Opinion ID: 393888
Heading Depth: 1
Heading Rank: 2

Heading: Elements of a Preference

Text: 12 The Bankruptcy Code prescribes five requirements for a preference, all of which must be met for the Trustee to avoid a transfer. 3 A transfer is preferential if it is (1) to a creditor, (2) on account of a pre-existing debt, (3) made while the debtor is insolvent, (4) made on or within 90 days before the date of filing the petition, or made between 90 days and one year before the date of filing the petition if the creditor was an insider who had reasonable cause to believe the debtor was insolvent, and which (5) enables the creditor to receive more than he would receive if the estate were liquidated under Chapter 7. 11 U.S.C. § 547(b). 4 13 There is no dispute that the first four elements of a preference are established in each case. The installment payments were all made by a debtor to a creditor, on a pre-existing debt, within 90 days of the bankruptcy filing. The debtors are presumed insolvent during the 90-day period, 11 U.S.C. § 547(f), and no evidence was presented to rebut the presumption. Appellees argue, however, that they have not improved their position vis-a-vis other creditors, as required by § 547(b)(5). The Trustee, on the other hand, contends that the payments received within the 90-day period enabled the creditors to receive a greater proportion of their respective debts than they would if the estate were liquidated under Chapter 7. 14 As noted above, the debts in all of these cases are undersecured. 11 U.S.C. § 506(a) 5 separates undersecured creditors' claims into two parts: a secured component and an unsecured component. A creditor has a secured claim only to the extent of the value of his collateral. Any remaining balance is an unsecured claim. The effect of § 506(a) is to classify claims, not creditors, as secured and unsecured. In other words, a single undersecured creditor has both a secured claim and an unsecured claim, each of which is considered in its respective class. See S.Rep.No.95-989, 95th Cong., 2d. Sess. 68, (1978) reprinted in 5 U.S.Code Cong. & Admin.News (U.S.C.C.A.N.), 5787, 5854 (1978). 15 Except for two cases involving valuation of automobiles, it is agreed that the unsecured components of the debts exceed the amounts of the asserted preferences. The Trustee argues that the payments must be charged against the unsecured claims, and therefore the payments enabled the creditors to receive a greater proportion of their unsecured claims than other unsecured claimants. 16 Appellees, on the other hand, assert that in all but one case, where the debt is partially secured by a minimal balance in a credit union share account, because the value of the collateral exceeds the payments during the 90-day period, they did not receive more than they would have upon liquidation. The answer to these opposing contentions will depend on which component of the debts, secured or unsecured, the payments should be charged against. 17 The sparse case law in point supports the Trustee's position. The court in In Re McCormick, 5 B.R. 726 (Bkrtcy. N.D. Ohio 1980) faced a fact situation very similar to the present cases. The debtor's loan of $6,500 was secured by an automobile valued at $3,000. The Trustee sued to recover regular car payments made within the 90-day period preceding the bankruptcy filing. BancOhio, the creditor, maintained that the payments were not avoidable because they did not diminish the bankruptcy estate as required by § 547(b)(5). In other words, BancOhio, like the creditors in these cases, argued that because it was a secured creditor it would have received more than the disputed payments upon liquidation. 18 The court rejected BancOhio's argument because it ignored the bifurcation of its claim by the operation of § 506(a). The court assumed, in the absence of proof to the contrary, that the payments were credited toward the unsecured portion of the debt, since this course of action would comport with standard business practice. 5 B.R. at 729-30. The court concluded that BancOhio therefore must have received greater payment on its unsecured claim than other unsecured creditors and that the transaction satisfies the requirements of Section 547(b)(5). Id. at 730. 19 In re Conn, 9 B.R. 431 (Bkrtcy. N.D. Ohio 1981) similarly dealt with the fifth element of a preference. There a $4,000 debt was secured by an automobile whose value was listed as $3,500. The debtor disputed this valuation, however, arguing that it was much higher. The bankruptcy court found that the trustee had not carried his burden of proving the claim was greater than the value of the collateral. In the absence of proof to support the listed value, the court assumed the collateral was equal to the amount of the claim, so the debt was not bifurcated pursuant to § 506(a). 9 B.R. at 434. 20 This determination was crucial to the court's ultimate conclusion that the installment payments were not voidable preferences. Id. Because the debt was deemed fully secured, the payments did not enable the creditor to obtain a greater percentage of its debt than it would under the distributive provisions of the Code. The court's analysis implies, however, that had the value of the collateral been shown to be less than the claim, a preference would have been found to exist. 21 We find the reasoning in McCormick and Conn persuasive. A principal goal of the preference provisions is the assurance of equal distribution among creditors. H.R.Rep. 95-595 95th Cong., 1st Sess. 178 (1977), reprinted in 5 U.S.Code Cong. & Admin. News 6138-39 (1978); 4 Collier on Bankruptcy (Collier) P 547.03(1) (15th ed. 1980). Section 547(b)(5) is aimed at achieving that goal. The greater distribution requirement of § 547(b)(5) is discussed in 4 Collier P 547.35. The discussion emphasizes the comparison between what a creditor actually received in an alleged preference and what other creditors of the same class would have received upon liquidation had the questioned transfer not been made. This explanation alone, however, does not adequately clarify the statutory scheme. 22 For example, if upon liquidation unsecured creditors would be paid 20% of their claims (based on remaining assets and scheduled claims after secured creditors are paid), to defeat a trustee's avoidance rights a creditor would have to show only that the payments received during the 90-day period do not exceed 20% of the creditor's unsecured claim. This sole comparison, however, does not account for what happens thereafter. If the payments made were less than 20%, there would be no preference and the creditor would keep the payments and later also receive a pro-rata share of the balance of his claim. In the final analysis, this would violate the fundamental principle of equal distribution among a class of claims. 23 Section 547(b)(5) is directed at transfers which enable creditors to receive more than they would have received had the estate been liquidated and the disputed transfer not been made. As long as the transfers diminish the bankrupt's estate available for distribution, creditors who are allowed to keep transfers would be enabled to receive more than their share. The creditors in the instant case must account for the payments they received during the 90 days preceding the bankruptcy filing, or they will ultimately receive a larger share of their unsecured claims than other unsecured creditors. Of course, they will still receive the full benefit of their collateral as to their secured claims. 24