Preference/Fraudulent Transfer


The Bankruptcy Code permits a trustee or a Chapter 11 debtor to recover payments made to creditors within 90 days prior to the commencement of the bankruptcy case. In the case of payments to creditors who were also insiders of the debtor, the look-back period is one year, rather than 90 days. These payments to creditors, which are recoverable because of their proximity to a bankruptcy filing, are called "preferences". Preferences are payments of legitimate debts shortly prior to the commencement of a bankruptcy case. These payments are not illegal or improper; but, bankruptcy law permits recovery from the creditor who was paid, in order to redistribute the money to all creditors.

Creditors of a business that filed for bankruptcy protection are often surprised to receive a letter or lawsuit from a bankruptcy trustee or creditors committee demanding the return of an alleged preference payment made many years before. Even if the payment was received by the creditor within 90 days prior to the bankruptcy filing, there are several defenses that the creditor may be able to raise if, for example, the payment was made in the ordinary course of business, the creditor provided new value to the debtor after receipt of the payment, or the creditor was acting merely as a conduit for another party that actually received the benefit of the payment.

Since he began practicing, James Olson has been defending creditors who had the good fortune to be paid by a company that would shortly go into bankruptcy, but the ill fortune to have been paid within 90 days before that event. As would be expected, these representations have involved a wide variety of businesses and industries, including automobile dealerships, apparel manufacturing, fiber extraction from agricultural waste, food additives, medical services, commercial construction, and many others.

Fraudulent Transfers

Despite its title, most "fraudulent transfers" do not involve any actual fraud. Although a fraudulent transfer may involve actual intent to hinder or delay creditors from collecting money owed to them, in most cases, the fraudulent transfer is merely the payment of money or transfer of property by an insolvent entity to another for less than reasonably equivalent value. A simple example would be a gift from one person to another. No fraudulent intent is involved; but, the giver receives nothing in exchange. If the gift giver is insolvent at the time, the gift could be a fraudulent transfer.

In the business context, this issue most frequently arises where the now bankrupt business made a payment or transferred property for which it received something in return. However, the trustee or creditors do not believe that what was received in return provided reasonably equivalent value. Individuals who received payments from a Ponzi scheme are often sued by the receiver or trustee to recover those payments.

Defendants who are sued for the recovery of alleged fraudulent transfer may have defenses where they provided non-monetary value to the insolvent debtor or where they provided value to a third party, which in turn provided value to the debtor.

Mr. Olson has been involved in the defense of fraudulent transfer claims in Ponzi scheme cases, including the Madoff case, and in more traditional business cases.

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