Preferences Flashcards
what is the penalty for a preference?
Just have to return the money you received in exchange for a bankruptcy claim
What is the stiffer version of a preference?
Equitable subordination (either of shareholder debt or of creditor)
What are the different forms of preference payment?
Cash, security interests, additional collateral on an undersecured loan, execution on property by the sheriff, cancellation of a separate debt owed to the company
Why would a DIP ever bring a preference claim?
Fear of replacement with a trustee
Creditors may threaten to bring the claim derivatively (In re Cybernetics)
What are the 6 elements of a preference?
1) Transfer
2) to or for the benefit of a creditor
3) on account of an antecedent debt
4) while the debtor is insolvent
5) within 90 days/1 year
6) Enables the creditor to recover more than they otherwise would
What are the 4 preference defenses?
contemporaneous exchange, ordinary COB, PMSI grace period for perfection, floating liens on inventory/AR
Who can a preference be recovered from?
Can be recovered from the initial transferee or the person for whose benefit the transfer was made
Cannot recover from an (post-initial) immediate or mediate transferee in good faith for value and without knowledge of the voidability of the transfer or any subsequent transferee
What are the two prongs of the Deprizio Solution?
550 prevents recovery from a non-insider transferee for transfers between 90days-1year if the transfer was made to benefit an insider (can still recover from an insider though)
547(i) prevents the transfer to a non-insider for the benefit of an insider from being avoided with respect to the non-insider (the insider is still on the hook though) this 547(i) section only backfilled the 550 change which is relevant to avoiding security interests
What is a good strategy for debtors looking to buy time?
Enter into a workout with a creditor (pay them off) and then file bankruptcy within 90 days so you can get the whole thing recalled as a preference
What are some strategies for creditors with regard to preferences?
Become over secured so even if you get paid off early, it’s not a preference
May the payment look like it’s in ordinary COB
Save yourself the expense o litigating if it’s likely within 90 days of bankruptcy
Look for patterns of payments indicating petition date (either join or force an involuntary)
If received a preference payment, don’t be super aggressive until the 90 days has passed
Outside of 90 days, find some way to get the debtor to be in your debt so you can then setoff (could even buy it from someone else)
What is the Deprizio Problem?
Payments made on loans that had insider guarantees were being subjected to the longer preference periods because technically the guarantor is an insider creditor who is benefitting from the transfer - hence 1 year.
Waiving subrogation rights doesn’t work because then if the firm pays the debt it’s a fraudulent transfer
Do the statutory changes actually solve the Deprizio problem?
No - just flips who wins. Now the bankruptcy estate and the other creditors are the losers
How should other creditors protect themselves from (now protected) Deprizio style payments draining value from the firm? (x5)
Get their own insider guarantees; treat payments to creditors with insider guarantees like dividends for purposes of the dividend covenant; treat debt with an insider guarantee like senior debt for purposes of the debt incurrence covenant; recover from the insider directly; recover within 90 days of bankruptcy so Deprizio changes in 548 and 550 don’t apply
How can a firm settle the derivative suits against its d/os?
554 allows for abandonment of property that burdens the estate, and the derivative claims are technically property of the company and they hinder the management from being willing to propose a plan; Per Texaco - look to the net benefit from the entire negotiation
When must a bond trustee resign?
If the bond is in default and the trustee is also a creditor of that obligor; until then the conflict is fine
