PREFERENCE LITIGATION

Nevertheless, the court found that Lucent exercised the power to coerce the debtor into making agreements with Lucent that were against the debtor's interests, such that the transactions were no longer at arm's length. The court was careful to note that Lucent's conduct was more than exercising financial control, as a lender threatening foreclosure or other legal action to collect its debt would. Instead, Lucent "had come to dominate the parties' relationship . . . ." Id. at 399.

The BAPCPA has limited the preference liability of non-insider lenders under the case of Levit v. Ingersoll Rand Fin. Corp. (In re Deprizio), 874 F.2d 1186 (7th Cir. 1989). Deprizio stood for the proposition that a payment to a non-insider lender that reduced the obligations of an insider guarantor was a preference that could be avoided within the 1year, as opposed to 90-day, look-back period. The BAPCPA expressly overturned this case to provide that such a non-insider lender would not be liable for payments during the 1-year insider preference period. See 11 U.S.C. S 547(i). For an extensive discussion of this section and its constitutionality, see Official Committee of Unsecured Creditors of ABC-NACO, Inc. ex rel. ABC-NACO, Inc. v. Bank of America, N.A., 402 B.R. 816 (N.D. Ill. 2009).

Action points

1. In counseling clients in transactions, make sure that they are aware of the nonstatutory insider opinions out there. It is not sufficient to check off the stated insider categories in section 101 and suggest that they are protected from the expanded preference period.
2. If you get involved in litigation over non-statutory insiders, make sure that plaintiff is proving the necessary factors to rise to the level of insider. There are few cases on the topic, and the US Medical case has a good summary.

G. Greater Percentage Test - Section 547(b)(5).

1. Hypothetical Liquidation.

Section 547(b) requires that a valuation of the transfer be judged against a hypothetical liquidation on the petition date. McCord v. Venus Foods, Inc. (In re Lan Yik Foods Corp.), 185 B.R. 103 (Bankr. E.D.NY. 1995). Subsection (b)(5) does not require a full-blown reconstruction of the estate and liquidation analysis -trustee need only prove that, as a result of the transfer, the creditor received a greater percentage recovery on its debt than it would have received had it received a distribution in a Chapter 7 case. With respect to