Month: March 2016

Preferential Transfers

A preferential transfer, codified under 11 U.S.C. 547(b), is a payment made to a creditor before a bankruptcy is filed.  There are two types that are relevant for bankruptcy in general: general transfers and insider transfers.

General transfers are payments made within the 90 days prior to filing.  There is a presumption that a Debtor (the term given to the person filing bankruptcy) is insolvent (meaning he is unable to meet his obligations as they become due) in the 90 days prior to bankruptcy.  As a result, any payment made during this time is “preferring” one creditor over the other.  A trustee in a bankruptcy is able to unwind these transfers, usually by suing the paid creditor, or more likely, politely asking for the money back.

Insider transfers refer to people who are friends and family of the Debtor.  This is where it gets sticky, because insiders have a special relationship with the Debtor, and can even be working with the Debtor to hide assets from the Trustee.  The lookback period therefore is one year from the date of the filing, which a good bankruptcy lawyer will be careful to avoid as no one wants their Nana to get sued, or to get a nasty letter requesting money that was received 12 months ago.

One further wrinkle concerns California Civil Code section 3439, which doesn’t concerns bankruptcy or preferential transfers, but is closely related to what I discussed above.  The term of art here is Fraudulent Transfer, and despite the word “fraud,” it doesn’t mean that you have to be lying or deceitful in concealing assets.  There are two types of fraud under CCC section 3439 : actual and constructive fraud.

Actual fraud, as noted above, doesn’t actually require the intent to commit fraud.  The intent element is satisfied just by the person intending to transfer the property. Economy Refining & Service Co. v. Royal Nat’l Bank (1971) 20 Cal. App. 3d 434, 441.  An eleven factor test is used to determine actual fraud, and I will be reviewing this in a future post.

Secondly, there is constructive fraud, and there are three different variations of this.  Each concerns the person giving the asset or money without receiving some of “reasonably equivalent value” back.  The other factors will also be discussed in the future post that I mentioned above.

Bottom line: State law matters in bankruptcy.  In California, CCC section 3439 is a potential landmine that can be a problem for a potential debtor and should be discussed with his attorney before filing.