Payments on Insider-guaranteed Debts: a Bankruptcy Preference?
| Publication year | 1986 |
| Pages | 1388 |
| Citation | Vol. 15 No. 8 Pg. 1388 |
1986, August, Pg. 1388. Payments on Insider-Guaranteed Debts: A Bankruptcy Preference?
Certain transfers of property occurring prior to a debtor's filing of a petition in bankruptcy are voidable as preferences under the U.S. Bankruptcy Reform Act of 1978 ("Bankruptcy Code").(fn1) Typically, a transferee can feel secure about a potential preference if ninety days have expired before the transferor-debtor files bankruptcy. This is because the trustee then cannot recover the transferred property or its value under the preference section of the Code (§ 547). However, if an insider of the debtor benefits from the transfer, one year must pass before the transfer can be considered safe from attack.
Noninsider creditors may be surprised to find that payments to them by the debtor during the entire year preceding bankruptcy may be the subject of preference recovery action by the trustee. The grounds of the action would be that an insider of the debtor, who guaranteed the payment of the indebtedness, has benefited from the payments during that time.
Such an expansion of the reach of the preference laws in bankruptcy affects lenders in obtaining guarantees of unsecured loans; insider-guarantors in deciding how to allocate pay to creditors and when to file bankruptcy during troubled financial times for their businesses; and trustees and unsecured creditors when looking for additional funds for the debtor's estate once bankruptcy is filed. This article analyzes why payments on insider-guaranteed debts may be considered insider preferences for which the lender, as well as the guarantor, is liable, and discusses alternatives available for parties wishing to address this issue.
A trustee in bankruptcy may avoid any transfer of an interest of the debtor in property to or for the benefit of a creditor under § 547(b) of the Bankruptcy Code if the trustee shows the following: (1) the transfer was made for or on account of an antecedent debt owed by the debtor before the transfer was made; (2) the transfer was made within ninety days before the date of the filing of the petition, or between ninety days and one year of the petition if the creditor was an insider at that time; (3) the transfer was made while the debtor was insolvent; and (4) the transfer enables the creditor to receive more than it would under a Chapter 7 liquidation and distribution of the debtors' assets.(fn2)
The Code denotes "insiders" to include relatives, directors, officers, affiliates, general partners, managing agents and persons in control of the debtor; partnerships in which the debtor is a general partner; and corporations of which the debtor is a director, officer or person in control.(fn3) Since the transfer must enable the creditor to receive more than it would receive in Chapter 7, the preference section affects only unsecured or under-secured creditors. If a transfer can be avoided as a preference, the trustee may recover for the benefit of the estate the property transferred or its value from the initial transferee, from the entity for whose benefit the transfer was made, or from any immediate or mediate transferee of the original transferee.(fn4)
A payment made more than ninety days before the bankruptcy petition to a noninsider creditor on an indebtedness guaranteed by an insider can be considered a preference, using the following reasoning. The guarantor of an indebtedness owed by a debtor in bankruptcy is a creditor of the debtor, holding a contingent claim that exists from the date of the execution...
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