For generations, federal bankruptcy law has given trustees and debtors-in-possession (collectively, for simplicity, trustees) in Chapter 7 liquidation and Chapter 11 reorganization cases the power to “avoid,” or invalidate, certain pre-bankruptcy preferential transfers and to add the recovered proceeds to the bankruptcy estate. Since the trustee’s avoidance powers extend to transfers intended as security, not just absolute transfers, even secured claims are vulnerable to avoidance when the necessary preference elements can be established. Secured creditors have been comforted by several decisions over the past two decades that have made it easier to defeat preference attacks. A recent case, O&G Leasing, LLC v. First Security Bank (In re O&G Leasing, LLC),1 nevertheless provides a timely reminder to lenders that the power to avoid preferences remains a potent and oft-used weapon in the trustee’s arsenal.
Preferences Generally
Section 547 of the Bankruptcy Code2 sets forth the basic statutory provisions regarding preferences. Under §547(b), preferences are transfers (1) made to or for the benefit of creditors (2) within the period of 90 days (or one year, for transfers made to the transferor’s insiders) before the petition date (3) on account of “antecedent debt” (i.e., debt incurred pre-transfer) (4) while the transferor was “insolvent” (i.e., its liabilities exceed its assets, it expects to incur debts beyond its ability to repay or it has unreasonably small capital), and (5) that enable such creditors to receive more than they would have received in a Chapter 7 liquidation had the transfers not been made.
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