Transcript The National Mortgage Settlement: What Every Consumer

Presented by:
Presented by Elaine Dowling, Esq. (Oklahoma, OK) and the Hon. Margaret Mahoney, U.S.
Bankruptcy Court (Mobile, AL), this program will discuss what preferences are, when they can be
avoided, and how to defend preference actions.
Friday, February 22, 2013
Copyright (c) 2012 NACBA
Watch Out for Preferences
PREFERENCES
WHAT IS A PREFERENCE?
• A transfer of an interest in the debtor’s property
WHAT IS A PREFERENCE?
• A transfer of an interest in the debtor’s property
• To or for the benefit of a creditor
WHAT IS A PREFERENCE?
• A transfer of an interest in the debtor’s property
• To or for the benefit of a creditor
• For or on account of an antecedent debt
WHAT IS A PREFERENCE?
• A transfer of an interest in the debtor’s property
• To or for the benefit of a creditor
• For or on account of an antecedent debt
• Made while the debtor was insolvent
WHAT IS A PREFERENCE?
• A transfer of an interest in the debtor’s property
• To or for the benefit of a creditor
• For or on account of an antecedent debt
• Made while the debtor was insolvent
• Within 90 days before the bankruptcy filing (or
one year if the creditor is an insider)
WHAT IS A PREFERENCE?
• A transfer of an interest in the debtor’s property
• To or for the benefit of a creditor
• For or on account of an antecedent debt
• Made while the debtor was insolvent
• Within 90 days before the bankruptcy filing (or
one year if the creditor is an insider)
• That enables the creditor to receive more than
the creditor would in a chapter 7 case
A TRANSFER – WHAT IS IT?
INSOLVENCY
• At the time of the transfer
• Not based on hindsight
INSOLVENCY
• Presumption of insolvency if transfer is within 90
days prebankruptcy
WHO HAS THE BURDEN OF PROOF?
• The trustee has to prove all 6 elements
WHO IS AN INSIDER?
• Section 101(13)
• Includes relatives, partners, partnerships,
corporations, affiliates, managing agents, etc.
• Anyone who has a close enough relationship
with the debtor so as to not deal with the debtor
at arm’s length
• Must be insider on date of transfer
New Case
Manera v. Butcher (In re Alekson)
• Bankruptcy Court, District of Arizona
• Judge Charles Case
• Adv. Case No. 2:11-ap-01538-CGC
STATUTE OF LIMITATIONS
• 2 years after filing of case or 1 year after
appointment of trustee if appointment occurs
before the expiration of 2 years
DEFENSES TO A PREFERENCE CLAIM
DEFENSES
•
•
•
•
•
•
•
•
•
Contemporaneous exchange for new value – 547(c)(1)
Ordinary course of business – 547(c)(2)
Purchase money security interest – 547(c)(3)
Subsequent new value – 547(c)(4)
Inventory or receivables financing – 547(c)(5)
Unavoidable statutory lien – 547(c)(6)
Domestic support obligation – 547(c)(7)
Consumer debt of less than $600 – 547(c)(8)
Nonconsumer debt of less than $5850 – 547(c)(9)
CONTEMPORANEOUS EXCHANGE
• The statute states no time period
• 1st, 6th, and 7th Circuits have a bright line test – 10 days
ORDINARY COURSE OF BUSINESS
• One of two tests must be met
• Subjective test
• Made in the ordinary course of business or financial affairs of the
debtor and transferee
• Objective test
• Made according to ordinary business terms
PURCHASE MONEY SECURITY INTERESTS
• PMSI must be perfected within 30 days after debtor receives
possession of the property
SUBSEQUENT NEW VALUE
• Value given AFTER the preferential transfer
• Must be unsecured
• Usually involves revolving credit
DOMESTIC SUPPORT OBLIGATION
• Must be part of a separation agreement or divorce decree
• Not just a payment that is given to an ex-spouse
CONSUMER AND NONCONSUMER DEBTS
• Consumer debt – less than $600
• Nonconsumer debt – less than $5850
• Aggregation may be an issue
NONSTATUTORY DEFENSES
• Not property of the debtor
• Escrowed funds
• Constructive trust
• Bare legal title
NONSTATUTORY DEFENSES
• Earmarking
• Personal jurisdiction
• Jury demand
• Limited jurisdiction of the Bankruptcy Court
OTHER CONSIDERATIONS
• Guaranties
• Payment of bank debt
• Transfers to children’s trust
• Lis pendens
• Recordation issues
• Restitution – a preference?
• Checks
OTHER CONSIDERATIONS
• Offsets
• Control of funds
• Estimated Tax Payments
• Trustee’s Fees
• Retirement Contributions
• Insufficient funds checks
ETHICS
• Can you represent both the transferee and the
debtor?
• What can you advise a debtor to do before
filing?
STANDING
• Trustee can bring a preference action
• Creditors may seek permission to bring an action
• Debtor can bring action in certain circumstances
LIABILITY OF TRANSFEREES
• Section 550
• A transfer to a non-insider made more than 90
days prepetition may only be recovered from the
insider – the ANTI-DEPRIZIO RULE
• Good faith transferees are protected
PLEADING PREFERENCES
• Twombly and Iqbal
• The trustee must plead his/her case with more
than conclusory statements
• If the pleadings are inadequate, file a motion to
dismiss for failure to state a claim under
Fed.R.Bank.P. 7012(b)(6)
DISCUSSION TOPICS
• The Refrigerator Case
THE REFRIGERATOR CASE
• Debtor decides to buy refrigerator from Best Buy
6 months before filing
• Refrigerator is repayment of a loan from
Debtor’s father-in-law Debtor borrows $1200
from his/her 401(k)
• Debtor deposits money in his/her checking
account
• Debtor buys refrigerator and pays in full
EXAMPLES
THE FRIENDLY LOAN CASE
• Debtor borrows $10,000 from an old friend
• Papered with a note and payment schedule
• 10% interest
• Secured by Debtor’s paid for car worth $5000
• Lien is not perfected
• Debtor begins paying friend at $500/month
• About 1 year later, Debtor comes to see you
about a bankruptcy filing
THE NEW CAR CASE
THE NEW CAR CASE
• Debtor buys car on 12/01/2011
• Car is financed through local bank
• Local bank does not record its lien until
1/29/2012
• Debtor needs the car
• Debtor cannot wait to file
THE FAMILY LOAN CASE
THE FAMILY LOAN CASE
• Debtor owns 100% of a small corporation
• Debtor guaranteed all of its debt of more than
$1,000,000
• Corporate assets total about $60,000
• Debtor has $300,000 in personal debt
• Corporation closes when debtor files bankruptcy
THE FAMILY LOAN (CONT.)
• While in operation, debtor’s business paid
debtor’s father, who was the company lawyer,
$1000/month for 4 months more than 3 months
before the bankruptcy case (but less than 1 year
before)
• Payments were for legal fees – defense of
corporation and son