Anatomy of a Preference (Series: Bankruptcy Battle Royale)

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listening to a one hour webinar on the topic.
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MEET THE FACULTY
Moderator:
Mark Melickian – Sugar Felsenthal Grais & Helsinger
Panelists:
Rafael Zahralddin – Elliott Greenleaf
Thad Wilson – King & Spalding LLP
Michael Schwarzmann – Independent CRO and Restructuring Advisor
Christopher Wick – Hahn Loeser
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ABOUT THIS WEBINAR:
Anatomy of a Preference
Chapter 5 of the Bankruptcy Code creates certain causes of action that arise only upon the
filing of a bankruptcy case. Specifically, these provisions enable the debtor or trustee to
take actions to bring assets back into the debtor’s estate. Most commonly, these come in
the form of preference lawsuits This webinar discusses the standards for bringing these
causes of action and then dives into how to defend against them. The panelists also provide
practical tips on how creditors can try to protect and insulate themselves from these
attacks ahead of time, by taking certain precautions when dealing with distressed business
prior to the filing of a bankruptcy case.
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ABOUT THIS SERIES:
Bankruptcy Battle Royale
No matter how you are involved in a Chapter 11 bankruptcy proceeding, there is a real
chance you will wind up litigating some issue. Litigating in bankruptcy court, however, is
very different than litigating in any other federal or state court because the customs, rules
and players are all different. This webinar is designed for the litigator who does not
generally find herself in front of a bankruptcy judge As with all Financial Poise Webinars,
each episode in the series episode is delivered in Plain English, bringing you into engaging,
sometimes humorous conversations designed to entertain as they teach. And, as with all
Financial Poise Webinars, each episode in the series is designed to be viewed
independently of the other episodes, so that participants will enhance their knowledge of
this area whether they attend one, some, or all of the episodes.
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EPISODES IN THIS SERIES
2/26/19 Episode #1:
Cash Collateral and DIP Loan Contests
3/26/19 Episode #2:
Anatomy of a Preference
4/23/19 Episode #3:
Anatomy of a Fraudulent Transfer
5/21/19 Episode #4:
Contesting Confirmation
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

OVERVIEW
• The Bankruptcy Code presumes that the Debtor knows, in the 90 days before it files for
bankruptcy, that its ship is sinking. During that period of time (commonly, the
“Preference Period”), the Debtor may pay some preferred vendors but not others. Such
preferential treatment is unfair to the creditors who are not paid.
• Section 547 of the Bankruptcy Code provides the bankruptcy trustee with a cause of
action against parties who received preferential payments to avoid and recover the
payments, and then redistribute them equitably, under the Bankruptcy Code’s priority
scheme.
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ELEMENTS
• A transfer is prima facie preferential under 11 U.S.C. § 547(b) if it was:
1. A transfer of an interest of the Debtor in property
2. To or for the benefit of a creditor
3. On account of an antecedent debt
4. Made while the debtor was insolvent
5. Made within 90 days before the petition date (1 year for insiders); and
6. Enabled the creditor to receive more than it would have in a Chapter 7
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OCCURRENCE OF A TRANSFER
• Litigation of this element often relates to the timing of perfection and priority of
security interests in the debtor’s property.
• § 547(e)(2): If perfection occurs within 30 days after the granting of the security
interest, the date of perfection relates back to the date that the security interest was
granted.
• Federal law controls when the transfer occurred; state law controls when perfection
occurred for the 30-day rule.
• After-acquired property often cannot benefit from the 30-day rule, and the security
interest in such property can often be avoided as preferential.
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TRANSFER OF AN INTEREST OF THE
DEBTOR IN PROPERTY
• Corporate control or bare legal title doesn’t count
• Payments made by Debtors under trust agreements generally don’t count
• Issues may arise when Debtor deposits funds into escrow
• Earmarking: Creditor loans money to debtor for specific purpose of paying
another creditor. May not be a preference if Debtor is “mere conduit”
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TO OR FOR THE BENEFIT OF A
CREDITOR
• § 547(b)(1)
• Broad definition of “creditor,” includes anyone with a right to payment from
estate, or equitable remedy against estate
• Direct transfers from Debtor to creditor more easily identifiable
• Nonlineal transfers, such as to a creditor’s guarantor, may be considered
preferential.
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ANTECEDENT DEBT
• § 547(b)(2)
• Transfer preferential only if Debtor incurred debt to creditor before the transfer
• Antecedent debts include contingent, unliquidated, or unfixed
• Common issue is when timing of when debt was incurred
• If debt incurred simultaneously with transfer, there is no antecedent debt, e.g. a
concurrent exchange of consideration
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INSOLVENCY
• § 547(b)(3)
• Insolvency means whether the Debtor’s liabilities exceeded its assets on the date
of the transfer.
• Debtor is presumed insolvent during 90-days pre-petition. This presumption is
rebuttable.
• If presumption successfully rebutted, expert testimony often determines issue.
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PREFERENCE PERIOD
• § 547(b)(4)
• 90 days pre-petition for most creditors; 1 year for insiders
• Form of payment can be an issue. For example, for checks, the date the check
clears is generally the operative date, not the date the Debtor delivered the
check to the creditor.
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INSIDERS
• § 547(b)(4)(B)
• Preference period extended from 90 days to 1 year for insiders
• Insider status determined at time of transfer
• Includes not only officers and directors, but also relatives of such persons.
• Also includes Debtor’s affiliates.
• Most important factor is control
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GREATER THAN CHAPTER 7
• § 547(b)(5)
• Only a preferential transfer if creditor received more than it would have
received in a Chapter 7 liquidation
• Court not bound to valuations in Debtor’s schedules; actual facts and
circumstances can be considered.
• May arise where creditor raised its status from unsecured to partially or wholly
secured.
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LIMITATIONS
• § 546(a)
• A complaint to avoid a preferential transfer may not be commenced after the
earlier of:
✓ The later of
o 2 years after the petition date (in voluntary cases)
o 1 year after the appointment of a trustee, under certain circumstances
✓ The time the case is closed or dismissed
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DEFENSES
• § 547(c) has 9 statutory exceptions
• If trustee makes prima facie case under § 547(b), it becomes creditor’s burden to
plead and prove defense.
• Some of the 547(c) exceptions are addressed in the following slides.
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CONTEMPORANEOUS EXCHANGE
• § 547(c)(1)
• Applies where preferential transfer occurs contemporaneously with creditor’s
providing new value, and the parties intended that the exchange be
contemporaneous.
• Overlaps antecedent debt element of prima facie case
• Litigation often arises where parties intended that transfer be
contemporaneous, but there is a delay between incurring of debt and
preferential transfer.
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ORDINARY COURSE OF BUSINESS
• § 547(c)(2)
• Applies where the preferential transfer was in payment of debt incurred in the ordinary
course of the debtor’s business, and the payment was made either (a) in the ordinary
course of business between the parties; or (b) according to ordinary business terms.
• The first part compares the preferential transfer with typical transfers made during the
pre-preference period (e.g. similar days paid past invoice date, similar amounts, similar
form of payment, payment was not the result of coercion by creditor, etc.)
• The second part compares the transfer with industry standards.
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CALCULATION OF LOOKBACK DATES
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ENABLING LOANS
• § 547(c)(3)
• Applies to prevent the avoidance of a security interest to a creditor where the
creditor’s earlier loan enabled the debtor to acquire the subject property,
provided that the security interest is perfected as of the date the debtor obtains
perfection of collateral, or within 30 days thereafter.
• Often used to protect creditors who make purchase-money security interests.
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SUBSEQUENT NEW VALUE
• § 547(c)(4)
• Preference amount reduced to the extent the creditor provided “new value” to
the debtor after the date of the preferential transfer.
• For this defense to apply, the new value cannot be secured by an unavoidable
security interest.
• Preferential transfer reduced by the amount of the subsequent new value.
• Can be a partial or complete defense.
• Courts split regarding paid vs unpaid new value.
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AFTER-ACQUIRED INVENTORY AND
RECEIVABLES
• § 547(c)(5)
• Provides special exception to creditor who has floating lien over debtor’s
inventory and receivables. These two classes of collateral frequently fluctuate in
composition and value.
• Under 547(e)(3), a transfer that creates a perfected security interest in inventory
or receivables may not be avoided as a preference.
• But, the transfer can be avoided to the extent that the secured creditor’s position
is improved over the course of the preference period.
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INDIRECT PREFERENCES
• An example: Say Debtor owes money to Vendor. Debtor’s President guaranteed
Debtor’s payment. Debtor made a preferential payment to Vendor during the
preference period. The trustee may have a cause of action not only against
Vendor, but also against President.
• President was a creditor of Debtor, on account of her right to contribution from
Debtor for President’s guaranty of Debtor’s obligation to Vendor. When Debtor
paid Vendor, it made a transfer that benefited President by extinguishing
President’s contingent liability on the guaranty.
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RECOVERY OF AVOIDED TRANSFERS
• § 550 permits bankruptcy trustee to recover property subject to avoided
transfers for the benefit of the bankruptcy estate.
• Trustee may recover actual property transferred or its monetary value
• Value of post-transfer appreciation may also be recoverable
• Persons potentially liable include initial transferees, persons for whose benefit
transfers were made, immediate (second-level) transferees of initial transferee,
mediate (third-level) transferees and beyond
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LIMITS TO RECOVERABILITY
• Trustee may not recover from a transferee who was a “mere conduit” for a
transfer, ie., the transferee did not exercise “dominion and control” of the
property.
• Transfers also not recoverable from secondary and later transferees who
received property in good faith, for value, and without knowledge of the
voidability of the transfer.
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ABOUT THE FACULTY
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MARK MELICKIAN – mmelickian@sfgh.com
Mark leads Sugar Felsenthal Grais & Helsinger LLP’s restructuring practice. Over the two-plus decades, he has worked
primarily on business transactional and litigation matters with a focus on chapter 11 commercial bankruptcy cases and
non-bankruptcy distressed situations. His practice includes both debtor- and creditor-side representations and
include financial institutions, indenture trustees, trade creditors, asset purchasers, investors, commercial real estate
interests, corporate officers, and other parties in interest in chapter 11 cases throughout the country. A significant focus
of his practice is the representation of committees and other estate fiduciaries in bankruptcy cases. He has counseled
dozens of official and unofficial bankruptcy committees, liquidating trustees, litigation trustees, and plan
administrators charged with pursuing and liquidating assets for the benefit of estate creditors. Mark is a Contributing
Editor to The Bankruptcy Strategist and has authored several articles for the American Bankruptcy Institute Journal.
He is a contributing author to the treatise Reorganizing Failing Businesses: A Comprehensive Review and Analysis of
Financial Restructuring and Business Reorganization, Third Edition (American Bar Association, 2018), and has
written for Wiley Bankruptcy Law Update, Ginsberg & Martin on Bankruptcy, Norton Bankruptcy Law Adviser, and
the Cornell University Legal Ethics Library, as well as dozens of professional conferences and seminars. For several
years, he wrote a monthly legal affairs column for Student Lawyer, an America Bar Association publication, for which
he received the Peter Lisagor Award for Exemplary Journalism from the Chicago chapter of the Society of Professional
Journalists. Mark is a graduate of Colorado State University and Northwestern University School of Law, and studied
creative writing for two years at the University of North Carolina-Greensboro.
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RAFAEL ZAHRALDDIN – RXZA@elliottgreenleaf.com
Rafael X. Zahralddin-Aravena is a Shareholder, Director, and Chair of his firm’s Commercial Bankruptcy and
Restructuring Practice. He founded the Elliott Greenleaf Delaware office in 2007, which specializes in business
law, as its first Managing Shareholder. He works as a litigator and advises businesses on issues of compliance,
corporate formation, corporate governance, insolvency, distressed mergers and acquisition, commercial
transactions, cyber law, and international and cross border issues.
He has been lead counsel in several significant matters including serving as special litigation counsel in
Washington Mutual, the largest bank insolvency in U.S. history. In the Nortel bankruptcies he successfully
secured a settlement of more than $50 million for the permanently disabled former employees of the company.
The firm and Mr. Zahralddin were named among the firms that received multiple awards in 2014, culminating
in the Large Company Transaction of the Year Award from the Turnaround Management Association for their
work in the AgFeed USA, Inc. bankruptcy, which involved the sale of the U.S. and China assets of a publicly
traded company. Mr. Zahralddin is the co-editor of the American Bar Association’s book, Reorganizing
Failing Businesses and has co-authored several chapters in the treatise. He has recently been named one of
the Top 50 Latino Lawyers in the United States by Latino Leaders Magazine, a 2019 Philadelphia Inquirer
Influencer of Law, and a Pennsylvania Super Lawyer (2019) as a Top Rated Creditor Debtor Rights Attorney.
He is rated AV by Martindale-Hubbell and a Fellow of the American Bar Foundation.
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THAD WILSON – ThadWilson@KSLAW.com
Thad Wilson is a partner in the Atlanta office of King & Spalding and a member of the firm’s Financial Restructuring
practice. Thad has represented a broad spectrum of clients in financial restructuring, corporate and insolvency matters,
including bankruptcy-related government investigations and appeals. He has represented debtors, secured and
unsecured creditors, and other parties in interest in major Chapter 11 bankruptcy cases. Thad has substantial experience
representing litigants in contested matters, adversary proceedings and other high stakes litigation in significant Chapter
11 bankruptcy cases and insolvency proceedings involving creditors’ rights, fraudulent transfers, and alter ego, as well as
representing buyers and sellers of distressed assets in Chapter 11 bankruptcy proceedings. Thad is a member of the
American Bankruptcy Institute, the Turnaround Management Association, the Atlanta Bar Association and the State Bar
of Georgia. He is a founding member of the Atlanta chapter of the Turnaround Management Association NextGen
organization and is the current president-elect of its board. In 2014, he was elected to the initial class of Barristers of the
W. Homer Drake, Jr. Georgia Bankruptcy American Inn of Court, of which he is currently a member. Thad is a frequent
lecturer on bankruptcy-related issues before bar groups and in continuing legal education programs. Thad has authored
and co-authored numerous articles on bankruptcy-related topics and has been published in numerous publications.
Thad received his law degree from the University of Iowa College of Law, with distinction. While in law school, Thad
served as the Executive Editor of the Iowa Law Review and as treasurer of McLain Inn of Phi Delta Phi. Thad received
his Bachelor of Arts in Economics, magna cum laude, from Furman University in 2005.
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MICHAEL SCHWARZMANN– michaelschwarzmann@yahoo.com
Michael Schwarzmann has over 20 years’ experience helping identify opportunities to create value for his
clients. I have extensive experience working with established companies when they encounter financial
difficulties by assisting them in developing solutions to address short term cash needs and longer term
profitability. My process includes helping to identify cost savings and value capture scenarios by analyzing
historical financial performance along with current operations and projecting optimizing strategies. Utilizing
weekly and monthly cash flow statements, budgets, and forecasts, I utilize a focused, data driven approach to
identifying opportunities to increase company profitability. Through a broad review of financial, operational
and strategic performance, I help guide companies to increased profitability. Working across the organization,
vertically and horizontally, uncovers additional solutions and generates greater buy-in of the goals, objectives
and action plan, all of which are critical to maximize the impact of proposed changes. I utilize my legal
knowledge to seamlessly work with counsel to identify and address legal issues in a more cost effective manner.
I have guided the development and evaluation of business plans and formulated successful strategies to
preserve or improve asset values. I am a consensus builder. Industry experience includes: health care,
manufacturing, agricultural, construction, restaurants and franchising, energy and travel.
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CHRISTOPHER WICK – cwick@hahnlaw.com
Christopher B. Wick specializes in corporate restructuring and bankruptcy. Chris focuses his practice on
corporate reorganizations, workouts, debtors’ and creditors’ rights and corporate transactions across the
United States. He has represented parties in the restructuring, reorganization or sale of complex business in
various industries, including energy, automotive, agriculture, telecommunications, logistics, manufacturing,
real estate and steel. He also has a broad range of transactional experience and has advised clients in
connection with a variety of DIP financing facilities, recapitalization transactions and asset dispositions and
acquisitions.
Chris has substantial experience representing and advising companies, buyers and investors in all aspects of
distressed and insolvency situations. He counsels boards of directors, chief executive offices and other
members of senior management with respect to their duties and obligations to and exposures in connection
with financially challenged companies.
Chris received his J.D. from Washington & Lee School of Law in 2000 and his B.A. in Print Journalism and
European History from Washington and Lee University in 1997.
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