e)(2). Wooden borrows $300K from 2nd Bank unsecured Feb 7. On July 11 Wooden granted a SI and Secondbank filed. When was transfer? §547(e)(2)(A). Avoidable? Yes. Wooden borrows $300K secured from 3rd Bank Feb 7. FS lost in mail, filed July 11. Avoidable? Yes. §547(e)(1)(B). (But see 9-516(a)!)

When is a security interest transfer made? §547(e) (2). 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 . . . (B) At the time such transfer is perfected, if such transfer is perfected after such 30 days . . . (1). For purposes of this section -- (A) A transfer of real property . . . is perfected when a bona fide purchaser . . . cannot acquire an interest that is superior . . (B) A transfer of a fixture or property other than real property is perfected when a creditor . . . cannot acquire a judicial lien that is superior . . .

The Statute §547(b). The trustee may avoid any transfer of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . . (B) between 90 days and one year before the date of the filing . . . if such creditor . . . was an insider, §101(31) (5) That enables such creditor to receive more than such creditor would receive if the case were . . . under chapter 7 . . . [and] the transfer had not been made . . .

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 Now Jul 21 Sep 1 Dec 30 Wooden borrows $30K purchase money secured from 4th Bank July 21.

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Jul 21 Aug 4 Sep 1 Dec 30 Wooden borrows $30K purchase money secured from 4th Bank July 21. 4th Bank files August 4.

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Jul 21 Aug 4 Sep 1 Dec 30 Wooden borrows $30K purchase money secured from 4th Bank July 21. 4th Bank files August 4. Avoidable?

547(3) Purchase Money Exception (c) (3) [Then] The trustee may not avoid under this section a transfer . . . 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;

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Jul 21 Aug 4 Sep 1 Dec 30 Wooden borrows $30K purchase money secured from 4th Bank July 21. 4th Bank files August 4. Avoidable? No. §547(c)(3).

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Jul 21 Aug 4 Sep 1 Dec 30 Wooden borrows $30K purchase money secured from 4th Bank July 21. 4th Bank files August 4. Avoidable? No. §547(c)(3). Different if 4th Bank disbursed to Wooden and Wooden used other funds to purchase?

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Jul 21 Aug 4 Sep 1 Dec 30 Wooden borrows $30K purchase money secured from 4th Bank July 21. 4th Bank files August 4. Avoidable? No. §547(c)(3). Different if 4th Bank disbursed to Wooden and Wooden used other funds to purchase? Not PMSI. §547(c)(3)(A)(iv) “in fact used by the debtor to acquire such property.”

Problem 31.1, page 518 SA FS loan Convert to Ch 7 Ch 11 FS filed Now Jul 21 Aug 4 Sep 1 Dec 30 Wooden borrows $30K purchase money secured from 4th Bank July 21. 4th Bank files August 4. Avoidable? No. §547(c)(3). Different if 4th Bank disbursed to Wooden and Wooden used other funds to purchase? Not PMSI. §547(c)(3)(A)(iv) “in fact used by the debtor to acquire such property.” Still no different. §547(e)(2)(A).

Problem 31.1, page 518 Convert to Ch 7 Ch 11 Loan Now Mar 9 Sep 1 Dec 30 f. Elsa lends March 9.

Problem 31.1, page 518 Convert to Ch 7 SA FS filed Ch 11 Loan Now Mar 9 Apr 12 Sep 1 Dec 30 f. Elsa lends March 9. SA signed and FS filed April 12.

Problem 31.1, page 518 Convert to Ch 7 SA FS filed Ch 11 Loan Now Mar 9 Apr 12 Sep 1 Dec 30 f. Elsa lends March 9. SA signed and FS filed April 12. Avoidable?

Problem 31.1, page 518 Convert to Ch 7 SA FS filed Ch 11 Loan Now Mar 9 Apr 12 Sep 1 Dec 30 Elsa lends March 9. SA signed and FS filed April 12. Avoidable? Yes. §101(31)(B)(vi) and (45).

Problem 31.1, page 518 Convert to Ch 7 SA FS filed Ch 11 Loan Now Mar 9 Apr 12 Sep 1 Dec 30 Elsa lends March 9. SA signed and FS filed April 12. Avoidable? Yes. §101(31)(B)(vi) and (45). When was the transfer made?

Problem 31.1, page 518 Convert to Ch 7 SA FS filed Ch 11 Loan Now Mar 9 Apr 12 Sep 1 Dec 30 Elsa lends March 9. SA signed and FS filed April 12. Avoidable? Yes. §101(31)(B)(vi) and (45). When was the transfer made? April 12. §547(e)(2)(B).

Problem 31.2, page 519 $1.5 million verdict Dysan Creditors

Problem 31.2, page 519 $1.5 million verdict Dysan Creditors FS FS FS

Problem 31.2, page 519 $1.5 million verdict Judgment Dysan Creditors FS FS FS

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do?

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do? Levy?

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do? Levy? File an involuntary bankruptcy?

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do? Levy? File an involuntary bankruptcy? Accept a security interest?

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do? Levy? File an involuntary bankruptcy? Accept a security interest? Deal: Preferred creditors assign us our prorata share of their claims.

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do? Levy? File an involuntary bankruptcy? Accept a security interest? Deal: Preferred creditors assign us our prorata share of their claims. Example: Assets are $1 million. Debt is $4 million. FS debt is $2 million.

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do? Levy? File an involuntary bankruptcy? Accept a security interest? Deal: Preferred creditors assign us our prorata share of their claims. Example: Assets are $1 million. Debt is $4 million. FS debt is $2 million. Deal: We get this fraction of the assets: $1,547/$3,547

Problem 31.2, page 519 $1.5 million verdict Judgment Now Dysan 90 days Creditors FS FS FS The debtor is still in business. What should we do? Levy? File an involuntary bankruptcy? Accept a security interest? Deal: Preferred creditors assign us our prorata share of their claims. Example: Assets are $1 million. Debt is $4 million. FS debt is $2 million. Deal: We get this fraction of the assets: $1,547/$3,547 If others figure it out, we cut them in.

The Statute §547(b). The trustee may avoid any transfer (§101(54)) of an interest of the debtor in property To or for the benefit of a creditor For or on account of an antecedent debt . . . Made while the debtor is insolvent, §101(32) Made -- (A) on or within 90 days before the date of the filing . . . (B) between 90 days and one year before the date of the filing . . . if such creditor . . . was an insider, §101(31) (5) That enables such creditor to receive more than such creditor would receive if the case were . . . under chapter 7 . . . [and] the transfer had not been made . . .

Problem 31.3, page 519 2.5M 1.3M 1.2M 90 days before

Problem 31.3, page 519 2.5M 1.3M 1.2M 1.5M 800K 700K 90 days before Bankruptcy

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy The trustee may avoid any transfer To a creditor on account of an antecedent debt Made while debtor was insolvent Made within 90 days before the petition That enables the creditor to receive more than it would if debtor didn’t make the transfer but filed chapter 7.

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy The trustee may avoid any transfer. What is the “transfer?” To a creditor on account of an antecedent debt Made while debtor was insolvent Made within 90 days before the petition That enables the creditor to receive more than it would if debtor didn’t make the transfer but filed chapter 7.

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? Payments and security interests in inventory items §547(e)(3) 2.5M 1.3M 1.2M 1.5M 800K 700K 90 days before Bankruptcy The trustee may avoid any transfer To a creditor on account of an antecedent debt Made while debtor was insolvent Made within 90 days before the petition That enables the creditor to receive more than it would if debtor didn’t make the transfer but filed chapter 7.

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy §547(c)(5). “The trustee may not avoid . . . a transfer . . . that creates a perfected security interest in inventory or a receivable . . . except to the extent that the aggregate of all such transfers . . . caused a reduction, as of the date of filing . . . of any amount by which the debt secured . . . exceeded the value of all security interests . . . 90 days before the filing of the petition.”

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy §547(c)(5). “The trustee may not avoid . . . a transfer . . . that creates a perfected security interest in inventory or a receivable . . . except to the extent that the aggregate of all such transfers . . . caused a reduction, as of the date of filing . . . of any amount by which the debt secured . . . exceeded the value of all security interests . . . 90 days before the filing of the petition.”

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy §547(c)(5). “The trustee may not avoid . . . a transfer . . . that creates a perfected security interest in inventory or a receivable . . . except to the extent that the aggregate of all such transfers . . . caused a reduction, as of the date of filing . . . of any amount by which the debt secured . . . exceeded the value of all security interests . . . 90 days before the filing of the petition.”

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy §547(c)(5). “The trustee may not avoid . . . a transfer . . . that creates a perfected security interest in inventory or a receivable . . . except to the extent that the aggregate of all such transfers . . . caused a reduction, as of the date of filing . . . of any amount by which the debt secured . . . exceeded the value of all security interests . . . 90 days before the filing of the petition.”

Problem 31.3, page 519 Did Swissbank receive an avoidable preference? 90 days before Bankruptcy §547(c)(5). “The trustee may not avoid . . . a transfer . . . that creates a perfected security interest in inventory or a receivable . . . except to the extent that the aggregate of all such transfers . . . caused a reduction, as of the date of filing . . . of any amount by which the debt secured . . . exceeded the value of all security interests . . . 90 days before the filing of the petition.” $500K

Problem 31.4, page 519 Our law firm settles a class action for $247 million to the class and $33 million to our firm. The defendant pays by check. We deposit the check. The check clears. Is it time to celebrate?

Problem 31.4, page 519 Our law firm settles a class action for $247 million to the class and $33 million to our firm. The defendant pays by check. We deposit the check. The check clears. Is it time to celebrate? No.

Problem 31.4, page 519 Our law firm settles a class action for $247 million to the class and $33 million to our firm. The defendant pays by check. We deposit the check. The check clears. Is it time to celebrate? No. When will it be time to celebrate?

Problem 31.4, page 519 Our law firm settles a class action for $247 million to the class and $33 million to our firm. The defendant pays by check. We deposit the check. The check clears. Is it time to celebrate? No. When will it be time to celebrate? 90 days after the check clears.

Problem 31.5, page 519 1. Bowers story. Bowers solution: let debtors distribute their estates 2. Modern Chapter 11 preference avoidance a. Preferences recovered before plan confirmation go to unsecured creditors b. Strategy: confirm plan first, then recover preferences c. Thousands of preference actions in a single case 3. Madoff and other Ponzi schemes 4. Should preference avoidance be abolished? 5. Congress responded in 2005 with a $5,850 minimum. §547(c)(9)