Section 6.7 To or for the Benefit of a Creditor—Indirect Transfer Issues

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

B. (§6.7) To or for the Benefit of a Creditor—Indirect Transfer Issues

For a transfer to be avoided as a preference, it can either be made directly to a creditor or made indirectly to a third party “for the benefit of” a creditor. 11 U.S.C. § 547(b)(1). Thus, a creditor can receive a preference even if it is not the transferee if the transfer has the effect of reducing that creditor’s claim against the estate.
For example, payment to a senior secured creditor, which increases the value of collateral available to the junior undersecured creditor, may create an indirect preference to the junior creditor. See In re Prescott, 51 B.R. 751, 756 (Bankr. W.D. Wis. 1985), aff’d, 805 F.2d 719 (7^th Cir. 1986).

The most common “indirect transfer” is a payment to a creditor, which has the effect of reducing a guarantor or surety’s contingent claim against the debtor. Payments by a debtor directly to the
obligee of a guaranteed obligation are avoidable as transfers not only directly “to” the creditor/obligee, but also “for the benefit of” the creditor/guarantor. In re Midwestern Cos., 102 B.R. 169, 171 (W.D. Mo. 1989); In re Aldridge, 94 B.R. 589, 591 (Bankr. W.D. Mo. 1988) (See, B.J.) (payment...