Calculating the Preference Period:

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Effective Date of the Trasfer and the Inapplicability of Federal Rule of Bankruptcy Procedure 9006(a) to the Trustee's Avoidance Powers
By Richard Ruszat

A threshold issue to preference litigation is the determination of whether a transfer occurred within the applicable preference period. The Bankruptcy Code empowers a trustee to avoid any transfer in interest made on or within 90 days of the filing of the bankruptcy petition, or alternatively, within one-year if the transfer is made to an insider. See Title 11 U.S. C. § 547(b)(4)(the “Bankruptcy Code”). Accordingly, determining the effective date of the transfer and calculation of the preference period is essential in preference litigation.

Trustee’s Avoidance Powers

Pursuant to § 547(b), a trustee may avoid any transfer of interest of the debtor if the transfer meets certain requirements enumerated in the Bankruptcy Code. Generally, a transfer is preferential if made to a creditor on account of antecedent debt while the debtor was insolvent. See 11 U.S. C. § 547(b)(1-3). In addition, the transfer must occur during the applicable preference period and permit a creditor to receive more than it is entitled to under a hypothetical liquidation. See 11 U.S.C. § 547(b)(4-5). The Bankruptcy Code’s definition of a transfer is expansive and encompasses “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property.” See Barnhill v. Johnson, 503 U.S. 393, 400 (1992); 11 U. S.C. § 101(54).

Method of the Transfer and the Effective Date

The method of transfer determines the effective date of the transfer. Generally, the effective date occurs when the transferee receives an interest in the property through possession or control. For example, the effective date of a transfer by cashier’s check or wire transfer is the date that the transferee receives the property. See In re Lee, 179 B.R. 149, 159 (9th Cir. 1995)(reasoning that a cashier’s check is accepted upon issuance and that a transferee may still enforce its rights if the cashier’s check is lost or destroyed); In re Barefoot, 952 F.2d 795 (4th Cir. 1991)(concluding that the receipt of the wire transfer was the effective date).

However, for the limited purpose of § 547(b), if the transfer occurs through an ordinary check, then the date of honor is the effective date of the transfer. See Barnhill, 503 U.S. at 400. The Barnhill Court reasoned that a myriad of events can intervene between the delivery and presentment of a check including the closing of an account, acquisition of liens and garnishments, or mistaken refusal to honor a check. See Id. at 399. However, the Barnhill decision may not apply to defenses applicable under § 547(c), and therefore, the decision dubiously creates different meanings to the prosecution and defenses in preference litigation. See Barnhill, 503 U.S. at 401 (discussing legislative history suggesting that the date of delivery rule, and not the date of honor rule, is controlling for the purpose of preference defenses).

Calculating the Preference Period: Counting Backwards from the Date of the Petition or Forward from the Date of the Transfer

There is a jurisdictional split regarding the correct computation of the preference period. The split arises from the applicability of § 547 to Federal Rule of Bankruptcy Procedure 9006(a)(“Rule 9006 (a)”). See Fed. R. Bankr. P. 9006(a). A majority of courts conclude that Rule 9006 (a) is not applicable to § 547(b). See e.g., Greene v. MBNA America, 223 F.3d 1064 (9th Cir. 1999). The majority cites to the plain meaning of § 547(b)(4), which empowers the trustee to avoid any transfer of interest “on or within 90 days [or one-year if made to an insider] before the filing date of the petition.” See 11 U.S.C. § 547(b)(4) (emphasis added). The majority computes the applicable preference period backwards 90-days, or one year if the transfer was to an insider, beginning with the day immediately preceding the bankruptcy filing. Moreover, the majority contends that the counting forward approach is absurd since the filing of the petition gives rise to the trustee’s avoidance powers and that counting backwards is logical since the trustee counts only once instead of counting from each alleged transfer. See e.g., Nelson Co. v. Counsel for the Official Committee of Unsecured Creditors (In re Nelson Co.), 959 F.2d 1260, 1265 (3d. Cir. 1992).

Alternatively, a minority of jurisdictions count forward from the date immediately following the transfer to determine whether a transfer constitutes a preference. See Wilmington Nursery Co., Inc. v. Burkert (In re Wilmington), 36 B.R. 813 (Bankr.E. D.N.Y.). In doing so, the minority applies Bankruptcy Rule 9006(a), which excludes the “date of the act” (i.e., transfer), and counts forward 90-days, or one year if the transfer was to an insider.

Rule 9006(a) Is Not Applicable to § 547(b)

Although these differing methods usually produce the same preference period, application of Bankruptcy Rule 9006(a) may serve to impermissibly extend the preference period beyond 90-days. See Levinson v. Security Sav. Bank SLA (In re Levinson), 128 B.R. 365, 368 (Bankr.S.D.N.Y. 1991)(concluding that 9006(a) is only relevant if the terminal date falls on a weekend or holiday). The minority’s use of Rule 9006(a) to determine the first day of the computation also serves to extend the preference period beyond the 90th day, if the 90th day falls on a weekend or holiday. Rule 9006(a) provides in pertinent part, that:

[i]n computing any period of time prescribed or allowed by these rules … or by any applicable statute, the day of the act, event, or default from which the designated period of time begins to run shall not be included [and] the last day of the period so computed shall be included, unless it is a Saturday, a Sunday, or a legal holiday … in which event the period runs until the end of the next day which is not one of the aforementioned days.

For example, if counting forward from the date of the transfer, and the 90th day falls on a Sunday, then pursuant to Rule 9006(a), the effective date of the Transfer would be on the following Monday. This effectively expands the time period provided by § 547 by one day, or two-days if the 90th day falls on a Saturday, or three-days if the 90th days falls on a Saturday of a three-day weekend. Noticeably, the counting forward approach does not benefit creditors.

The majority’s reasoning is sound and based in the Bankruptcy Code. The majority concludes that § 547 is not an “applicable statute” within the meaning Bankruptcy Rule 9006(a). See Greene, 223 F.3d at 1069. In support, the majority cites to the Advisory Committee’s comments that Bankruptcy Rule 9006(a) only governs the time for “acts to be done and proceedings to be had [in cases under the Code] and any litigation commenced therein.” The majority concludes that the occurrence and timing of pre-petition transfers do not constitute a “procedure” in chapter 11 case since the transfer is made independently of any judicial action and there is no “act to be done or proceeding to be had.” See Id. Most important, the majority contends that a transfer can take place on any day of the week, including a weekend or holiday, and therefore does not require the bankruptcy court to be open for business for the purpose of determining the preference period. See Id. Accordingly, the 90th day controls and may not be extended.

The majority also concludes that Rule 9006(a) is not applicable to § 547 on substantive grounds. Pursuant to the Rules Enabling Act, the Bankruptcy Rules may not “abridge, enlarge, or modify any substantive right.” See Title 28 U.S.C. § 2075. The Rules Enabling Act only applies to substantive rights. To determine whether a rule is substantive or procedural, the inquiry is whether the rule regulates procedure (i.e., the judicial process to enforce substantive rights and duties) or is substantive in nature (i.e., rules of decision that a court determines a party’s rights). See Hanna v. Plumer, 380 U.S. 460, 464 (1985). The majority concludes that § 547 is a substantive right because the power to avoid a preferential transfer within the applicable period is a substantive element of a cause of action requiring no action by the trustee. Accordingly, § 547 creates a statutory period, and an extension of this period, would be an impermissible enlargement of the trustee’s avoidance powers permitted by statute.

Conclusions

The determination of the effective date of a transfer and the applicable preference period may be the key to a litigant’s success in a preference action. The plain meaning and logic of the Bankruptcy Code illustrates that the backwards approach should control the computation of the preference period. It follows, that since 9006(a) is not applicable to § 547, then the counting forward approach should not be used as an earmark to begin the computation period, or likewise, to extend the preference period beyond the time permitted by the Bankruptcy Code. Moreover, it is imperative that the litigant determine the effective date of the transfer to conclude whether it falls within the applicable preference period.

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About timothymccandless

Attorney at law, specializing in litigation, labor law overtime, criminal record expungement, partnership dissolution, and Real Estate workout solutions. Employment law claims and Wage and Hour claims Wrongful termination
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