§ 50.5 — Preferences after BAPCPA

Revised: July 3, 2007

[1]

BAPCPA made many changes to the preference avoidance power in § 547 of the Code. Six of these changes have some possibility of affecting Chapter 13 practice.

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1. Ordinary course of business. The ordinary course of busi-ness defense to preference recovery in § 547(c)(2) has been simplified in favor of the preference defendant. Prior to BAPCPA, the ordinary course of business defense had five elements, including that the transfer was made in the ordinary course of business or financial affairs of the debtor and the transferee and was made according to ordinary business terms.1 BAPCPA changed “and” to “or” in the previous sentence, permitting the preference defendant to prove either that the payment was made in the ordinary course of the debtor’s and the transferee’s business or that the payment was made according to ordinary business terms.2 Although preference litigation is not rampant in Chapter 13 cases, there will be occasion—especially with respect to Chapter 13 debtors engaged in business—when the new easier-to-prove ordinary course of business defense will be in play.

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2. No more Deprizio.3 Somewhat less likely in a Chapter 13 case, under Deprizio payment to a non-insider on a debt that benefits or is guaranteed by an insider was avoidable under the longer one-year reach-back under § 547(b)(4)(A). For more than a decade, Congress has chipped away at the Deprizio result, and BAPCPA probably lays it to rest altogether. By amendment to § 547(i), BAPCPA limits preference avoidance to the insider creditor when a transfer is made between 90 days and one year before the petition to an entity that is not an insider for the benefit of a creditor that is an insider.4 This amendment applies to any case or proceeding that is pending or commenced on or after the enactment of BAPCPA.5

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3. Domestic support obligations. BAPCPA substitutes the new term of art “domestic support obligation”6 in the defense to preference recovery in § 547(c)(7). The defense now reads that “bona fide payment of a debt for a domestic support obligation” is not recoverable as a preference. Bona fide could mean noncollusive in this context, but that is just a guess.

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4. Grace periods. BAPCPA changed several of the grace periods within which a lender must perfect a security interest to insulate the lien from preference recovery. The 20-day period after the debtor receives possession of property within which a purchase money lender can perfect has been extended to 30 days.7 The 10-day period within which perfection of a security interest or lien relates back to the date of the original transfer is enlarged to 30 days by amendments to § 547(e)(2). These grace periods typically arise in Chapter 13 practice when a car lender delivered possession to the debtor but failed to timely complete the lien or title registration. Chapter 13 trustees have a fiduciary duty to avoid liens that are not protected by the grace periods under state law or under § 547.8 The enlargement of the grace periods in § 547 by BAPCPA will reduce the opportunities for avoidance actions in Chapter 13 cases.

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5. Alternative repayment schedule. BAPCPA added a new subsection (h) to § 547, which reads: “The trustee may not avoid a transfer if such transfer was made as a part of an alternative repayment schedule between the debtor and any creditor of the debtor created by an approved nonprofit budgeting and credit counseling agency.”9 Nonprofit budget and credit counseling agencies are those approved by the U.S. trustee under new 11 U.S.C. § 111. “Alternative repayment schedule” is undefined but probably means a debt management plan negotiated with some or all creditors by a nonprofit budget and credit counseling agency approved by the U.S. trustee. Discussed elsewhere,10 BAPCPA imposes a new eligibility requirement that every individual debtor complete a “briefing” by a nonprofit budget and credit counseling agency that includes a related budget analysis. Perhaps an alternative repayment schedule is a possible outcome of the briefing or budget analysis required for eligibility for a Chapter 13 case. New § 547(h) will immunize from preference recovery any payment made pursuant to an alternative repayment schedule. There is some invitation here to mischief. A debtor who desires to pay friends or relatives before filing a bankruptcy case might negotiate an alternative repayment schedule with the assistance of a nonprofit budget and credit counseling agency.

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6. Venue changes. BAPCPA amended 28 U.S.C. § 1409 to provide that a proceeding to recover “a consumer debt of less than $15,000 or a debt (excluding a consumer debt) against a noninsider of less than $10,000” may be brought only in “the district in which the defendant resides.” This new provision is not artfully worded and may be interpreted to apply only to actions for a monetary judgment. But it certainly looks like the drafters of BAPCPA intended to force small preference actions into the district where the transferee resides. This could be a problem in Chapter 13 cases because the economics often won’t support litigation outside the debtor’s district.


 

1  11 U.S.C. § 547(c)(2)(B) and (C) (before amendment by BAPCPA).

 

2  11 U.S.C. § 547(c)(2) now reads:

(c) The trustee may not avoid under this section a transfer—
. . . .
(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; or
(B) made according to ordinary business terms.

 

3  Levit v. Ingersoll Rand Fin. Corp. (In re Deprizio), 874 F.2d 1186 (7th Cir. 1989).

 

4  11 U.S.C. § 547(i) reads:

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.

 

5  Pub. L. No. 109-8, § 1213(b), 119 Stat. 23 (2005).

 

6  See 11 U.S.C. § 101(14A).

 

7  11 U.S.C. § 547(c)(3)(B).

 

8  See § 60.1 [ Avoidance and Recovery Powers ] § 53.12  Avoidance and Recovery Powers.

 

9  11 U.S.C. § 547(h).

 

10  See 11 U.S.C. § 109(h), discussed in § 373.1 [ Briefing Requirement and Certificate ] § 36.25  Briefing Requirement and Certificate.