Page 62 - Bankruptcy Volume 1

than partnerships fn 13 and municipalities fn 14 to be a financial condition such that the sum of the entity’s
debts is greater than all of such entity’s property, at fair valuation, excluding any property that may have
been transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors,
as well as any property exempted by 11 USC 522. The Bankruptcy Code provides no definition of fair
valuation. Although fair valuation has been interpreted in most jurisdictions to mean fair market value,
practitioners engaged to evaluate solvency in conjunction with avoidance actions must understand the
standard of value and how fair valuation is interpreted in the locality where the matter will be tried. 11
USC 547(f) establishes a presumption of insolvency on and during the 90 days preceding the petition
date. Thus, the creditor is initially burdened with rebutting the presumption of insolvency, and the debtor
need only prove insolvency if the creditor presents evidence contrary to the presumption. For additional
guidance regarding business valuation in bankruptcy, practitioners are directed to Providing Bankruptcy
and Reorganization Services: Volume 2 — Valuation in Bankruptcy.

Other conditions for avoidance of a preferential transfer are that the transfer of an interest of the debtor
or property of the debtor must be made on or within 90 days before the filing of the petition for nonin-
siders and within one year before the filing of the petition for insiders (11 USC 547(b)(4)) for or on ac-
count of an antecedent debt owed by the debtor prior to the transfer by the debtor. These seemingly
straightforward criteria for avoidance have historically been a source of contention. What is the date of
transfer when such transfer is made via a check — the check issue date, or the date the check clears the
bank? What gives rise to an antecedent debt of the debtor — rendering of service or delivery of an in-
voice? Is a debt considered to be an antecedent debt if it is not matured? Practitioners providing services
in conjunction with preference actions should familiarize themselves with how courts have resolved
these questions of fact in the jurisdiction in which the case will be tried and gather information accord-
ingly.

For a payment to be considered preferential, the creditor must have received more than it would have re-
ceived in a Chapter 7 liquidation. This analysis typically involves an analysis of the value of the assets
and liabilities in a liquidation and the resulting recovery to unsecured creditors. If the recovery in Chap-
ter 7 liquidation is less than 100%, then any creditor that received payment in full with respect to an ob-
ligation during the time period prescribed by 11 USC 547(b)(4) will have received more than it would
have received in a Chapter 7 liquidation. When the analysis of recovery in a Chapter 7 liquidation is
prospective or hypothetical, the practitioner will need to consider the types of assets and liabilities and
what the likely liquidation outcome would be for those assets and liabilities, potentially necessitating
expert consultation and testimony. Practitioners should keep in mind that secured creditors can addition-
ally be affected to the extent they receive more than the value of their security interest and that such
transfers would also be subject to this test. As noted, 11 USC 547(c) specifically carves out transfers that
meet the criteria in 11 USC 547(b) as exempt from avoidance. Transactions specifically excluded from
the recovery as a preference include the following. The trustee may not avoid a transfer

fn 13 Refer to 11 USC 101(32)(B). For partnerships, insolvent means a financial condition such that the sum of the partnership’s debts
is greater than all of such partnership’s property, at fair valuation, excluding any property that may have been transferred, concealed,
or removed with intent to hinder, delay, or defraud such partnership’s creditors and the sum of the excess of the value of each general
partner’s nonpartnership property over nonpartnership debts.

fn 14 Refer to 11 USC 101(32)(C). For municipalities, insolvent means a financial condition such that the municipality is generally not
paying its debts as they become due unless such debts are the subject of a bona fide dispute, or is unable to pay its debts as they be-
come due.

60 © 2020 Association of International Certified Professional Accountants