ADVANCED ISSUES IN AVOIDANCE

By Hon. William H. Brown, Dennis J. Connolly, David A. Lander, Timothy M. Lupinacci

I. INTRODUCTION	1
1. Transfer of Debtor's Property	4
2. The Transfers Were to a Creditor of the Debtor	4
3. The Transfer Was on Account of an Antecedent Debt	5
4. The Transfer Was Made While the Debtor Was Insolvent	5
5. The Transfer Was Made on or Within 90 Days Before the Filing of the Petition	5
6. The Defendant Received More Than It Would Have from a Liquidation	5
II. PREFERENTIAL TRANSFERS	6
A. Objective Application	6
B. Transfer Requirement	7
1. Transfer Broadly Defined	7
2. Time of Transfer	7
3. Transfer by Check	9
4. Transfer Must be Shown	10
C. Interest of the Debtor in Property Requirement	10
1. Interest of the Debtor in Property Requirement	10
2. Existence of a Trust/Constructive Trust	13
3. Earmarked Funds	14
4. PonziScheme Funds	19
D. Antecedent Debt Requirement	19
1. Claim and Debt Defined	19
2. Timing	19
E. Insolvency Requirement	20
1. Insolvent Defined	20
2. Presumption of Insolvency	21
3. Insolvency Tested on the Date of Transfer	22
4. Fair Valuation	22
F. Transfer Made on or Within 90 Days Before the Petition Date	25
G. Greater Percentage Test -Section 547(b)(5)	26
1. Hypothetical Liquidation	26
2. FullySecured or Over-Secured Creditors	28
III. PREFERENCE DEFENSES	29
A. Purpose of Defenses	30
B. Waiver of Defenses	30
C. Burden of Proof	31
D. Section 547(c)(1) -Contemporaneous Exchange for New Value	32
1. Overview	32
2. New Value Defined for Purposes of Section 547(c)(1)	33
3. "Contemporaneous Exchange"	5
4. Specific Cases Discussing New Value	34
5. Application of Defense to Secured Creditors	36
6. In Fact a Substantially Contemporaneous Exchange	37
a. Payment by Check	38
b. Miscellaneous Cases	39
E. Section 547(c)(2) -Ordinary Course of Business Defense	39
1. Overview	39
2. Debt "Incurred" in Ordinary Course ofBusiness	41
3. Section 547(c)(2)(A) Parameters of Subjective Test: The Specific Relationship Among the Transferor and the Transferee	42
4. Section 547(c)(2)(B) Parameters of Subjective Test: IndustryStandards	50
5. "The Effective Use of Evidence to Prove Industry Standards Under [pre-BAPCPA] 547(c)(2)(C)	57
a. Introduction	57
b. The Burden of Proving Ordinary Business Terms	57
c. Evidence Sufficient to Prove IndustryStandards	60
d. Evidence Insufficient to Prove IndustryStandards	64
e. Conclusion	70
6. "The Role of Wire Transfers and Electronic Commerce Within the Context of S547(c)(2)	71
F. Section 547(c)(3) -Relating Back	75
G. Section 547(c)(4) - New Value Exception	77
1. Overview	77
2. Purpose of Defense	77
3. Definition of New Value	78
4. To or for the Benefit of the Debtor	79
5. New Value May Not be Secured by an Otherwise Unavoidable Security Interest to or for the Benefit of the Creditor Extending New Value	80
6. New Value After Transfer	80
7. New Value Must Remain Unpaid	81
8. Calculation	82
9. Timing of the Transfer When the Transfer is by Check	84
10. New Value Must be from Transfers	85
H. Section 547(c)(5) Floating Liens	85
1. Overview	85
2. Policy	85
3. Elements of Defense	86
I. Section 547(c)(6) -Statutory Liens	88
1. Overview	88
J. Section 547(c)(7) -Bona Fide Payments for Alimony, Maintenance, and Support	88
K. Section 547(c)(8) -"De Minimis" Transfers in Consumer Case	89
L. Section 547(c)(9)	90
M. Alternate Repayment Schedule	91
N. Venue/Limited Liability	91
O. "Ten Practical Tips in Defending an Avoidance Action	92
1. Know the Facts	92
2. Chart the Factual History	93
3. Write a Detailed Settlement Letter.	93
4. Raise Affirmative Defenses in the Answer	94
5. Barriers to Recovery(see Section Vinfra)	95
6. Make the Plaintiff Prove All the Elements	97
7. Do Not Forget Industry Standards in the Ordinary Course Defense	98
8. Do Not Overlook Local Trade Groups and Competitors in Hiring Experts	100
9. Make a Jury Demand	101
10. Secure All Necessary Evidence	101
P. Section 549 -PostpetitionTransactions	102
1. The Statute	102
2. Overview	103
3. The Exceptions	105
IV. FRAUDULENT CONVEYANCE	107
A. If You Feel You Have Paid Too Much for Something You Purchased, Can You Set Aside That Purchase as a Fraudulent Conveyance?	107
B. Tax Avoidance, or Is It Avoidance of Taxes, or Is It Avoidance of Decisions Regarding Taxes, or	111
C. Is Indirect Benefit Ever Sufficient to Satisfy the Reasonably Equivalent Value Test for a Corporation That Has Gone to Bat for ItsCorporate Affiliates, and If So When is It Sufficient?	127
D. Can (May) a Dissolution of Marriage be an Avoidable Transfer?	129
E. After BFP are There Any Types of Foreclosure Sales that Might Still be Avoidable as a Fraudulent Conveyance?	131
F. Retroactive Disclaimer of Bequest -Is It a Fraudulent Conveyance?	135
1. What is a Disclaimer of Inheritance?	135
2. What are the Elements of a Section 548 Fraudulent Conveyance?	136
3. Prior to Drye, Did Courts Determine That a Disclaimer of Inheritance Constituted a Fraudulent Conveyance Under Either State Law Fraudulent Conveyance Statutes or Under Section 548(a)?	136
a. Introduction.	136
b. Applicability of State Law Fraudulent Conveyance Statutes	137
c. Applicability of Section 548, the Bankruptcy Code Fraudulent Conveyance Provision	137
(i) Not Subject to Section 548	138
(ii) Subject to Section 548	139
G. PonziScheme Payments May be Avoidable as Preferences or as Fraudulent Conveyances	146
H. Proving Insolvency in Fraudulent Conveyance Action	151
I. BAPCPAProvisions Relating to Fraudulent Conveyances Under Section 548	151
J. Practical"Pointers" as to Procedural Matter	152
1. Pleading Cause of Action	152
2. Mootness Doctrine	153
1. Pleading Cause of Action	153
3. Duty to Complete Appellate Record -Sanctions	153
4. Scope of Materials to be Considered on Appellate Review	153
5. Creditors' Derivative Standing to Pursue Avoidance Actions	154
K. BankruptcyCode and State Law "Preference" Statute	155
V. PLAN, PLEADING AND PROCESS ISSUES	156
A. Introduction
B. Retention of Avoidance Actions in a Plan of Reorganization	156
1. Res Judicata and Claim Preclusion	156
a. General Principles	156
b. Claim PreclusionofAvoidance Actions	157
C. Observations with Respect to Plan Drafting	163
D. Miscellaneous Chapter II Plan Issues	164
1. Judicial Estoppel	164
2. Releases of Committee Members and Professionals That the Conversion on the planning of the Creditors' Committee in a DIP Order	166
3. That the Conversion on the planning of the Creditors' Committee in a DIP Order.	166
E. Chapter 7 and Chapter 13 Issues	168
F. Section 550 of the Bankruptcy Code	169
1. Introduction	169
2. Judgment and Value of the Property	170
3. Benefit to the Estate	172
4. RecoveryAgainst Transferees	175
a. Overview	175
b. InitialTransferee vs. Subsequent Transferees	175
(i) For Value	177
(ii) Good Faith and Without Knowledge	177
c. Entityto Whose Benefit Such Transfer Was Made	180
d. Who is a Transferee -Conduits and the Doctrine of Earmarking	183
e. Trustee's Ability to Reach-Back Beyond 90 Days	186
f. Multiple Recoveries	188
5. Cash Management and Related Issues	188
6. Lien Priority	189
G. Pleading and Process Issues	191
1. Introduction	191
2. Recent Delaware Cases Regarding Pleading Requirements	191
a. Introduction	191
b. The Valley Media Approach	192
c. Different Approaches to the Pleading Standard	193
d. Practice Pointers	194
H. Other Pleading Issues	194
1. Indispensable Party	194
2. Setoff and Recoupment as Affirmative Preference Defenses	195
3. Essential Vendor Orders	196
4. Relation Back and the Statute of Limitations	196
a. Section 546	196
b. Relation Back Cases	197
5. Section 502(d) Issues	198
a. The Preclusive Effect of Allowance of a Claim Under Section 502(d)	198
b. A Number of Courts Have Rejected the Argument That Section 502(d) Precludes the Assertion of a Preference Claim Following Allowance of a Claim	199
c. Observations with Respect to the Section 502(d) Issues	200
6. Evidentiary Issues	200
7. Issues Arising Under Sale Orders	202
8. Limitations on Avoidance Actions with Respect to Transfers Under Swap Arrangements	203
9. Solverent Immunity	204
10. Extra Territorial Effect of Section 548	204

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ADVANCED ISSUES IN AVOIDANCE

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