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The purpose of these materials and the presentation at the Seminar is to help the lawyer who is bringing or defending an avoidance action. These materials discuss selected developments related to sections 547 and 550 of the Bankruptcy Code with notations for cases decided within the past several years. They were compiled by David Lander, Dennis Connolly and Tim Lupinacci and include information from materials developed by Peggy Hunt, Robert G. Richardson, Hon. William Brown, Hon. James Gregg and Jonathan M. Landers for previous Norton Institutes. For a more thorough discussion of avoidance powers see the Norton Bankruptcy Treatise.
One of the fundamental objectives of all bankruptcy legislation, at least from a policy perspective, is to ensure that all similarly situated creditors share equally in the distribution of a debtor's estate. To that end, the Bankruptcy Code contains provisions which target certain types of prepetition transactions that have been determined to offend the Bankruptcy Code's fundamental objectives. One such transaction is known as a "preferential transfer" or simply "preference." A preference is a showing of favoritism by the debtor to one or more creditors in the period leading up to the filing of the bankruptcy petition.
There are two reasons that are most often cited as the basis of preferential transfer law. One is the principal of "fairness and equality of distribution" and the other is to reduce "pillaging of weak debtors." Courts alternate between assigning these goals coequal treatment and elevating one over the other. In 2000, Judge Drake said: "[T]he central purpose of [the preference statutes] is to discourage creditors from 'racing to the courthouse to dismember the debtor during his slide into bankruptcy.'" Hays v. Ala. Gas. Corp. (In re RDM Sports Group), Inc., 253 B.R. 298, 305 (Bankr. N.D. Ga. 2000). Trade creditors, the primary defendants in such actions, have long argued that these principals are not effectuated by preferential transfer law and that they punish creditors that normally are already taking losses as a result of the bankruptcy and provide a disincentive for creditors that attempt to work with customers in financial trouble. In very different contexts, Judge Lundin, in Gregory v. Cmty. Credit. Co. (In re Biggers), 249 B.R. 873 (Bankr. M.D. Tenn. 2000), and Judge Pearlman, in Dakmak v. U.S. Internal Revenue Serv. (In re Lutz), 212 B.R. 846 (Bankr. E.D. Mich. 1997), rev'd 241 B.R. 179 (E.D. Mich. 1999), worked hard to avoid the necessity of avoiding a transfer that seemed technically to fit within the letter of section 547(b) and that did not have a ready defense under section 547(c).
A Third Circuit Opinion delved into the purpose of section 547 to analyze a settlement trust plan structure. In re Combustion Eng'g, Inc., 391 F.3d 190, 239-240 (3d Cir. 2004), the court noted that section 547 operates to "ensure that equality among creditors is not undermined by transfers to creditors in contemplation of bankruptcy." Id. at 239. The court therefore concluded that a Chapter 11 plan appeared to discriminate against certain claimants with asbestos-related personal injury claims given plan structure relying on prepetition payment to settlement trust.
