provides a supplemental remedy for those sellers who would be preferred reclamation sellers, but for a minor disqualification under section 546(a).'" In re World Imports, 516 B.R. 296, 297 (Bankr. E.D. Pa. 2014) (quoting In re Momenta, Inc.,2012 WL 3765171, *4 (D.N.H. Aug. 29, 2012)); accord In re O.W. Bunker Holding N. Am. Inc., 607 B.R. 32, 40 (Bankr. D. Conn. 2019).The Subsequent New Value Defense to Preferential Transfer AvoidanceSection 547(b) of the Bankruptcy Code provides that a trustee or DIP, "based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses under subsection (c)," may avoid "any transfer" made by an insolvent debtor within 90 days of a bankruptcy petition filing (or up to one year, if the transferee is an insider) to a creditor, if the creditor, by reason of the transfer, receives more than it would have received in a chapter 7 liquidation and the transfer had not been made. 11 U.S.C. § 547(b).Section 547(c) sets forth nine defenses or exceptions to preference avoidance. One of those is the "subsequent new value" defense in section 547(c)(4), which provides as follows:The trustee may not avoid under this section a transfer … 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[.]11 U.S.C. § 547(c)(4) (emphasis added).Under this section 547(c)(4) exception, even if a creditor receives a preferential transfer, any subsequent unsecured credit provided to the debtor by the creditor may be offset against the creditor's preference liability. The "subsequent new value defense," in turn, is reduced to the extent a debtor makes an "otherwise unavoidable transfer" to the creditor on account of the new

A bankruptcy trustee's ability to avoid and recover pre-bankruptcy preferential transfers is essential to preserving or augmenting the estate for the benefit of all stakeholders. In 2019, however, the Bankruptcy Code was amended to add a due diligence requirement to the Bankruptcy Code's preference avoidance provision, apparently as a way to minimize the volume of speculative and coercive preference litigation. Neither the amendment nor its legislative history, however, clearly specifies the pleading rules or the allocation of the evidentiary burdens associated with the due diligence requirement, which has led to confusion among the courts.The U.S. Bankruptcy Court for the District of Delaware recently addressed this issue in In re Pinktoe Tarantula Ltd., 2023 WL 2960894 (Bankr. D. Del. Apr. 14, 2023). In dismissing a preference avoidance complaint without prejudice, the court concluded that the due diligence requirement in section 547(b) of the Bankruptcy Code is an element of a preference claim that must be proved by the preference plaintiff rather than the basis for an affirmative defense that must be proved by the defendant. Avoidance of Preferential TransfersUnder section 547(b) of the Bankruptcy Code, a bankruptcy trustee (or a chapter 11 debtor in possession ("DIP") by operation of section 1107(a)) may, "based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses under [section 547(c)]," avoid any transfer made by an insolvent debtor within 90 days of a bankruptcy petition filing (or up to one year, if the transferee is an insider) to or for the benefit of a creditor if such creditor, by reason of the transfer, receives more than it would have received in chapter 7 liquidation, if the transfer had not been made. 11 U.S.C. § 547(b) (emphasis added).Section 547(c) contains nine defenses or exceptions to avoidance. These include, among other things

Key PointsThe risk that prepetition lease payments made by a lessee that is a debtor in a US bankruptcy will be clawed back from an aircraft lessor can be reduced if:the lease is a true lease rather than a disguised secured loan or finance leaseone or both of basic rent and maintenance reserves are payable in advance (i.e., at the beginning of a rent period rather than at the end)basic rent and maintenance reserves are payable monthly rather than quarterly or semiannuallythe lessor enforces the lease’s payment obligations consistentlyany payment made by a third party on behalf of the lessee is clearly allocated by the payor to a specific amount payable under the lease.OverviewIn certain circumstances, a payment made by a debtor in a US bankruptcy within 90 days before the date the bankruptcy petition was filed can be avoided and recovered from the recipient as a preference payment under 11 U.S.C. §§ 547(b) and 550(a). This feature of the Bankruptcy Code is intended to prevent any creditors of the debtor from being favored unfairly, so that all creditors’ claims are resolved in an orderly manner within the bankruptcy and similarly situated creditors are treated similarly.In a recent USbankruptcy case, King v. Bombardier Aerospace Corporation et al. (Adv. No. 2:19-ap-01147 SK; USBankruptcy Court for the Central District of California, Los Angeles Division) (cited herein as “King”), the bankruptcy trustee overseeing the debtors’ estates vigorously argued that the bankruptcy court should order a lessor to disgorge aircraft lease rent payments that the lessor had received within the 90-day preference period.

Faulkner v. Broadway Festivals, Inc.The recent bankruptcy case for Northern District of Texas, Faulkner v. Broadway Festivals, Inc., Adv. Proc. 20-05031 (Bankr. N.D. – Tex., January 11, 2022), addresses preferential transfer issues.IntroductionThis case focuses on avoidance and recovery of preferential transfers under §§547 and 550 of the Bankruptcy Code. The opinion is a ruling on a motion for summary judgment brought by Plaintiff Dennis Faulkner, the Trustee of the Reagor-Dykes Auto Group Creditors Liquidating Trust (“Trustee”).

ulent TransfersIn bankruptcy cases, a trustee has the "paramount duty … to act on behalf of the bankruptcy estate, that is, for the benefit of the creditors." In re Cybergenics Corp., 226 F.3d 237, 243 (3d Cir. 2000). In furtherance of this duty, the Bankruptcy Code provides trustees with an array of tools that they can wield to fulfill this mandate. Among these tools are the "statutorily created powers, known as avoidance powers, which enable trustees to recover property on behalf of the bankruptcy estate." Id.Each avoidance power has a specific application. Two of the most commonly invoked avoidance powers are the ability to avoid preferential and fraudulent transfers made (or obligations incurred) by debtors prior to filing for bankruptcy.Preferential Transfers.A preference generally "exists when a debtor makes a payment or other transfer to a certain creditor or creditors and not others." Kenan v. Fort Worth Pipe Co. (In re George Rodman, Inc.), 792 F.2d 125, 127 (10th Cir. 1986). Section 547(b) of the Bankruptcy Code establishes the trustee's power to avoid preferential transfers, providing in part:Except as provided in subsections (c) and (i) of this section, the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property ….11 U.S.C. § 547(b) (emphasis added). A preferential transfer may be avoided under section 547(b) only if:1. The transfer was made to or for the benefit of a creditor (§ 547(b)(1));2.The transfer was for or on account of an antecedent debt owed by the debtor (§547(b)(2));3.The transfer was made while the debtor was insolvent (§547(b)(3));4. The transfer was made either: (i) on or within 90 days before the date of filing of the petition; or (ii) between 90 days and one year before the filing of the petition if the creditor at the time of the transfer was an insider (§ 547(b)(4)); and5. The transf

Traditional avoidance actions under the Bankruptcy Code, i.e., preferences and fraudulent transfers, have laudable goals: (a) to provide equal treatment to creditors of an insolvent company and (b) to claw back otherwise unavailable assets for the benefit of creditors. It is no wonder then that the governing provisions of the Bankruptcy Code and applicable state law are drafted so broadly.For example, a “transfer” under section 547 (governing preferences) and section 548 (governing fraudulent transfers) can include, among other things, the creation of a lien or “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.”11 U.S.C. § 101(54) (emphasis added). This provision has been interpreted as covering any type of loss or transfer of a property interest.Another prime example is the first element of a preference, which requires a transfer to be “to or for the benefit of a creditor.” 11 U.S.C. 547(b)(1). Courts have almost universally held that this element does not require that the creditor actually receive the transfer; only that a creditor (including a third-party) benefit from it. Yet, under section 550(a)(1) of the Code the trustee or debtor may recover the transfer or its value from either (a) the transferee or (b) the creditor who benefitted from the transfer.And, of course, in addition to the broad statutory scheme under the Bankruptcy Code, is section 544(b)(1) of the Code, which allows a trustee or debtor to avoid transfers under any applicable state law that allows an unsecured creditor to avoid such transfers outside of bankruptcy. Among other statutes, the Uniform Fraudulent Transfer Act, as adopted by most states (“UFTA“), is often utilized by a debtor or trustee to avoid transfers, because it provides for a longer claw back period (i.e., 4 years as opposed to 2 years under the Code).Notwithstanding the broad avoidance powers under the Bankruptcy Code, defendant transfe

In July 2005, the Fifth Circuit Court of Appeals held in Baker Hughes Oilfield Operations, Inc. v. Cage (In re Ramba, Inc.), 2005 WL 1581076 (5th Cir.), that a creditor’s agreement to dismiss an involuntary bankruptcy petition in exchange for a debtor’s payment of pre-existing debt�because it does not provide a “direct benefit” to the debtor�does not fall within the “contemporaneous exchange” exception to preference actions under 11 U.S.C. § 547(c)(1). The Fifth Circuit Court of Appeals decided this issue as a matter of first impression.

In a decision that surprised many, the United Stated Circuit Court of Appeals for the Tenth Circuit (the “10th Circuit Court of Appeals”) affirmed decisions finding that a payment made on account of a first time transaction between a debtor and creditor can qualify for the ordinary course of business defense under 11 U.S.C. § 547(c)(2).C.W. Mining Company (the “Debtor”) entered into an equipment agreement with a new contractor, SMC Electric Products, Inc. (“SMC”), in an attempt to increase the Debtor’s coal production. This agreement was reached several months before the filing of an involuntary bankruptcy petition.

informing them that the value of the cryptocurrency they withdrew in the 90 days before the bankruptcy petition date must be repaid to the estate.Not only will the depositors not be made whole in the bankruptcy case in this all-too-likely scenario, they must give back what they did manage to pull out before the bankruptcy as a so-called preference.The policy behind the Bankruptcy Code’s preference provision seeks to promote equal treatment of creditors by requiring preferred creditors, who were paid in full, to share their recovery with members of their cohort who weren’t so lucky.“But how can this be?” asks the outraged depositor. After all, the debtor didn’t prefer the depositor. The debtor didn’t pay the depositor. In fact, the debtor had no way of even knowing when or if the depositor would withdraw his coins.The problem is that the preference provision of the Bankruptcy Code sweeps much more broadly than just sweetheart payments made to favored creditors on the eve of bankruptcy. Section 547(b) of the Bankruptcy Code allows a debtor-in-possession or trustee to “avoid any transfer of an interest of the debtor in property”:That was made to or for the benefit of a creditor on account of an antecedent debt;While the debtor was insolvent;On or within 90 days before the filing of the petition; andThat gave the creditor more than it would get in a Chapter 7 liquidation.This sets the bar to presenting a prima facie case for a preference clawback very low. Any prior loan or provision of credit to the debtor fulfills the antecedent debt requirement. The debtor is legally presumed to have been insolvent during the 90 days prior to its bankruptcy filing.And in most cases, a creditor that receives payment in full prior to the petition date has almost certainly received more than it would have gotten had the payment not been made, and the creditor instead had to settle for whatever distribution it might get in Chapter 7.In the case of the cryptocurrency exchanges, to the extent that a deposit of coins on an exc

Less than ninety 90 days later, the Hacklers filed for bankruptcy and immediately filed a preference action to avoid the Transfer.The ArgumentsThe Hacklers argued that the foreclosure sale met all the requirements for a preference under 11 U.S.C. § 547(b) and, therefore, the sale could be avoided. Indeed, the sale was (1) for the benefit of the Buyer/creditor, (2) on account of a pre-existing debt, (3) made while the debtors were insolvent, (4) made within 90 days of the petition, and (5) allowed the Buyer/creditor to receive more than it would be entitled to receive under a chapter 7 liquidation (i.e., $45,000).