LAWDOG BANKRUPTCY: CHAPTER 11
Avoidable Transfers
LAWDOG is intended to assist in the understanding of basic concepts. See
Disclaimer. Always obtain legal advice from legal professionals.
A trustee or a debtor in possession has "avoiding"
powers, which may be used to cancel a transfer of money or property made during a certain
period of time prior to the filing of the bankruptcy petition. This "avoidance"
of a particular transfer by a trustee or a debtor in possession, may force the return of
the payments or property tranferred, for the benefit of all creditors. As a general rule,
the power to avoid transfers is effective against transfers made within 90 days prior to
the filing of the bankruptcy petition. If the transfers involved insiders, which include
relatives, general partners, directors or officers of the debtor, the trustee or debtor in
possession may "avoid" or cancel such transfers if they were made up to one year
prior to the bankruptcy filing.
Trustee As Hypothetical Creditor
The Trustee in a bankruptcy has certain powers to set aside
certain transactions and transfers. Bankruptcy Code Section 544(a) provides that, at the
commencement of the case, the trustee becomes a hypothetical creditor whose lien rights
may supersede others. The trustee is given the rights of a creditor with a judgment lien
and unpaid writ of execution, and rights of an innocent purchaser of real property on the
date of the bankruptcy filing. The trustee is therefore able to set aside any transactions
which these hypothetical creditors could set aside. See Section 544(b) reproduced here for
illustration purposes only.
Preferences
The Trustee may avoid certain statutory liens, fraudulent
transfers, as well as preferences. "Preferences" are transfers of a debtor's
property to a creditor, or to benefit a creditor, for payment of a prior debt, which
result in the creditor receiving more than the creditor would have received in a Chapter 7
Bankruptcy if the property had not been transferred. The transfer must occur when the
debtor is insolvent and, generally, within 90 days before the bankruptcy filing. 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.
Transfers to "insiders", which includes relatives,
general partners, and directors or officers of the debtor, made up to one year prior to
the filing of a bankruptcy, may be avoided or undone. ln addition, the Trustee may be able
to avoid transfers under applicable state law, which may provide longer time periods. See
Section 547(b) reproduced here for illustration purposes only.
Exceptions
A trustee is permitted to "avoid" and demand the
return to the estate of property that is a preferential transfer transferred under these
circumstances. For the purposes of this section, the trustee has the burden of proving the
avoidability of a transfer. The creditor or other party may have the burden of proving the
nonavoidability of a transfer under certain exceptions to this preference rule. The
exceptions, listed in Section 547 (c) include that the trustee generally cannot avoid a transfer if it is a
substantially contemporaneous exchange for new value, it is a payment of a debt incurred by the debtor in the ordinary
course of business or financial affairs of the debtor and the transferee, and others. See
Section 547(c) reproduced here for illustration
purposes only.
Fraudulent
Transfers And Obligations
The trustee may avoid certain transfers of an interest of the
debtor in property, or any obligation incurred by the debtor, that was made or incurred on
or within one year before the date of the filing of the petition, if the debtor
voluntarily or involuntarily made such transfer or incurred such obligation with actual
intent to hinder, delay, or defraud creditors, or, if the debtor received less than a
reasonably equivalent value in exchange for such transfer or obligation, and was insolvent
on the date that such transfer was made or such obligation was incurred, or became
insolvent as a result of such transfer or obligation. Other rules for fraudulent transfers
and obligations are covered in Section 548, reproduced here for illustration purposes
only.
Determination of these issues is often a complex matter.
Actual cases should be discussed with your actual legal advisor or legal department.
Copyright 1996, 1997, 1998 by LAWDOG.COM
Publishing, Inc.
