Recent Bankruptcy Case Offers Creditor-Friendly Holding When Calculating Preference Period

My creditor clients are always in a hurry to get their money.

When a bank levy hits a big account, most judgment creditors go nuts during that 20 day period when the Court Clerk holds garnished funds (per Tenn. Code Ann. § 26-2-407) before disbursement.

Once the funds are paid out, though, I tell my clients to keep their fingers crossed for a bit more time–at least until the end of the Bankruptcy Code’s “preference period.” Until then, a Bankruptcy Trustee can “recover” payments received by creditors in the 90 days before a bankruptcy case is filed.

One of the most unfair creations of the Bankruptcy Code,” I’ve written on this very creditor-friendly blog.

The question I often get is this: Does the 90 day period start when the Clerk receives the funds or when the Clerk disburses the funds?

An August 19, 2022 Minnesota Bankruptcy Court opinion (In re Holbert, 643 B.R. 332 (Bankr. D. Minn. 2022))(from the Eight Circuit) presents pretty compelling reasoning that the clock starts ticking upon the Clerk’s receipt of the funds.

Specifically, this Court held that the “transfer” (per 11 U.S.C. § 547(b)) for property held in custodia legis occurs when the property is placed in escrow / deposited with the court.

The American Bankruptcy Institute has a more analysis of the case here (and a link to the opinion).

It will always be frustrating for a creditor to see the money just sitting there, in the court coffers, for 20 days. The silver lining, of course, is that the preference clock also appears to be burning off during that period.

Santa Fe Holding Company Bankruptcy Case in Middle District of Tennessee Starts the Preference Recovery Process

Yesterday in the Middle District of Tennessee Bankruptcy Court, the Trust (DBMC Restaurants f/k/a DBMC Investments, LLC) created in the Santa Fe Holding Company, Inc. bankruptcy began the process of filing adversary proceedings to recover preferences. So far, about 30 cases have been filed.

This is a process that generally happens after a Chapter 11 Plan is confirmed, in which the post-confirmation entity takes action on the various lawsuits it held as of the bankruptcy filing.

Here, the pleadings, styled “Complaint to Avoid and Recover Avoidable Transfers,” make claims under 11 U.S.C. 547, which is a provision of the Bankruptcy Code that, under certain circumstances, allows a trustee to recover payments made to creditors within 90 days of the bankruptcy filing.

The basic theory is that, the debtor is presumed to be insolvent during those 90 days, and any payments made during that period were selective disbursements (a.k.a. preferential payments) to certain preferred creditors. By these actions, the trustee recovers these preference payments, puts the money into a big pot, and then distributes it evenly to all creditors.

Sounds pretty fair in theory, right? Well, in practice, these actions drive creditors crazy. “Not only did this company bankrupt on the debt, now, two years later, they’re suing me to take back some of the last money they paid me?” My response? “Yes.”

There are a number of defenses to these actions (see 11 USC 547(c)), and I’ll touch on those in a later post. Right now, I’m going to go look at the dockets to see who all is getting sued. So far, this includes: Continue reading “Santa Fe Holding Company Bankruptcy Case in Middle District of Tennessee Starts the Preference Recovery Process”