Loan Repaid to Family Member 8 months < BK:Trustee claims Preferential Payment

[M1chaelB]

A Chapter 7 Debtor filed her bankruptcy petition in May, 2009 .

Several years before her bankruptcy was filed, she had taken a $50,000 loan from a Family Member (her Mom). The loan became due in October, 2008. In October, 2008, per the agreement, she paid the Family Member back the $50,000 that she had previously borrowed. EIGHT MONTHS LATER -- the Debtor's financial condition did not improve -- so she decided to file for Chapter 7 bankruptcy.

Now, in the Debtor's Chapter 7 case (filed 5/09), the Trustee has served a "preferential payment" Complaint on the Mom of the debtors -- suing her for return of the $50,000 loan payment (which had been made by the Debtor 8 months prior to the bankruptcy and which was made to the Family Member because the loan was due).

Under these facts, Is the Trustee's allegations possibly valid?

(CAN SOMEONE POINT ME TO CASES WHICH WOULD SHOW OTHERWISE . . . .you'de be my hero?)

Thanks.

[justbroke]

First, you need to remove all your personal information.

Under these facts, Is the Trustee's allegations possibly valid?

Absolutely Valid. Not only is that a preference, it's an insider payment!

The Trustee has these powers under 11 USC 547. The Trustee can lookback a year for these. Now, this doesn't affect the Debtor, but affects the creditor who received the payment (the insider/debtor's parents). The Trustee sues them, not the Debtor. So the Debtor themselves have nothing to worry about.

The only way the Insider could have been able to avoid all this, was to have created a lien against real or personal property within the statutory period allowed for that particular State. Then, it wouldn't be a preference to pay a secured creditor. However, you didn't mention any UCC or recorded mortgage or other lien against property, so I think there's no sense even visiting that.

Was this loan agreement recorded anywhere? Was it verbal? Did it attach to any property of the Debtor?

[M1chaelB]

Thanks for the reply. Loan evidenced by an simple agreement. not recorded.

I guess the only argument would be that the Debtor was NOT insolvent at the time of the transfer 8 months earlier . . . . . Are their any other arguments out there? ;)

[StartingOver08]

No argument for the debtor. You are clearly in the one year look back period for insider payments.

Didn't the attorney mention it when you had a consult with him/her?

[M1chaelB]

Couldn't the debtor argue that -- 8 months later -- when she had the $50,000 in hand and repaid her mother -- she was not "insolvent" (as defined by the Code)? Since insolvency is a requirement of the "look back" provisions, that seems like the only argument I can think of.

[justbroke]

I guess the only argument would be that the Debtor was NOT insolvent at the time of the transfer 8 months earlier . . . . . Are their any other arguments out there? ;)

The Trustee would need to prove insolvency, and since this has certainly aged beyond the 90 "presumptive" insolvency in the Code, you may be able to easily rebut insolvency.

The only other arguments are what's in 11 USC 547 on contemporaneous exchanges and the like.

I think the insolvency would be your key. Answer the complaint with "the Defendant did receive payments on unsecured credit from Debtor, but at the time of the transfer, the Debtor was not insolvent." I guess the claim of solvency would put the ball back in the Trustee's court to prove insolvency. You may need to show financial records evidencing that the Debtor was not in any financial jeopardy at the time they paid this creditor, and that some other catastrophic event occurred later which caused the Bankruptcy (e.g. unemployment, military deployment, disability, etc). You would also need to show where the Debtor was actually paying his other unsecured creditors on-time. Whatever you could do to prove that the Debtor was not insolvent at the time.

If you could do all that... I would say that you could win against the Trustee.

[M1chaelB]

thanks. appreciate the help. we'll see what happens . . . .

[MakinMeCrazy]

Hello..just out of curiousity.....had this person waited one year or more to file.........would a large payment like that pass the ONE year look back on insider payments?
In other words.would the mom in law be off the hook had her daughter filed one year or more after this large payment ? Does the one year look back hold even in a large payment like this?

[shabam]

Definitely an insider payment here. What would being solvent have to do with an insider preferential payment? That usually arises if a creditor sues. This family member could file an AP and make the debt nondischargeable.

The insider payment rule is quite simply. Any payments made towards money borrowed from a family member within a year, is an insider payment. Same deal with borrowing $50k from a bank. Pay it back within 90 days and it's a preferential payment.

Solvency test means that at the time of acquiring debt, your assets were worth more than your debts. Being able to pay the minimums does not mean someone was solvent.

[shabam]

Hello..just out of curiousity.....had this person waited one year or more to file.........would a large payment like that pass the ONE year look back on insider payments?
In other words.would the mom in law be off the hook had her daughter filed one year or more after this large payment ? Does the one year look back hold even in a large payment like this?

Generally speaking yes. The trustee would not be able to go after the family member.

Now, if someone transferred assets, this would be a different story.