Class 10
Bankruptcy, Spring, 2000
Preferences
Randal C. Picker
Leffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/r-picker@uchicago.edu
Copyright © 2005-09 Randal C. Picker. All Rights
547(b): The Prima Facie
Case

Preferences
(b)
Except as provided in subsections (c)
and (i) of this section, the trustee may avoid
any transfer of an interest of the debtor in
property (1) to or for the benefit of a creditor;
 (2) for or on account of an antecedent debt
owed by the debtor before such transfer was
made;
 (3) made while the debtor was insolvent;

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547(b) (cont.)

Preferences (cont.)

(4) made • (A) on or within 90 days before the date of the
filing of the petition; or
• (B) between ninety days and one year before the
date of the filing of the petition, if such creditor at
the time of such transfer was an insider; and
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547(b) (cont.)

Preferences (cont.)

(5) that enables such creditor to receive
more than such creditor would receive if • (A) the case were a case under chapter 7 of this
title;
• (B) the transfer had not been made; and
• (C) such creditor received payment of such debt
to the extent provided by the provisions of this
title.
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547(c): Contemporaneous
Exchange

Preferences (cont.)
(c)
The trustee may not avoid under this
section a transfer 
(1) to the extent that such transfer was • (A) intended by the debtor and the creditor to or
for whose benefit such transfer was made to be
a contemporaneous exchange for new value
given to the debtor; and
• (B) in fact a substantially contemporaneous
exchange;
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547(c)(2): Ordinary Course

Preferences (cont.)

(2) to the extent that such transfer was in
payment of a debt incurred by the debtor in
the ordinary course of business or financial
affairs of the debtor and the transferee, and
such transfer was—
• (A) made in the ordinary course of business or
financial affairs of the debtor and the transferee;
and
• (B) made according to ordinary business terms;
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547(c)(3): PMSIs

Preferences (cont.)

(c)(3) that creates a security interest in property acquired by
the debtor  (A) to the extent such security interest secures new value that
was • (i) given at or after the signing of a security agreement that
contains a description of such property as collateral;
• (ii) given by or on behalf of the secured party under such
agreement;
• (iii) given to enable the debtor to acquire such property; and
• (iv) in fact used by the debtor to acquire such property; and

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(B) that is perfected on or before 30 days after the debtor
receives possession of such property;
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547(c)(4): New Value

Preferences (cont.)
(c)(4)
to or for the benefit of a creditor, to
the extent that, after such transfer, such
creditor gave new value to or for the benefit
of the debtor 

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(A) not secured by an otherwise unavoidable
security interest; and
(B) on account of which new value the debtor did
not make an otherwise unavoidable transfer to or for
the benefit of such creditor;
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8
547(c)(5): Two-Point Net
Improvement Test

Preferences (cont.)
 (c)(5)
that creates a perfected security interest in
inventory or a receivable or the proceeds of either,
except to the extent that the aggregate of all such
transfers to the transferee caused a reduction, as
of the date of the filing of the petition and to the
prejudice of other creditors holding unsecured
claims, of any amount by which the debt secured
by such security interest exceeded the value of all
security interests for such debt on the later of -
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547 (cont.)

Preferences (cont.)
 (c)(5)


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(cont.)
(A)(i) with respect to a transfer to which subsection
(b)(4)(A) of this section applies, 90 days before the
date of the filing of the petition; or (ii) with respect to
a transfer to which subsection (b)(4)(B) of this
section applies, one year before the date of the
filing of the petition; or
(B) the date on which new value was first given
under the security agreement creating such security
interest;
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10
547(e): Timing of Transfers

More in a bit
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No Antecedent Debt, No
Preference
Debtor
2/1
SA: Machine
FS: Machine
$10,000
Finco
4/1 Has Finco
received a preference
under BC 547(b)?
Machine = $10,000
4/1 Debtor files for bankruptcy
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Answer

No antecedent debt, so no preference
Finco
Debtor
2/1
SA: Machine
FS: Machine
$10,000
4/1 Has Finco received
a preference under BC
547(b)?
Machine = $10,000
4/1 Debtor files for bankruptcy
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Antecedent Debt,
Preference
Debtor
2/1
$10,000
Finco
3/1 SA & FS Machine
Machine = $10,000
5/1 Debtor files for bankruptcy
5/1 Has Finco
received a
preference under
BC 547(b)?
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Answer

b(1): transfer to or for the benefit of a
creditor
Yes

b(2): on account of an antecedent debt
The

2/1 debt of $10K
b(3): made while the debtor was insolvent
Finco
Debtor
Presumed
2/1
$10,000
insolvent for 90 days prior under
3/1 SA & FS Machine
547(f)
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Machine = $10,000
5/1 Debtor files for bankruptcy
Copyright © 2005-09 Randal C.
5/1 Has Finco received
a preference under BC
Picker 547(b)?
15
Answer

b(4): for non-insiders, made within 90 days
of filing
Yes

b(5): does better with transfer than without
in hypo Chap 7
With
transfer: collect in full
Without: pro rata
Finco
Debtor
2/1
$10,000
3/1 SA & FS Machine
Machine = $10,000
5/1 Debtor files for bankruptcy
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5/1 Has Finco received
a preference under BC
Picker 547(b)?
16
Payments to Fully Secured
Creditors
Debtor
2/2
$10,000
Bank
March 18, 2016
2/1
SA: Machine
FS: Machine
$10,000
Finco
4/2 Has Finco
received a preference
under 547(b)?
Machine = $10,000
4/1
Debtor sells machine for $10,000
Gives money to Finco
4/2 Debtor files for bankruptcy
Assets = $5,000
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Answer

Two transfers to Finco within preference
period
2/1 Transfer
Debtor

No

Finco
2/1
SA: Machine
FS: Machine
$10,000
problem as before
4/1 Transfer
b(1)
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2/2
$10,000
4/2 Has Finco received
a preference under BC
547(b)?
Machine = $10,000
4/1
Debtor sells machine for $10,000
Gives money to Finco
Bank
4/2 Debtor files for bankruptcy
Assets = $5,000
to b(4): yes
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Answer
b(5)
Prior security interest fully protects this
payment
 Would have collected $10K in bankruptcy
 Better off?

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Synergies and Fully
Secured Creditors
Debtor
Finco
2/1
SA: Machine 1
FS: Machine 1
$10,000
4/2 Has Finco
received a preference
under 547(b)?
Machine 1 = $10,000
2/2
$10,000 Machine 2 = $5,000
Both = $17,000
Bank
March 18, 2016
4/2 Debtor files
for bankruptcy
Assets = Machine 2
4/1
Debtor sells Machine 1 for $10,000
Gives money to Finco
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Answer

No preference issue, but note harm done to
other creditors from sale of first machine
Finco
Debtor
2/1
SA: Machine 1
FS: Machine 1
$10,000
2/2
$10,000
March 18, 2016
Bank
Copyright © 2005-09 Randal C.
Machine 1 = $10,000
Machine 2 = $5,000
Both = $17,000
4/2 Has Finco received
a preference under BC
547(b)?
4/2 Debtor files
for bankruptcy
Assets = Machine 2
4/1
Debtor sells Machine 1 for $10,000
Picker Gives money to Finco
21
11 USC 547(e): Timing
Transfers

(e)(1) For the purposes of this section –
 (A)
a transfer of real property other than fixtures,
but including the interest of a seller or purchaser
under a contract for the sale of real property, is
perfected when a bona fide purchaser of such
property from the debtor against whom applicable
law permits such transfer to be perfected cannot
acquire an interest that is superior to the interest of
the transferee; and
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11 USC 547(e)(1) Cont.
(B)
a transfer of a fixture or property other
than real property is perfected when a
creditor on a simple contract cannot acquire
a judicial lien that is superior to the interest
of the transferee.
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11 USC 547(e) Cont.
(2)
For the purposes of this section, except
as provided in paragraph (3) of this
subsection, a transfer is made –

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(A) at the time such transfer takes effect
between the transferor and the transferee, if
such transfer is perfected at, or within 30
days after, such time except as provided in
subsection (c)(3)(B);
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11 USC 547(e)(2) Cont.
(B) at the time such transfer is perfected, if
such transfer is perfected after such 30
days; or
 (C) immediately before the date of the filing
of the petition, if such transfer is not
perfected at the later of –

• (i) the commencement of the case; or
• (ii) 30 days after such transfer takes effect
between the transferor and the transferee.
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11 USC 547(e) Cont.
(3)
For the purposes of this section, a
transfer is not made until the debtor has
acquired rights in the property transferred.
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Late Filings and Secured
Creditors
Debtor
2/2
$10,000
2/1
SA: Machine
$10,000
3/15
FS: Machine
Finco
4/2 Has Finco
received a preference
under 547(b)?
4/1
Debtor sells Machine 1 for $10,000
Gives money to Finco
Bank
March 18, 2016
4/2 Debtor files for bankruptcy
Assets = $5,000
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Answer

Two Transfers
SI
The

Sale Proceeds
The SI
Under
547(e)(2)(B), the transfer of the SI
took place on 3/15, the date it was
perfected
This creates antecedence, so avoidable

The 4/1 Sale Proceeds
Can’t
be supported
under 547(b)(5) given
Copyright © 2005-09 Randal C. Picker
absence of underlying SI
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New Property and Secured
Creditors
Debtor
Bank
2/1
SA: All Prop, TE & TA
Article 9 filing
$10,000
2/12
Debtor acquires machine
3/1 Debtor files for bankruptcy
4/2 Has Bank received a
preference under 547(b)?
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Answer

Two Transfers
Debtor
2/1
Bank
Transfer
2/12 Purchase of Equipment

2/1
Fine

2/1
SA: All Prop, TE & TA
Article 9 filing
$10,000
2/12
Debtor acquires machine
3/1 Debtor files for bankruptcy
4/2 Has Finco received a
preference under BC 547(b)?
2/12
Under
547(e)(3), transfer takes place at
time debtor acquires equipment
Problem as before
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11 USC 547(c)(5): Two Point
Net Improvement Test

(c) The trustee may not avoid under this
section a transfer (5)
that creates a perfected security interest
in inventory or a receivable or the proceeds
of either, except to the extent that the
aggregate of all such transfers to the
transferee caused a reduction, as of the
date of the filing of the petition and to the
prejudice of other creditors holding
unsecured claims, of any amount by which
the debt secured by such security interest
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11 USC 547(c)(5): Two Point
Net Improvement Test
exceeded
the value of all security interests
for such debt on the later of –

(A)(i) with respect to a transfer to which
subsection (b)(4)(A) of this section applies,
90 days before the date of the filing of the
petition; or
• (ii) with respect to a transfer to which subsection
(b)(4)(B) of this section applies, one year before
the date of the filing of the petition; or

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(B) the date on which new value was first
given under the security agreement creating
Copyright © 2005-09 Randal C. Picker
32
such security interest;
Floating Collateral and
Secured Creditors
Debtor
Bank
2/1
SA: INV, TE & TA
Debtor already has
Article 9 filing
$10,000 in INV
$10,000
3/1 Debtor files for bankruptcy
3/1 Debtor has $10,000 in INV
all acquired after 2/1
3/1 Has Bank received a
preference under 547(b)?
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Answer

Bottom Line
No
improvement in position, so one hopes
no preference
547(c)(5) protects this

Step by Step
Debtor
Debtor already has
$10,000 in INV
Bank
2/1
SA: INV, TE & TA
Article 9 filing
$10,000
3/1 Debtor files for bankruptcy
3/1 Debtor has $10,000 in INV
all acquired after 2/1
March 18, 2016
3/1 Has Finco received a
Copyright © 2005-09 Randal C. Picker
preference under BC 547(b)?
34
Floating Collateral and
Secured Creditors
Debtor
Bank
2/1
SA: INV, TE & TA
Debtor already has
Article 9 filing
$8,000 in INV
$10,000
3/1 Debtor files for bankruptcy
3/1 Debtor has $10,000 in INV
all acquired after 2/1
3/1 Does that change
your answer?
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Answer

Bottom Line
$2K
improvement in position, so should be
preference

Step by Step
Debtor
Debtor already has
$8,000 in INV
Bank
2/1
SA: INV, TE & TA
Article 9 filing
$10,000
3/1 Debtor files for bankruptcy
3/1 Debtor has $10,000 in INV
all acquired after 2/1
March 18, 2016
Copyright © 2005-09 Randal C. Picker
3/1 Does that change your
answer?
36
Guarantees and
Preferences I
Owner
2/1: Guarantees Debt
4/1: Debtor files; is there a
preference under 547(b)?
3/1: Debtor pays $10,000
Bank
Debtor
March 18, 2016
2/1: $10,000
loan
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37
Guarantees and
Preferences II
Owner
2/1: Guarantees Debt
8/1: Debtor files; is there a
preference under 547(b)?
3/1: Debtor pays $10,000
Bank
Debtor
March 18, 2016
2/1: $10,000
loan
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550

Liability of transferee of avoided transfer
 (a)
Except as otherwise provided in this section, to
the extent that a transfer is avoided under section
544, 545, 547, 548, 549, 553(b), or 724(a) of this
title, the trustee may recover, for the benefit of the
estate, the property transferred, or, if the court so
orders, the value of such property, from 

March 18, 2016
(1) the initial transferee of such transfer or the entity
for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such
initial transferee.
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550 (cont.)

Liability of transferee of avoided transfer (cont.)
 (b)
The trustee may not recover under section
(a)(2) of this section from 

March 18, 2016
(1) a transferee that takes for value, including
satisfaction or securing of a present or antecedent
debt, in good faith, and without knowledge of the
voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee
of such transferee.
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550 (cont.)

Liability of transferee of avoided transfer (cont.)
 (c)
If a transfer made between 90 days and one
year before the filing of the petition—


(1) is avoided under section 547(b) of this title; and
(2) was made for the benefit of a creditor that at the
time of such transfer was an insider;
the trustee may not recover under subsection (a)
from a transferee that is not an insider.
 (d) The trustee is entitled to only a single
satisfaction under subsection (a) of this section.
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Guarantees and
Preferences III
Owner
2/1: Guarantees Debt
8/1: Debtor files; is there a
preference under 547(b)?
3/1: Debtor grants
perfected SI in property
worth $10,000
Bank
Debtor
March 18, 2016
2/1: $10,000
loan
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2005 Adds 547(i)

547(i)
If
the trustee avoids under subsection (b) a
transfer made between 90 days and 1 year
before the date of the filing of the petition,
by the debtor to an entity that is not an
insider for the benefit of a creditor that is an
insider, such transfer shall be considered to
be avoided under this section only with
respect to the creditor that is an insider.
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Bergner I
Swiss
8/23/91: Debtor files; is there a
preference under 547(b)?
AMC
7/19/91: Wires
$31mm to Bergner
operating account
90, 91: Bank issues LCs
5/91: Bank announces
won’t renew LCs,
induces 7/19/91 draw
$
Bank
Bergner
7/89: LC Facility
March 18, 2016
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44
Bergner II
8/23/91: Bank segregates funds from
operating account to cover LC; Bergner
files; is there a preference under
547(b)?
Liberty
90, 91: Bank issues LCs
8/2/91: Bergner puts funds
in operating account to
cover Liberty LC
5/91: Bank announces
won’t renew LCs
Bank
Bergner
7/89: LC Facility
March 18, 2016
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