What Are Avoidable Transfers in a Chapter 11 Bankruptcy?
When a business files for Chapter 11 bankruptcy (or in the less common situation in which an individual files for Chapter 11 bankruptcy), the debtor will typically become a debtor in possession. What this means is that, during the course of the bankruptcy case, the debtor will take on all but the investigative powers and duties typically held by the trustee. As such, the debtor as debtor in possession as fiduciary duties that are set forth in the US Bankruptcy Code, which include “accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the US trustee or bankruptcy administrator, such as monthly operating reports.” In addition to these duties that the debtor in possession must perform, the debtor in possession has the powers of a trustee, too. These include something known as “avoiding powers” that are associated with avoidable transfers.
What are avoidable transfers and avoiding powers in a Chapter 11 bankruptcy case? Our West Palm Beach bankruptcy lawyers can explain in more detail.
What is an Avoidance Action or Avoiding Power?
What is an avoidance action, or what does it mean for a debtor in possession to have avoiding power? According to the United States Courts, avoiding powers “may be used to undo a transfer of money or property made during a certain period of time before the filing of the bankruptcy petition.” In other words, an avoidance action — made possible by the avoiding powers that the debtor in possession has — is a legal action in which the debtor in possession recovers property or money that the debtor transferred before filing for Chapter 11 bankruptcy. The purpose of avoiding powers is to ensure that certain creditors are not unfairly paid by the debtor prior to the filing of the bankruptcy case, “at the expense of all other creditors,” according to the United States Court.
The avoiding powers generally apply to transfers that were made within the 90-day period prior to the bankruptcy filing. For transfers that the debtor made to “insiders,” such as family members or general partners in the business, the powers may extend for up to one year prior to the date of the bankruptcy filing.
Defenses Used by Creditors Who Received Preference Payments
When a creditor is paid in the lead-up to the bankruptcy filing — either within 90 days for most creditors or within 1 year for “insiders” — those parties will want to be able to keep the payment they received from the debtor. There are several types of defenses that these creditors may say are applicable to their case.
Typically, a creditor will seek to show that the “preference payment” was actually in exchange for new goods or services provided, or that the payment was not actually a preference payment because it was made in the regular courts of doing business with the debtor.
Contact Our West Palm Beach Bankruptcy Attorneys for More Information
If your business is considering a Chapter 11 filing, it is critical to understand the duties and powers of a debtor in possession and to work closely with a lawyer during your business’s bankruptcy case. An experienced West Palm Beach bankruptcy lawyer at Kelley, Fulton, Kaplan & Eller can begin working with you today and can answer any questions you have.
Sources:
law.cornell.edu/uscode/text/11
justice.gov/archives/jm/civil-resource-manual-58-avoidance-powers
