Bankruptcy Law LAW 0783 L01

1
Bankruptcy LawLAW 0783 L01

• Adjunct Professor Ivan J. ReichGray Robinson
• Thursdays during the Fall Semester
• 500 p.m. - 750 p.m.
• Room 3

2
Week Seven Thursday, October 8, 2009 5
p.m.-750 p.m.

• Bankruptcy, Warren Bussel, Chapter 7 Avoiding
  Powers of the Trustee (pgs. 323-368) (Section on
  Preferences)

3
Chapter 5

• Avoiding Powers of the Trustee

4
Transfer defined101(54)

• (54) The term transfer means--
• (A) the creation of a lien
• (B) the retention of title as a security
  interest
• (C) the foreclosure of a debtor's equity of
  redemption or
• (D) each mode, direct or indirect, absolute or
  conditional, voluntary or involuntary, of
  disposing of or parting with--
• (i) property or
• (ii) an interest in property.

5
Liability of transferee of avoided transfer under
550(a)

• (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.

6
Automatic preservation of avoided transfer under
551

• Any transfer avoided under section 522, 544, 545,
  547, 548, 549, or 724(a) of this title, or any
  lien void under section 506(d) of this title, is
  preserved for the benefit of the estate but only
  with respect to property of the estate.

7
The Concept of a Preference
8
Preferences 547(b)

• (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
• (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
• (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.

9
The Preference Period 547(b)(4)

• (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

10
Insider under 101(31)

• (A) if the debtor is an individual--
• (i) relative of the debtor or of a general
  partner of the debtor
• (ii) partnership in which the debtor is a
  general partner
• (iii) general partner of the debtor or
• (iv) corporation of which the debtor is a
  director, officer, or person in control
• (B) if the debtor is a corporation--
• (i) director of the debtor
• (ii) officer of the debtor
• (iii) person in control of the debtor
• (iv) partnership in which the debtor is a
  general partner
• (v) general partner of the debtor or
• (vi) relative of a general partner, director,
  officer, or person in control of the debtor
• (C) if the debtor is a partnership--
• (i) general partner in the debtor
• (ii) relative of a general partner in, general
  partner of, or person in control of the debtor
• (iii) partnership in which the debtor is a
  general partner
• (iv) general partner of the debtor or
• (v) person in control of the debtor
• (D) if the debtor is a municipality, elected
  official of the debtor or relative of an elected
  official of the debtor

11
Presumption of Insolvency 547(f)

• 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.

12
Transfer of Debtors Interest in Property and the
Earmarking Doctrine
13
Superior Stamp Coin Co., Inc.

• Earmarking doctrine applied to preclude Chapter
  11 trustee from avoiding as preferential
  transfers portions of prepetition payments
  received by creditor that were funded by loans
  which bank extended to debtor, pursuant to
  agreement, for specific purpose of making
  payments to creditor, even though debtor
  requested loans and funds were placed in debtor's
  bank account rather than being paid directly to
  creditor by bank.
• Under the earmarking doctrine, when a debtor
  transfers a security interest to the new creditor
  in return for the loan to pay an old creditor,
  the payment is voidable to the extent of the
  value of the collateral transferred by the
  debtor.
• A key inquiry in the analysis of whether a third
  party transfer is voidable, notwithstanding
  earmarking doctrine, is the source of control
  over the new funds if the debtor controls the
  disposition of the funds and designates the
  creditor to whom the monies will be paid,
  independent of a third party whose funds are
  being used in payment of the debt, payments made
  by the debtor to the creditor constitute a
  preferential transfer.
• When a transfer is made pursuant to an antecedent
  agreement between a new lender and the debtor
  that the new funds will be used only to pay a
  specified creditor, the lender rather then the
  debtor controls the funds for purposes of
  earmarking doctrine.
• Under earmarking doctrine, it is irrelevant
  whether the debtor or the lender initiates
  discussions concerning a loan or proposes a
  particular creditor as the recipient of the
  funds, so long as the funds are advanced on the
  condition that they be used to pay that specific
  creditor.

14
Defenses to a Preference 547(c)
15
Burden of Proof 547(g)

• For the purposes of this section, the trustee has
  the burden of proving the avoidability of a
  transfer under subsection (b) of this section,
  and the creditor or party in interest against
  whom recovery or avoidance is sought has the
  burden of proving the nonavoidability of a
  transfer under subsection (c) of this section.

16
Contemporaneous Exchanges
17
547(c)(1)

• (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

18
547(c)(3)

• (c) The trustee may not avoid under this section
  a transfer
• (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

19
Transfer upon perfection547(e)(2)

• (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)
• (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.

20
National City Bank of New York v. Hotchkiss

• A bank which credits to the deposit account of
  certain stock brokers the amount of a clearance
  loan to be used to clear securities and to be
  repaid later in the day, and which does not
  require a separate account to be kept of money
  received from deliveries of the stock so
  released, obtains a preference voidable on the
  subsequent bankruptcy of the brokers, where after
  their suspension it receives securities to make
  good the brokers' obligation to the bank.

21
Dean v. Davis

• Preference implies paying or securing a
  pre-existing debt of the person preferred. The
  mortgage was given to secure Dean for a
  substantially contemporary advance. The bank, not
  Dean, was preferred. The use of Dean's money to
  accomplish this purpose could not convert the
  transaction into a preferring of Dean, although
  he knew of the debtor's insolvency. Mere circuity
  of arrangement will not save a transfer which
  effects a preference from being invalid as such.

22
Ordinary Course Payments
23
547(c)(2)

• (c) The trustee may not avoid under this section
  a transfer--
• (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 or
• (B) made according to ordinary business terms

24
Policy Basis

25
Union Bank v. Wolas

• Chapter 7 trustee sought to avoid preferential
  transfers made to long-term creditor.
• The Supreme Court held that payments on long-term
  debt, as well as those on short-term debt, may
  qualify for ordinary course of business exception
  to trustee's power to avoid preferential
  transfers.

26
Union Bank v. Wolas

• Five characteristics of voidable preference are
  that it (1) benefit creditor (2) be on account
  of antecedent debt (3) be made while debtor was
  insolvent (4) be within 90 days before
  bankruptcy and (5) enable creditor to receive
  larger share of estate than if transfer had not
  been made.
• That Congress may have intended only to address
  particular concerns in statutory amendment or may
  not have foreseen all consequences of its
  statutory enactment is insufficient reason for
  refusing to give effect to statute's plain
  meaning.
• Payments on long-term debt, as well as those on
  short-term debt, may qualify for ordinary course
  of business exception to trustee's power to avoid
  preferential transfers.

27
Meaning of Ordinary Course

28
Tolona Pizza Products Corp.

• Chapter 11 debtor in possession brought adversary
  proceeding to recover alleged preferential
  payments to supplier.
• Late payments were made in ordinary course of
  business and could not be avoided as
  preferential.

29
Tolona Pizza Products Corp.

• When debtor makes payment to unsecured creditor
  within 90 days before debtor's bankruptcy filing,
  payment is preference, and trustee can recover
  it.
• Under ordinary-course-of-business exception to
  trustee's preference-avoidance power, trustee may
  not recover otherwise preferential payment to
  creditor if creditor can show that payment was on
  account of debt incurred in ordinary course of
  business of both debtor and creditor, that
  payment was made and received in ordinary course
  of parties' businesses, and that payment was made
  according to ordinary business terms.
• For ordinary-course-of-business exception to
  apply, debtor's obligation to the allegedly
  preferred creditor must have been incurred in
  ordinary course of business of both debtor and
  creditor, and payment on account of debt must
  have been in ordinary course as well.

30
Tolona Pizza Products Corp.

• Even a late payment may be preferential to
  creditor who receives it.
• Late payment normally will not be in ordinary
  course of debtor's and creditor's businesses,
  within meaning of ordinary-course-of-business
  exception to trustee's preference-avoidance
  power.
• Purpose of preference statute is to prevent
  debtor, during his slide toward bankruptcy, from
  trying to stave off the evil day by giving
  preferential treatment to his most importunate
  creditors.

31
Ordinary Business Terms

• To successfully invoke ordinary-course-of-business
  exception to trustee's preference-avoidance
  power, creditor must show that the payment he
  received was made in accordance with ordinary
  business terms in industry, and not just that
  payment conformed to norm established by debtor
  and creditor in period prior to preference
  period.
• To show that payment was made according to
  ordinary business terms in industry, allegedly
  preferred creditor need not establish the
  existence of some single, uniform set of business
  terms, but only that payment was made according
  to terms which fall within broad range of terms
  that encompasses the practices in which firms
  similar in some general way to creditor engage.
• Phrase ordinary business terms, as used in
  ordinary-course-of-business exception to
  trustee's preference-avoidance power, refers to
  the range of terms that encompasses the practice
  in which firms similar, in some general way, to
  creditor in question engage only dealing so
  idiosyncratic as to fall outside that broad range
  should be deemed extraordinary and outside scope
  of exception.
• Debtor's late payments to supplier were made
  according to ordinary business terms, and could
  not be avoided as preferential, in light of
  parties' past practice of making and accepting
  payment significantly beyond date specified on
  invoices and of general practice by supplier and
  its competitors to pay little or no attention to
  terms stated on their invoices.

32
The Subsequent Advance Rule

• Prior law permitted the creditor to offset all
  payments and advances made during the preference
  period in determining the creditors net
  preference liability adopting the so-called net
  result rule
• Section 547(c)(4) limits recovery of prior
  preferential payments to the extent that the
  preferred creditor has made subsequent unsecured
  advances, applying the narrower subsequent
  advance rule.

33
In re IRFM, Inc.

• New value preference avoidance exception is
  available unless debtor repays new value by
  transfer that is otherwise unavoidable.
• Purpose of preference avoidance is to allow
  trustee to secure equality of distribution among
  unsecured creditors by preventing debtor from
  benefitting particular creditor on eve of
  bankruptcy.
• Purpose of new value preference avoidance
  exception is to encourage creditors to continue
  to do business with financially troubled debtors
  with eye toward avoiding bankruptcy altogether.
• New value preference avoidance exception allows
  subsequent advances of new value to be used to
  offset prior preferences, and creditor is
  permitted to carry forward preferences until they
  are exhausted by subsequent advances of new
  value.
• New value preference avoidance defense does not
  allow credit for new value paid for by something
  other than avoidable transfer.
• Creditor may not attempt to obtain double
  credit for transfer by asserting separate
  preference avoidance defense against preference
  if creditor has already used new value preference
  avoidance exception to offset that preference.
• New value preference avoidance exception applied
  to full amount of Chapter 7 debtor-grocery's
  preference period payments to cheese and dairy
  supplier, where none of debtor's payments was
  otherwise unavoidable, and value of goods shipped
  by supplier exceeded amount of prior preferences.
  
• Granting new value offset for each preferential
  transfer received by cheese and dairy supplier
  from Chapter 7 debtor-grocery precluded supplier
  from asserting any other preference defense for
  same transfers.

34
547(c)(4)

• (c) The trustee may not avoid under this section
  a transfer--
• (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

35
547(a)(2)

• new value means money or money's worth in goods,
  services, or new credit, or release by a
  transferee of property previously transferred to
  such transferee in a transaction that is neither
  void nor voidable by the debtor or the trustee
  under any applicable law, including proceeds of
  such property, but does not include an obligation
  substituted for an existing obligation

36
Time of Transfer When Made by Check
37
Barnhill v. Johnson

• For the purpose of 547(b)(4) transfer occurs on
  the date the drawee bank honors the check
• Transfer made by check is deemed to occur on date
  check is honored, rather than date of payee's
  receipt of check, for preference purposes

38
Tennessee Chemical Co.

• For purposes of new value exception to trustee's
  preference avoidance power, under 547(c)(4),
  the date of receipt rule, rather than date of
  honor rule, applies to check payments.

39
Security Interests in Inventory and Accounts
Receivable

• UCC Article 9 allows the secured party to take a
  security interest in all of a debtors personal
  property now owned or thereafter acquired to
  secure both present and future advances.
• If the floating lien were upheld in bankruptcy,
  there would be nothing left in a debtors estate
  to distribute among unsecured trade creditors who
  had provided goods and services to the failed
  debtor.
• Security interests in inventory acquired and
  accounts that arose during the preference period
  were potentially voidable as preferences because
  the time of transfer for security interests in
  bankruptcy is the time of perfection of the
  security interest, not its attachment. 547(e).
• Under Article 9 a security interest attachs, with
  respect to any item of inventory, when all of the
  following conditions were met (1) there was an
  authenticated security agreement (2) Bank gave
  value to Debtor and (3) Debtor had rights in the
  item of inventory. 9-203(b).
• With respect to after-acquired inventory it was
  satisfied when the inventory was acquired.
  Section 9-308(a) states that a security interest
  is perfected when it has attached and when all of
  the applicable steps required for perfection have
  been taken.

40
Bankruptcy Act 60a(2)

• Under Bankruptcy Act the apparent result was that
  the transfer of Debtors property represented by
  the security interest was made when the security
  interest attached and was perfected during the
  preference period. Thus, if Debtor was insolvent
  at the time of the transfer, the security
  interest was voidable as a preferential transfer.

41
Net improvement test under 547(c)(5)

• It was drafted against a background that assumed
  the following
• accounts receivable and inventory normally turn
  over within a short period of time
• it is likely that at the date of bankruptcy some
  receivables or inventory on hand had been
  acquired by the debtor within the 90-day period
• since a security interest in this new collateral
  was, by virtue of 547(e)(3), a transfer to the
  secured party when it was acquired by the debtor,
  there might have been a voidable preference under
  547(b) if the debtor was insolvent at the time.

42
547(c)(5)

• (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
  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

43
Application of 547(c)(5)

• Secured Party is secured by all accounts
  receivable of Debtor, now owned or thereafter
  acquired.
• At the beginning of the 90-day period the debt
  was 100k and at the date of bankruptcy the debt
  was 90k.
• At the beginning of the 90-day period there were
  60k in receivables.
• During the 90-day period Debtor increased its
  receivables so that on the date of bankruptcy
  they amounted to 70k.
• The test is stated in terms of the amount of the
  reduction of the amount by which the debt
  exceeded the value of the security interest from
  the beginning of the 90-day period to the date of
  bankruptcy.
• SP has valid secured claim for 50k, and 20k of
  the security interest is disallowed
• Beginning of period deficiency was 40k (100k
  debt less 60k collateral)
• Time of bankruptcy deficiency was reduced to 20k
  (90k debt minus 70k collateral)
• Has valid security interest in receivables except
  to extent the deficiency was reduced (20k)

44
Application of 547(c)(5)

• Secured Partys 100k debt was secured by 120k
  in account receivables at the beginning of the
  90-day period and 70k in receivables on the date
  of bankruptcy all obtained by Debtor within the
  90-day period.
• Net improvement test is inapplicable
• SP was oversecured initially and became
  undersecured.
• Deficiency grew by 30k. SP is worse off.
• Hence SP is fully secured in the 70k.

45
Other Protected InterestsDomestic support
obligations

• (c) The trustee may not avoid under this section
  a transfer--
• (7) to the extent such transfer was a bona fide
  payment of a debt for a domestic support
  obligation

46
Other Protected InterestsSmall preferences

• (c) The trustee may not avoid under this section
  a transfer--
• (8) if, in a case filed by an individual debtor
  whose debts are primarily consumer debts, the
  aggregate value of all property that constitutes
  or is affected by such transfer is less than
  600 or
• (9) if, in a case filed by a debtor whose debts
  are not primarily consumer debts, the aggregate
  value of all property that constitutes or is
  affected by such transfer is less than 5,475

47
Hailes

• Chapter 13 debtor brought adversary proceeding to
  recover garnished wages, as alleged preferential
  transfers. Garnishing creditor defended on theory
  that each individual payment pursuant to wage
  garnishment order was less than 600 and that
  payments therefore fell within de minimis
  exception to trustee's preference-avoiding power.
  
• The Court of Appeals held that individual
  prepetition transfers of less than 600 to single
  garnishing creditor could be aggregated, so as to
  remove such transfers from de minimis exception
  to trustee's preference-avoiding power.

48
Djerf

• Small preference exception to trustee's
  preference-avoidance power, 547(c)(8),
  precludes trustee from avoiding transfers by
  individual debtor whose debts are primarily
  consumer debts if aggregate value of all property
  affected by such transfer is less than 600
  dollars
• It does not insulate from avoidance Chapter 7
  debtor's transfers to same creditor during
  preference period, though each individual
  transfer did not exceed 600 minimum transfers
  that were made, during preference period, to same
  single creditor could be added together for
  purposes of reaching 600 minimum.
• It is designed to permit prepetition transfer to
  consumer creditor that is nominal or relatively
  small in dollar amount to withstand attack by
  trustee notwithstanding its preferential effect.
• It operates as adjunct to ordinary course of
  business exception by reducing litigation over
  relatively nominal payments made to creditors in
  ordinary course of financial affairs of consumer
  debtors which do not seriously impinge upon goals
  of equality of treatment and avoidance of undue
  pressure for payment or the grab-bag effect.

49
Letters of Credit
50
Compton Corp.

• (1) letter of credit issuer gave new value for
  increased security interest transfer, and
  transfer related back to date letter of credit
  issuer filed final financing statement relating
  to security agreement with debtor including
  future advances clause, under state law, so
  increased security interest transfer did not fall
  within preference window, for purposes of attempt
  to avoid preferential transfer
• (2) supplier which was beneficiary of letter of
  credit issued to pay off antecedent unsecured
  debt received indirect preference that could be
  recovered by trustee and
• (3) supplier had no valid claim against letter of
  credit issuer for reimbursement for any amounts
  supplier had to pay trustee under preference
  claim.
• There was a preferential transfer to Creditor
  even though Debtor transferred no property to
  Creditor. There is no requirement that the
  transfer of Debtors property be to Creditor. A
  transfer of Debtors property to or for the
  benefit of Creditor is sufficient under
  547(b)(1). Since the transfer was made on account
  of the past-due debt to Creditor, 547(b)(2) is
  satisfied as well. Thus there was a voidable
  preference to Creditor. However, there was no
  preference to the Bank because the transfer of
  the security interest to the Bank was a
  contemporaneous exchange for new value by Bank,
  the Banks undertaking on the letter of credit.

51
Powerline Oil Corp.

• Unsecured creditors committee sought to recover
  allegedly preferential payment made by Chapter 11
  debtor oil company to seller for prior purchase
  of crude oil.
• (1) prepetition payment made to seller, as
  unsecured creditor, would enable seller to
  recover more than it would have in Chapter 7
  liquidation, and thus it was preference
• (2) seller's ability to recover fully by drawing
  down letters of credit in case debtor defaulted
  had no bearing on whether payment was
  preferential and
• (3) contemporaneous exchange for new value
  exception would protect otherwise preferential
  payment, but only to extent lender's
  reimbursement claim against debtor's assets was
  secured.

52
Powerline Oil Corp.

• For preference purposes, Chapter 11 debtor-oil
  company incurred its debts to seller on date that
  seller delivered crude oil, not first date that
  exact amount of debt could be determined.
• Prepetition payments to fully secured creditor
  generally will not be considered preferential
  because creditor would not receive more than in
  Chapter 7 liquidation.
• As long as distribution in bankruptcy is less
  than full, any payment on account to unsecured
  creditor during preference period will enable
  that creditor to receive more than he would have
  received in liquidation had payment not been
  made.

53
Powerline Oil Corp.

• Chapter 11 debtor-oil company's prepetition
  payment to seller, from which debtor had
  purchased crude oil, was preference, even though
  seller could have recovered fully under letters
  of credit if debtor had not paid seller seller
  was unsecured creditor since it held no security
  interest in debtor's property, and, because most
  of debtor's assets on petition date were subject
  to lien held by secured creditors, debtor's
  unsecured creditors would not recover in full in
  hypothetical chapter 7 liquidation, and thus
  debtor's prepetition payment enabled seller to
  recover more than it would have in Chapter 7
  liquidation.
• Ability of seller, from whom Chapter 11
  debtor-oil company purchased crude oil, to
  recover fully on amount owed by debtor by drawing
  down letters of credit in case debtor defaulted
  and did not pay seller directly, had no bearing
  on whether payment made by debtor to seller
  within 90 days prepetition was preferential to
  secure its obligation to seller, debtor had
  designated seller as beneficiary of two
  irrevocable standby letters of credit issued by
  secured lender.
• In determining whether payment is preference,
  relevant inquiry focuses not on whether creditor
  may have recovered all monies owed by debtor from
  any source whatsoever, but instead upon whether
  creditor would have received less than 100
  payout from debtor's estate.

54
Powerline Oil Corp.

• When result reached was inconsistent with
  preference statute, Bankruptcy Appellate Panel
  (BAP) could not invoke rule of reason to avoid
  what it viewed as inequitable result, so as to
  enable BAP to consider unsecured creditor's right
  to draw on third-party letters of credit in
  deciding whether creditor had received preference
  in Chapter 11 debtor's prepetition payment to
  creditor on sales account although creditor may
  have been in worse position because debtor paid
  its debt rather than defaulting, debtor's payment
  was nonetheless preferential.
• Equity may not be invoked to defeat clear
  statutory language, nor to reach results
  inconsistent with statutory scheme established by
  Bankruptcy Code.
• Due to fact that creditor was beneficiary of
  letters of credit securing payment if debtor
  defaulted, contemporaneous exchange for new
  value exception would protect otherwise
  preferential payment made by debtor to creditor,
  but only to extent lender's reimbursement claim
  against debtor's assets was secured when debtor
  paid creditor directly, lender's exposure under
  letters of creditor was reduced by corresponding
  amount, its contingent claim against debtor's
  assets was thereby released to extent claim was
  secured, and debtor received new value equal to
  amount of secured portion of lender's claim.

55
False Preferences Delayed Perfection of Liens

• When a loan is made and the creation of the
  security interest are contemporaneous, but there
  is a delay between the creation, i.e. attachment,
  of the security interest and the perfection of
  the security interest.
• There is no true preference in these cases
  because the transfer of the security interest to
  the creditor is not on account of an antecedent
  debt.
• Rather, the problem of delayed perfection is the
  evil of the secret lien.
• The classic case is that of a debtor in financial
  difficulty who wants to conceal from general
  creditors the true state of its financial
  condition.
• The debtor obtains an emergency loan from a
  creditor and grants to that creditor a mortgage
  on real property or a security interest in
  personal property to secure the loan.
• The property involved might well be most of the
  debtors previously unencumbered assets.
• If public notice of the transaction were given by
  recording of the mortgage or filing a financing
  statement with respect to the security interest,
  the result might be that other creditors will be
  deterred from giving the debtor further unsecured
  credit because of the absence of unencumbered
  assets.
• To avoid this result the creditor might be
  induced not to record the mortgage or file the
  financing statement.

56
False Preferences Delayed Perfection of Liens

• Usually an unrecorded real property mortgage has
  priority over a creditor who subsequently levies
  on the property.
• The holder of an unperfected security interest in
  personal property takes a greater risk by not
  promptly perfecting because an unperfected
  Article 9 security interest does not have
  priority over a subsequent judicial lien.
• But in either case the creditor can protect the
  lien by promptly perfecting at the first sign
  that other creditors may either levy on assets of
  the debtor or file a petition for involuntary
  bankruptcy against the debtor.

57
False Preferences Delayed Perfection of Liens

• The Supreme Court resolved the issue in Fidelity
  Financial Services, Inc. v. Fink, 522 U.S. 211
  (1998), by holding that the time period provided
  in 547(e)(2) trumped any more expansive
  relation-back period under state law.
• In BAPCPA, the periods in 547(e)(2)(A), (B) and
  (C) for refinancing transactions and in
  547(c)(3)(b) for purchase money transactions are
  extended to 30 days.
• These amendments should ameliorate the
  difficulties posed for secured creditors by the
  Fink analysis.

58
547(e)

• (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
• (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.
• (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)
• (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.
• (3) For the purposes of this section, a transfer
  is not made until the debtor has acquired rights
  in the property transferred.

59
Setoff
60
506. Determination of secured status

• (a)(1) An allowed claim of a creditor secured by
  a lien on property in which the estate has an
  interest, or that is subject to setoff under
  section 553 of this title, is a secured claim to
  the extent of the value of such creditor's
  interest in the estate's interest in such
  property, or to the extent of the amount subject
  to setoff, as the case may be, and is an
  unsecured claim to the extent that the value of
  such creditor's interest or the amount so subject
  to setoff is less than the amount of such allowed
  claim. Such value shall be determined in light of
  the purpose of the valuation and of the proposed
  disposition or use of such property, and in
  conjunction with any hearing on such disposition
  or use or on a plan affecting such creditor's
  interest.

61
Limits on acquiring setoff rights during the
preference period
62
553(a)

• (a) Except as otherwise provided in this section
  and in sections 362 and 363 of this title, this
  title does not affect any right of a creditor to
  offset a mutual debt owing by such creditor to
  the debtor that arose before the commencement of
  the case under this title against a claim of such
  creditor against the debtor that arose before the
  commencement of the case, except to the extent
  that--
• (1) the claim of such creditor against the
  debtor is disallowed
• (2) such claim was transferred, by an entity
  other than the debtor, to such creditor--
• (A) after the commencement of the case or
• (B)(i) after 90 days before the date of the
  filing of the petition and
• (ii) while the debtor was insolvent (except for
  a setoff of a kind described in section
  362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27),
  555, 556, 559, 560, or 561) or
• (3) the debt owed to the debtor by such creditor
  was incurred by such creditor--
• (A) after 90 days before the date of the filing
  of the petition
• (B) while the debtor was insolvent and
• (C) for the purpose of obtaining a right of
  setoff against the debtor (except for a setoff of
  a kind described in section 362(b)(6), 362(b)(7),
  362(b)(17), 362(b)(27), 555, 556, 559, 560, or
  561).

63
542(b)

• (b) Except as provided in subsection (c) or (d)
  of this section, an entity that owes a debt that
  is property of the estate and that is matured,
  payable on demand, or payable on order, shall pay
  such debt to, or on the order of, the trustee,
  except to the extent that such debt may be offset
  under section 553 of this title against a claim
  against the debtor.

64
Cash collateral under 363(a)

• (a) In this section, cash collateral means
  cash, negotiable instruments, documents of title,
  securities, deposit accounts, or other cash
  equivalents whenever acquired in which the estate
  and an entity other than the estate have an
  interest and includes the proceeds, products,
  offspring, rents, or profits of property and the
  fees, charges, accounts or other payments for the
  use or occupancy of rooms and other public
  facilities in hotels, motels, or other lodging
  properties subject to a security interest as
  provided in section 552(b) of this title, whether
  existing before or after the commencement of a
  case under this title.
• (e) Notwithstanding any other provision of this
  section, at any time, on request of an entity
  that has an interest in property used, sold, or
  leased, or proposed to be used, sold, or leased,
  by the trustee, the court, with or without a
  hearing, shall prohibit or condition such use,
  sale, or lease as is necessary to provide
  adequate protection of such interest. This
  subsection also applies to property that is
  subject to any unexpired lease of personal
  property (to the exclusion of such property being
  subject to an order to grant relief from the stay
  under section 362).

65
Citizens Bank of Maryland v. Strumpf

• Chapter 13 debtor sought to hold bank in contempt
  for violation of automatic stay.
• The Supreme Court held that (1) bank's temporary
  refusal to pay its debt to debtor upon latter's
  demand was not exercise of setoff right in
  violation of stay, and (2) administrative hold
  did not violate other stay provisions.

66
Citizens Bank of Maryland v. Strumpf

• Action of creditor-bank in placing administrative
  freeze on Chapter 13 debtor's checking account
  pending resolution of bank's right of setoff did
  not violate automatic stay bank's refusal to pay
  its debt to debtor upon latter's demand did not
  constitute exercise of setoff right so as to
  violate stay, because bank did not refuse to pay
  its debt permanently and absolutely, but only
  while it sought relief from stay.
• Right of setoff, also called offset, allows
  entities that owe each other money to apply their
  mutual debts against each other, thereby avoiding
  absurdity of making A pay B when B owes A.
• Although no federal right of setoff is created by
  Bankruptcy Code, 553(a) does provide that, with
  certain exceptions, whatever right of setoff
  otherwise exists is preserved in bankruptcy.
• Requirement of intent permanently to settle
  accounts is implicit in rule that setoff has not
  occurred until decision has been made to
  effectuate setoff, there has been some action
  accomplishing setoff, and there has been
  recording of setoff.
• Intent permanently to settle accounts is required
  for setoff within meaning of automatic stay
  provisions.

67
Citizens Bank of Maryland v. Strumpf

• It is elementary rule of construction that the
  act cannot be held to destroy itself.
• Action of creditor-bank in placing administrative
  freeze on Chapter 13 debtor's checking account
  pending resolution of bank's right of setoff did
  not violate automatic stay applicable to any
  action to obtain or exercise control over estate
  property, or applicable to any act to collect,
  assess, or recover prepetition claim against
  debtor bank account was merely promise to pay
  from bank to depositor, and thus bank's temporary
  refusal to pay was neither taking of possession
  of debtor's property nor exercising of control
  over it, but merely refusal to perform its
  promise.
• Bank account does not consist of money belonging
  to depositor and held by bank, but instead it
  consists of nothing more or less than promise to
  pay, from bank to depositor.
• Bankruptcy Code provisions making automatic stay
  applicable to any action to obtain or exercise
  control over estate property, and to any act to
  collect, assess, or recover prepetition claim
  against debtor, cannot be interpreted to
  proscribe what Code otherwise permits, namely the
  temporary refusal of creditor to pay debt that is
  subject to setoff against debt owed by debtor.

68
The Improvement in Position Test
69
553(b)

• (b)(1) Except with respect to a setoff of a kind
  described in section 362(b)(6), 362(b)(7),
  362(b)(17), 362(b)(27), 555, 556, 559, 560, 561,
  365(h), 546(h), or 365(i)(2) of this title, if a
  creditor offsets a mutual debt owing to the
  debtor against a claim against the debtor on or
  within 90 days before the date of the filing of
  the petition, then the trustee may recover from
  such creditor the amount so offset to the extent
  that any insufficiency on the date of such setoff
  is less than the insufficiency on the later of--
• (A) 90 days before the date of the filing of the
  petition and
• (B) the first date during the 90 days
  immediately preceding the date of the filing of
  the petition on which there is an insufficiency.
• (2) In this subsection, insufficiency means
  amount, if any, by which a claim against the
  debtor exceeds a mutual debt owing to the debtor
  by the holder of such claim.

70
553(c)

• (c) 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.

71
And the answer to last weeks question..

• Sec. 547(h) The trustee may not avoid a transfer
  if such transfer was made as a part of an
  alternative repayment schedule between the debtor
  and any creditor of the debtor created by an
  approved nonprofit budget and credit counseling
  agency.