Fraudulent or Preferential Transfers

Three separate Bankruptcy law provisions and legal standards apply to when a trustee (or DIP) may avoid a transaction.

• §547 -- Preferential Transfers
• §548 -- Fraudulent Transfers
• §544(b) -- state law challenges

§547 -- Preferential Transfers

A Trustee may avoid “preferential transfer” to or for benefit of a creditor for an antecedent debt, made while insolvent within 90 days prior to filing (1 year if an insider). 11 USC 547.

Exceptions for:

• contemporaneous exchange of new value actually made 547(c)(1); or
• ordinary course of business; or
• creating a security interest securing new value given to acquire property (must be perfected within 30 days after closing) 547(c)(3). This is most purchase money mortgages.

§548 -- Fraudulent Transfers

A transfer of the debtor’s property to another party in order to deter, hinder or defraud a creditor, or to unfairly place such property out of the reach of a creditor is a fraudulent transfer under § 548 of the Bankruptcy Code. In bankruptcy cases, a trustee (or DIP) is given the power to set aside or avoid these transfers under either federal law or state law.

Under §548, the test is whether:

(A) the transfer was made "with actual intent to hinder, delay, or defraud"; or (B) the Debtor (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.

This is limited to transfers during the 2 year period prior to filing the petition. § 548(a)(1). As long as the transfer occurred within one year of the bankruptcy filing, the complaint can be filed anywhere within two (2), and perhaps as long as three (3), years after the bankruptcy is filed. This additional period to initiate the action under the Bankruptcy Code arises out of the language of 11 U.S.C. §546.

§544(b) -- State Law Challenges

Under §544(b) of the Bankruptcy Code, the trustee (or DIP) may also avoid a transfer “that is voidable under applicable law by a creditor holding an unsecured claim.” This means that the trustee may look to non-bankruptcy law (usually “state” law) and deploy any avoiding power that he finds there. The most common use of §544(b) is to give the trustee a right of action under state fraudulent transfer law, the UFTA or UFCA.

Most importantly, structuring this as a state law claim often allow the trustee (or DIP) a longer reach-back period based on the state Statute of limitations.