LAWDOG BANKRUPTCY: CHAPTER 7

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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, 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, 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 matters may involve complex issues. Actual cases should be discussed with your actual legal advisor or legal department.

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