Insights

My first job out of law school back in the late '80s was as an associate in the bankruptcy department of a large law firm. As a new lawyer, with little to no knowledge of federal bankruptcy law, I was handed a three-inch thick copy of the Bankruptcy Code and Rules. I was told to start with Section 547, entitled "Preferences." Why? Because the firm was representing the Chapter 11 trustee in the bankruptcy case of a local hospital and had filed cases against hundreds of parties that had received payments from the hospital within 90 days of its bankruptcy filing, seeking to have those payments returned to the bankruptcy estate. Because these payments favored certain vendors, they were "preferences." My job was to litigate or settle those cases.

So, when I came across a recent bankruptcy court case involving a preferential transfer action against a vehicle lienholder, I became nostalgic about my days as a "preference" lawyer and found myself digging into the case, and into Section 547 of the Bankruptcy Code, to see if - all these years later - I still retained any of that preference knowledge I gained so many years ago. Although my cases dealt with a debtor's transfer of money, Section 547 covers more than just transfers of money and addresses any transfers of a debtor's interest in property. In the recent case, the transfer involved the debtor's grant of a lien on his car to a finance company.

Here's how the case unfolded.

Timothy Resler and his company, Total Maintenance Solutions, LLC, bought a 2015 Lexus on December 29, 2014. The retail installment sale contract was assigned to Bank of America, N.A. Resler applied for a certificate of title on January 30, 2015, and the title, listing BofA as the lienholder and Resler or Total Maintenance as the owner, was issued on February 17, 2015. Resler and his wife filed a Chapter 7 bankruptcy petition on April 16, 2015, and the Chapter 7 trustee, Janine Reynard, filed an adversary proceeding seeking to avoid BofA's security interest as a preferential transfer. The U.S. Bankruptcy Court for the District of Idaho granted judgment for the trustee.

First, the court found that the Lexus was property of the Reslers' estate. The court relied on the fact that Resler, who was listed as an alternate owner, had the ability to transfer ownership of the car unilaterally, and the car's title was issued two months before the Reslers' bankruptcy filing. After finding that the sale contract was formed on December 29, not when the assignment was accepted by BofA, the court addressed the Bankruptcy Code's elements of a preferential transfer.

Section 547 provides that a trustee may avoid any transfer of a debtor's interest in property made to or for the benefit of a creditor, made for or on account of an antecedent debt owed by the debtor before the transfer was made, made while the debtor was insolvent, made on or within 90 days before the date of the filing of the bankruptcy petition, and that enabled the creditor to receive more than the creditor would receive if the transfer had not been made and the creditor received payment of its debt to the extent provided by the Bankruptcy Code.

The court noted that the only element at issue in this case was whether the transfer of a security interest in the Lexus was for or on account of an antecedent debt owed by Resler before the transfer was made. Section 547(e)(2)(A) of the Bankruptcy Code provides that if a transfer is perfected more than 30 days after the transfer takes effect between the transferor and the transferee, then the transfer is deemed made at the time the transfer is perfected. Because the security interest was perfected, at the earliest, on January 30, 32 days after Resler signed the retail installment sale contract and took possession of the Lexus, then the transfer of the security interest was on account of an antecedent debt that was incurred at least 32 days earlier, when Resler became legally bound to pay the purchase price for the Lexus under the signed retail installment sale contract.

Finally, the court rejected BofA's claim that the "new value" defense applied. Section 547(c)(3)(B) of the Bankruptcy Code provides that a trustee may not avoid a transfer that creates a security interest in property acquired by the debtor for new value if the security interest is perfected on or before 30 days after the debtor receives possession of the property. Because, as noted above, the security interest was perfected, at the earliest, 32 days after Resler took possession of the Lexus, the court found that the defense did not apply.

I realize I probably gave you much more information about preferences than you really needed to know. I simply could have told you that you must perfect your security interest in a vehicle within 30 days of the date the buyer takes possession of the vehicle in order to protect your lien from avoidance as a preferential transfer in the event the buyer files a bankruptcy petition.

But I just couldn't help myself. Once a "preference" lawyer, always a "preference" lawyer.

In re Resler (Reynard v. Bank of America, N.A.), 2016 Bankr. LEXIS 2187 (Bankr. D. Idaho June 3, 2016).