To prevail on a preference claim, the plaintiff must establish that the transfers in question were:
(1) made to or for the benefit of a creditor;
(2) on account of an antecedent debt;
(3) made while the debtor was insolvent;
(4) made within 90 days before the bankruptcy filing; and
(5) made in a manner that allowed the creditor to receive more than it would have under a Chapter 7 liquidation had the transfer not occurred. See 11 U.S.C. § 547(b)(1)–(5).
Importantly, the debtor is presumed to have been insolvent during the 90-day period immediately preceding the petition date.
There are seven (7) affirmative defenses available to defendants in preference actions. Of those, three (3) are most frequently and successfully invoked to limit or eliminate preference liability. These commonly asserted defenses are:
Contemporaneous Exchange Defense:
A transfer is not avoidable to the extent it was:
(A) intended by both the debtor and the creditor (or the beneficiary of the transfer) to be a contemporaneous exchange for new value provided to the debtor; and
(B) in fact a substantially contemporaneous exchange.
Ordinary Course of Business Defense:
A transfer is not avoidable to the extent it was made in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of both the debtor and the transferee, and the transfer was either:
(A) made in the ordinary course of business or financial affairs of the debtor and the creditor; or
(B) made according to ordinary business terms.
New Value Defense:
A transfer is not avoidable to the extent that, after the transfer, the creditor gave new value to or for the benefit of the debtor that was:
(A) not secured by an otherwise unavoidable security interest; and
(B) not repaid by the debtor through another avoidable transfer.
Finally, the statute of limitations to bring a fraudulent transfer claim under bankruptcy law is the later of:
(1) two years from the order for relief; or
(2) one year from the date a trustee is appointed—provided the appointment occurs before the expiration of the original two-year period.
Every state in the United States has its own fraudulent transfer (or conveyance) laws. In addition, the Bankruptcy Code contains its own provisions governing fraudulent transfers.
Under bankruptcy law, there are two primary types of fraudulent transfer claims: actual fraud and constructive fraud.
To prevail on a claim of actual fraud, the plaintiff must prove that the transfer at issue was:
(1) made within one year prior to the bankruptcy filing; and
(2) made or incurred with actual intent to hinder, delay, or defraud a creditor of the debtor.
To succeed on a claim of constructive fraud, the plaintiff must demonstrate that the transfer was:
(1) made within one year before the bankruptcy filing;
(2) for less than reasonably equivalent value; and
(3) made when the debtor was insolvent or as a result of which the debtor became insolvent.
Unlike preference actions, insolvency is not presumed in a fraudulent transfer claim under bankruptcy law.
An affirmative defense is available to defendants who are “good faith transferees.” This defense provides that a transfer may not be avoided to the extent of the value given, so long as the transferee received the transfer both in good faith and for value. Demonstrating good faith generally requires:
Under most state fraudulent transfer laws, the applicable look-back period often exceeds the one-year period provided under the Bankruptcy Code.
The statute of limitations for bringing a fraudulent transfer claim under bankruptcy law is the later of:
(1) two years after the entry of the order for relief; or
(2) one year from the appointment of a bankruptcy trustee, if the appointment occurs before the expiration of the initial two-year period.
The attorneys at Kasen Law Group, P.C. have experience successfully defending confirmation contests.
The attorneys at Kasen Law Group, P.C. have experience successfully defending non-dischargeability actions.