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Law Offices of Nicholas Gebelt

What Is The Date Of A Preferential Transfer? Is This The Date That The Debtor’s Check Is Delivered To The Creditor, Or The Date That The Check Was Honored By The Debtor’s Bank?


What Is The Date Of A Preference?

Whether the date of a preferential transfer is the date that the debtor’s check is delivered to the creditor or the date that the check was honored by the debtor’s bank, was the subject of the U.S. Supreme Court case, Barnhill v. Johnson, 503 U.S. 393 (1992). The Supreme Court held that the preference date is the date that the bank honors the check, not the date that the debtor sends the check to the creditor. The 90-day clock for ordinary creditors, or the one-year clock for insider creditors, starts ticking when the bank honors the check.

This holding is important because the bankruptcy trustee will review the debtor’s bank statements to find evidence of a preference. If a check was honored during that 90-day prepetition window, then the trustee may have evidence of a preference unless the defendant can use one of the affirmative defenses.

Are Payments Under An Agreed-Upon Payment Schedule Preferences?

Payments under an agreed-upon payment schedule are typically not preferences, but more information is necessary in order to say for sure. For example, a $3,000 mortgage payment each month is an example of an agreed-upon payment schedule that fits within the ordinary course of the debtor’s daily life and thus isn’t a preference. However, an unusual payment of $12,000 one month on the same mortgage is not a payment under the agreed-upon payment schedule and could be a preference.

Since the analysis is fact-specific, it’s important to look at the contract that specifies what the payments are supposed to be, when they’re due, and what the consideration is that the creditor is giving to the debtor in exchange for those payments. However, as a general principle, mortgages, car loans, or leases usually are not going to be considered preferences unless the payments are outside of the normal pattern of practice.

One Of The Prima Facie Elements Of A Preference Claim Is That The Transfer Must Have Been Made When The Debtor Was Insolvent; Is There A Presumption Of Insolvency?

Section 547(f) of the Bankruptcy Code contains a provision that says that the debtor is presumed to have been insolvent during the 90-day prepetition period. However, that presumption is rebuttable because a person can file for bankruptcy protection without being insolvent. A debtor filing for bankruptcy protection might have a home with so much equity that it dwarfs all of the debtor’s debts, meaning the debtor is not insolvent.

For example, an elderly person with a lot of home equity, who files for bankruptcy after January 1, 2021, when the equity exemption in California for a home will shoot through the roof, might be solvent. This could happen if the debtor has lived in the home for 35 years, and owns it without a mortgage. The debtor could have $500,000 worth of completely exempt equity in the paid-off house and $60,000 worth of credit card debt. That debtor is not insolvent.

What Is The Legal Standard In Determining Insolvency?

The most common definition of insolvency is: The sum of the debtor’s liabilities is greater than the sum of the values of the debtor’s assets. This standard seems simple enough, but a challenge can arise in valuing the assets. While it might not be difficult to have a house appraised, it can be difficult to put a value on other items, especially if there isn’t a robust market for them. For this reason, a trustee may need to hire a forensic accountant to look at the assets and liabilities. For example, a business with a fairly complex set of books might not be easy to value.

There are a couple of definitions of insolvency, the most common of which is that the sum of the debtor’s liabilities is greater than the sum of the values of the debtor’s assets. If the debts exceed the assets, then the debtor is insolvent.

However, sometimes a different definition is used because a debtor can be insolvent based on the asset/liability definition, but may still be able to service debts as they come due. The second definition is: The debtor is not making the payments on debts as they come due.

For more information on Date Of A Preference In California, a free 20 Minute Phone Strategy is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

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