LAWDOG BANKRUPTCY

Reclamation

Preferences and Fraudulent Transfers

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 results 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. See Section 544 of the Bankruptcy Code reproduced here for illustration purpose only.

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 circumstances as described above. For the purposes of section 547, 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, certain purchase money security interests, and others. See Section 547(c) reproduced here for illustration purposes only.

Fraudulent Transfers and Obligations

In addition to avoiding Preferences, 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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Reclamation

Reclamation refers to the right of a creditor to reclaim property sold to the debtor immediately before the filing of a bankruptcy. Bankruptcy Code section 546(c) provides that a trustee's avoiding power is subject to the statutory or common law right of a seller who sold goods to the debtor in the ordinary course of its business while the debtor is insolvent. However, a creditor who seeks to reclaim any goods must demand in writing reclamation of the goods:

1. within 10 days of receipt of the goods by the debtor; or

2. if the 10-day period expires after the commencement of the bankruptcy case, within 20 days after the debtor received the goods.

If a reclamation is timely made, the Bankruptcy Court generally may deny such claim only if it grants the creditor a priority claim or secures such claim by a lien. A copy of Bankruptcy Code section 546(c) is reproduced here for illustration purposes only. Obviously, in such a circumstance, time, as well as other considerations, are very important. Always discuss actual cases with your actual legal advisor or legal department.

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