| ID |
Name |
Group |
Other |
Code
Sec |
Cross
Ref |
Problem Referenced |
Proposed Solutions |
| NBRC-0010 |
Professor Morris G. Shanker |
Academia; Professor of Law, Case Western Reserve
University |
|
547 |
|
The preference avoidance statute has outlived its
usefulness. |
Eliminate the provisions regarding preferences or
significantly revised with an approach which permits the avoidance of
"fraudulent preferences." |
| NBRC-0026 |
"United States Law Week" |
|
|
548(c) |
|
Whether good faith standard under 548(c) is an
objective standard or a subjective standard |
Section 548(c) is an objective standard. Jobin v.
McKay. If the circumstances would place a reasonable person on inquiry
of a debtor's fraudulent intent. |
| NBRC-0076 |
Tim Johnston |
President; Quality Welding & Fabricating,
Inc. |
Forwarded on 8/28/96 by Steve Buyer; Congressman from
5th District of IN. |
547 |
|
Small business did some work and was not paid for
over 90 days after completion. 6 Mos. later, got a notice that U.S. Tech
had filed for bankruptcy and small biz had to pay back $6,000. Atorney
(hired in MI) was able to settle for $4,500 on preference, but was still
too much for small business to pay. |
No logic or fairness to the fact that a small
business that is put into financial jeopardy as a result of having to
pay back potentially preferential amounts. The law needs to be changed.
Small creditor had honored its end of the bargain, no reason why it
should have to bail out bi debtor and risk serious financial problems
itself as a result. |
| NBRC-0139 |
Ken Mease |
Congressman George W. Gekas |
|
547 |
|
Preference law as applied to small businesses is
tantamount to extortion |
Revise the Code to exempt small businesses from
preference laws. |
| NBRC-0152 |
Kenneth L. Robinson |
President; National Ass'n of Federal Credit
Unions |
|
547 |
|
Recovery of preferences from creditors who had no
reason to know of financial condition of debtor and act in the ordinary
course of business |
Code should be amended to exclude from preferences
transactions undertaken with creditors that lack the ability to know of
the debtor's insolvency and act in the ordinary course of
business. |
| NBRC-0175 |
Kenneth P. Childs, on behalf of the Bankruptcy Review
Committee of the Oregon State Bar Debtor-Creditor Section |
Attorney |
|
547(c)(2)(C) |
|
In interpreting the ordinary course defense to
preference claims, courts have held that § 547(c)(2)(C), which
specifies that tranfers must be made "according to ordinary business
terms," requires that the transfers be made in a manner that is
"ordinary in the industry in general." This standard is ambiguous,
difficult to prove and unnecessary. |
Requirement under 11 USC § 547(c)(2)(C) that the
transfer was "ordinary in the industry in general" is unnecessary. The
requirements under subsections (A) (that the debt was incurred in the
ordinary course of the debtor's business) and (B) (that the transfer was
made in the ordinary course of affairs of the particular debtor and
creditor) are sufficient for establishing that the subject of the claim
was an ordinary course transfer and not a preference. |
| NBRC-0175 |
Kenneth P. Childs, on behalf of the Bankruptcy Review
Committee of the Oregon State Bar Debtor-Creditor Section |
Attorney |
|
547, 550 |
|
Recent amendment to 11 USC § 550 does not
fulfill its intended purpose of overruling Levit v. Ingersoll Rand
(DePrizio). In DePrizio, the court held that payment to a creditor on a
debt guaranteed by an insider constitutes a transfer for the benefit of
the insider, and thus the one-year extended preference period applies.
Rather than precluding DePrizio type preference claims, the amendment
simply places a limit on the trustee's ability to recover a voided
preference (i.e., the trustee may not recover from a non-insider
transferee a voided transfer that occured between 90 days and one year
prior to the petition). The trustee's ability to void the transfer is
still "left open." With some types of transfers, such as the granting of
a security interest, avoidance will effectively result in defeating the
non-insider transferee's interest and for all practical purposes result
in recovery. |
11 USC §§ 547 and 550 should be rewritten
to provide that all transfers to a non-insider occuring between 90 days
and one year prior to a bankruptcy petition may not be avoided by a
trustee. |
| NBRC-0196 |
Chris F. Mohr |
Chairman and CEO of AmeriStaff, a temporary staffing
company |
|
|
|
Author is responding to an article by Commissioner
Butler that was published in the Insight Newsletter. The author raises
concerns about how temporary staffing companies could be victims of
"unscrupulous" debtors who use large numbers of temporary staff, and
then file for bankruptcy without compensating the staffing company. In
such a case, the staffing company would itself be obligated to pay the
staff, which could total several hundred thousand dollars in wages and
taxes. Due to their unsecured status, these staffing companies would
have no recourse against the debtors. |
Temporary staffing companies should receive
protection from "unscrupulous" creditors who declare bankruptcy without
first paying temporary staff. Staffing companies should at least be able
to recover direct wages and taxes on a preferred basis. |
| NBRC-0197 |
J. Stanley Payne |
Attorney; Corporate Vice President & General
Counsel/Secretary of Bassett Furniture |
|
547 |
|
Author is responding to an article by Commissioner
Butler that was published in the Insight Newsletter. The author comments
on the judicial interpretation of "ordinary course of business." The
author of the attached letter notes that trustees categorize every
payment within the 90-day pre-petition period as preferential, thereby
shifting the burden of defense. The author's furntiure company, however,
has a national chain of distribution and faces different standards for
the "ordinary course of business" defense across jurisdictions. Of the
various standards they encountered, the "best" was one based on the
payment history between the two parties, and not on the industry as a
whole. In other words, if the retailer has a history of late payments,
then a late payment made within the preference period should be
considered in the "ordinary course of business." |
Bankruptcy Code should be amended so that "ordinary
course of business" is based on each individual creditor-debtor
relationship, and not on the industry as a whole. |
| NBRC-0229 |
Tim Johnston |
President, Quality Welding & Fabricating,
Inc. |
Cover letter from Representative Steve
Buyer |
547 |
|
Author is a small business owner who complains that
the preference provisions are unfair and have resulted in hardship for
his company. |
Bankruptcy system should be revised with regard to
preferences. |
| NBRC-0318 |
Paul Mignini, Jr., Mary E. Wysocki and Charles M.
Tatelbaum |
President-National Association of Credit Management
("NACM"), Chair-NACM Government Affairs Committee, and NACM Legislative
and Bankruptcy Counsel, respectively |
|
547 |
|
NACM sought the input of all NACM members with
respect to proposed changes to the bankruptcy laws. The NACM Government
Affairs Committee, without discussing the rationales for their
suggestions, prepared the proposals below. |
NACM's Government Affairs Committee concludes that
§ 547 should be amended to provide: (1) in the event of a recovery
of an avoidable preferential transfer by a debtor-in-possession under
chapter 11, the proceeds shall initially be placed into a separate
interest-bearing escrow account which may be used only to satisfy the
claims of creditors in the same class from which the proceeds were
received; (2) when dealing with the avoidance of a preferential
transfer, and the transfer in question is made by check in payment of an
antecedent debt, the transfer shall be deemed to have been made and
effected on the date the transferee deposits the check; (3) the term
"made according to ordinary business terms" shall include a course of
dealing between the debtor and the creditor for a period not to exceed
one year prior to the transfer in question, and the bankruptcy court may
use practices that are consistent and relevant as a basis for defining
this term; contractual terms shall be used only in the absence of a
pattern of practice. |
| NBRC-0330 |
Richard G. Ephgrave |
Director of Credit and Product Service, Bassett
Furniture Industries, Inc. |
|
|
|
The 90 day presumption for voidable preferences is
unfair to the debtor and creditor alike, and may actually force the
debtor into bankruptcy by forcing the debtor into "cash before delivery"
agreements. Often, trustees severely compromise the integrity of the
preference statutes by routinely making settlements on preference claims
to avoid litigation or abandoning the claim entirely, leaving the
creditor in the uncomfortable position of having to haggle with the
trustee to negotiate a settlement. |
The 90-day insolvency presumption, the author
concludes, is "invalid" and should be lowered to seven days for
non-insiders. Also, the ability of the trustee to make settlements to
avoid litigation should be eliminated. The trustee should be allowed to
cancel a preference claim if a valid defense has been proven to his
satisfaction. |
| NBRC-0557 |
Paul Mignini & Gary White |
President and Chair, Government Affairs Cmte,
respectively, of the National Association of Credit
Management |
|
|
|
Authors write on behalf of National Association of
Credit Managers. They feel that, while the preference provisions work
well in large cases, their application in small businsess bankruptcy
cases or with respect to small amounts of preference is not always
fair. |
Any preference recoveries should substantially
benefit the debtor's estate, and not be used to meet administrative
claims. A dollar threshold should be created for qualification of
preference challenges. A dollar ceiling should be created for preference
challenges, and all preference actions between the threshold and the
ceiling would have to be brought in the jurisdiction of the creditor.
All preference recoveries should be retained by the debtor's estate to
satisfy the demands of other dreditors within the same creditor
class. |
| NBRC-0558 |
Lowell W. Belk, CCE |
Vice President - Credit, Dan River, Inc. |
|
|
|
Form letter from National Association of Credit
Managers. Same as NBRC-0557. |
|
| NBRC-0604 |
Richard H. Walker |
General Counsel, Securities and Exchange
Commission |
Document entitled "Issues Identified by Division of
Enforcement and Office of General Counsel of Securities and Exchange
Commission for Consideration by Bankruptcy Review
Commission. |
|
|
In securities fraud cases, the SEC often obtains a
judgment requiring the defendant to pay money to a disgorgement fund,
which may be distributed to defrauded investors or paid to the United
States Treasury. Numerous courts have found disgorgement to be a
necessary remedy for deterring violations of the federal securities laws
by depriving a violator of the fruits of his wrongdoing and for
achieving equity by preventing unjust enrichment. If the funds are
considered to be property of the estate, subject to turnover and
avoidance powers, or to a preference, important securities law
enforcement policy would be subverted. |
Exclude disgorgement/restitution funds from property
of the estate, turnover provisions, and preference
provisions. |
| NBRC-0688 |
David T. Young |
Vice President, Corporate Credit, Russell
Corporation |
|
11 |
|
Author's company is "forced to spend a lot of man
hours in just about every bankruptcy case to defend against preference
actions in which the trustee or debtor's attorney has simply sent a
demand letter to every vendor who received a check within 90 days of the
filing." "Additionally, ther are very few cases where any of the
proceeds from preference actions ever are recovered by creditors. It
simply goes to pay fees for attornies [sic] and accountants, whose fees
would have been less without the preference actions." |
"There should be a penalty to a debtor's attorney who
is found to have blatantly abused filing a preference action without
first investigating the circumstances of the alleged preference
payment." |
| NBRC-0710 |
Franklin Feldman |
Attorney |
Exhibit A - a collection of letters from and to
author concerning the enforcement of a Guarantee and legal
representation of the company; and, Exhibit B - exchage of letters
between author and Michael L. Cook concerning a request for legal fees
and a threat of sanctions. |
|
|
Author invested in company which had filed chapter 11
but which got a new president and CEO whom author thought could turn the
company around. Author later became convinced that the CEO had acted in
his own best interests, and not those of the company, when the company
had to file chapter 11 two more times. Author petitioned for the
appointment of a trustee or examiner and was denied, and has been
actively involved in the legal procedings of the bankruptcy. Author
writes with suggestions for changes in the bankruptcy code based on his
experience. |
Employment agreements of all Board members and senior
executives should automatically be rejected, and the salaries of each
during the Chapter 11 prodeeding should be examined on an individual
basis either by the Bankruptcy Judge or an examiner appointed by
him. |
| NBRC-0818 |
Timothy M. Lupinacci |
Attorney, Burr & Forman LLP |
Letter refers to an enclosure of an article written
by author in 1995 entitled Analyzing Industry Standards and Defending
Preference Actions: Equitable Purpose in Search of Statutory Clarity,
which was published in the Journal of Bankruptcy Law and Practice in
January/February 1996, but it is not included with the database
copy. |
11 |
|
Author writes with regard to Proposal Number Three of
the proposals for 11 U.S.C. § 547 concerning the ordinary course of
business defense. |
"...I recommend that § 547(c)(2)(B) should be
amended to provide that a transfer is protected to the extent it was
'made in the ordinary course of business or financial affairs of the
debtor and the transferee, or if no such course of affairs exist, such
transfer is made according to ordinary business terms....Therefore, I
strongly support Preference Proposal Number Three which includes a
disjunctive test under the subsection." |
| NBRC-0819 |
Neal R. Allen |
Attorney |
|
|
|
Author writes in response to Elizabeth Holland's
memorandum dated 6/1/97. With respect to Proposal #1, the minimum
threshold requirement, author asserts that the effect is to prevent a
preference recovery of less than $5,000.00 from any one creditor. Author
poses examples in which debtor has paid equal amounts, but in one case
it is a lump sum to one creditor, while in another it is in equal
amounts, below the threshold, to a number of small creditors. "Both
types of preference are basically 'unfair'. The trustee (or Chapter 11
debtor in possession) should have discretion to decide which ones to go
after." The point is that there will be great variences in the result in
these two types of case where the total preference is identical, and
this is not a good result. |
None |
| NBRC-0819 |
Neal R. Allen |
Attorney |
|
|
|
Author is responding to Proposal #3 of Elizabeth
Holland's memorandum of 6/1/97. "The effect of this proposal is to allow
the exception (and resulting no preference recovery) upon a showing that
the paytment is in the ordinary course of this debtor's and creditor's
business, without requiring a further showing that the payment is within
customary industry standards. Assume that the industry standard is
payment within thirty days of invoice date. However, debtor has a
supplier who is more lenient than most, and requires payment within
ninety days of invoice date. Debtor, being strapped for cash, of course
takes advantage of this. Under existing law, all payments within the
preference period which were over thirty days from invoice date would be
recoverable, but under the proposal, only payments to this creditor
which were more than ninety days from invoice date could be recovered.
This emasculates the concept of recovery of preferences. Debtors and
creditors should not be allowed to design their own unusual terms of
payment if these vary radically from industry standards, at least for
preference purposes." |
Nothing specific. |
| NBRC-0820 |
Eric P. Israel |
Attorney, Danning, Gill, Diamond & Kollitz,
LLP |
|
547 |
|
Author is a member of the Avoiding Powers
Subcommittee and is responding to the commission's position on three
proposals dated June 1, 1997 to amend section 547. "I do not agree that
abuse of section 547 is occurring, at least not in the district where I
practice (the Central Disstrict of California). In any event, adequate
remedies already exist to deal with the conduct over which concern is
expressed....I also note that hte first two proposals completely ignore
existing section 547(c)(8), which already provides a floor for
preference recoveries." |
"The three proposals should not be recommended for
adoption, at least not without further consideration, and I urge the
commission to reject them at this time." |
| NBRC-0826 |
Craig A. Weinberg |
Attorney, Stevens, Littman & Biddison,
L.L.C. |
|
547, 548 |
10 |
Author raises the problem of investors who lost money
a Ponzi scheme and were then sued by the Trustee to recover money paid
to them under the scheme when the scheme filed bankruptcy on the basis
that the payments were preferences or fraudulent transfers, and not
payments made in the ordinary course of business. This perpetuates the
Ponzi scheme because the only moneys the trustee will be able to recover
are payments made to later investors who received payments within the
last ninety days. "As a result, the bankruptcy trustee wil end up
distributing the funds recovered from later investors (those who
typically lose the most money in a Ponzi scheme) to pay earlier
investors - those outside the reach of the trustee's avoidance powers -
while at the same time taking a fee for her services. By definition,
that is a Ponzi scheme." |
"Because Ponzi schemes will unfortunately endure,
Congress should clarify the broader issue which was expressly left
unanswered by Union Bank, to wit, whether payments made by a Ponzi
scheme can be within the 'ordinary course of business or financial
affairs.'" "I therefore request that the Commission consider making
recommendations to Congress to amend §101 to include a definition
of "good faith" that is consistent with the former Bankruptcy Act and
applicable fraudulent conveyance state law requiring only subjective
honesty, rahter than non-negligence The Commission should also consider
a proposal to change the ordinary course of business exception to
account for the situation where the debtor turns out to be a fraudulent
business." |
| NBRC-0854 |
Robert L. Baer |
Attorney |
|
547 |
10 |
Author has raises objections to a number of proposals
in the memorandum of June 1, 1997 for reform of preference recovery
under 11 U.S.C. § 547. Author agrees that instances exist in which
preference actions are initiated either without proper investigation or
consideration of affirmative defenses, or in spite of information which
makes it apparent that the action is not well founded; however, author
feels that there have been various protective and remedial reforms, and
denying a remedy for all based upon perceived abuses of a few is not an
appropriate approach." "With respect to preference proposal #1, the
threshold amount is too high." "Preference proposal #2 is unsound. To
the extent it is more expensive to litigate in a distant form it is
unwise policy to shift that expense in every instance, without regard to
any other factor from the transferee to the estate...Requiring actions
for less than $10,000 t be brought in the district where the creditor
has his principal place of businessmay indeed protect parties...from
actions...brought by trustees. However, it also has the effect of
diminishing the net recovery for the estate to the dtriment of
creditors." With regard to proposal #3, author disagrees with the
memorandum's interpretation of the language, and feels that the language
should be clarified to avoid misinterpretation. Author notes that the
proposed changes are in response to concerns about abusive or frivolous
§547 claims. Author feels there are adequate safeguards in place,
but if the Commission feels that additional safeguards are needed, he
proposes ADR. |
Lower the threshold amounts in Preference proposal
#1. Author suggests an ADR procedure and a relaxed standard for award of
fees to curb abusive or frivolous §547 claims. |
| NBRC-0858 |
Ed Goldwasser, et al. |
Small World Toys |
|
|
|
Authors write to express changes they would like to
see in the Bankruptcy Code. |
"Elimination of the 90-day preference period prior to
the filing during which payments received by creditors must be
subsequently reimbursed to the debtor." |
| NBRC-0995 |
Daniel C. Cohn |
Attorney |
|
547 |
|
"I was susrprised to read in Bankruptcy Court
Decisions (July 29, 1997, page A-11) that the commission has voted to
change the ordinary course of business exception so that Section
547(c)(2)(A), (B), and (C) are in the disjunctive rather than the
conjunctive. If so, the commission has effectively voted to repeal the
preference statute, since almost every preference meets the criterion
set forth in (A), namely, that the debt was incurred in the ordinary
course of business." |
"The best solution would be to simply repeal the
ordinary course defense. This would leave us with a 'no-fault'
preference law designed to simply and efficiently redistribute all
transfers that were made on the eve of bankruptcy without regard to any
fault by the recipient." |
| NBRC-0998 |
Bruce Sledd |
Vendor. Letter contains no return address. Was
apparently faxed. |
|
|
|
Author is sending warning that vendors of bankrupt
companies may be sued to force a refund of all monies received for goods
and services provided. This apparently happened to author, as he cites
case no. 97-20093 Sledd vs. Smith, before the 5th Circuit Court of
Appeals. Author warns that "If this case is not over-turned, no vendor
would risk future litigation by conducting ordinary and customary
business transactions with any entity under Chapter 11 bankruptcy
protection." |
See above. |
| NBRC-1028 |
Jim Gulechyn |
National Credit Manager, General Mills,
Inc. |
|
547 |
|
Author gives examples of situations in which
§547 harms trade creditors with no concomitant benefit for debtors
or their estates. |
"To solve these problems, the ordinary course
exception of §547(c)(2) could be revised. (author suggests
changes)" "Next, subsection (C), which has been interpreted to mean that
the payments must have been within the ordinary terms of both the
debtor's and creditor's respective industries, could be deleted." If
subsection (C) is not deleted, the 90-day period should be reduced to 60
days. |
| NBRC-1034 |
Harry W. Greenfield and Alan Gordon |
Chair, Bankruptcy & Insolvency Section, and
Chair, Chapter 11 Subcommittee, respectively, Commercial Law League of
America (CLLA) |
Comments and suggestions regarding reforms to
preference recovery; Comments and suggestions regarding Employee
Participation in Bankruptcy Cases; Proposal on Section 547(c)(2)
Ordinary Course of Business |
547 |
|
Author makes observations with regard to three
proposals issued in a memorandum dated June 1, 1997 by Professor
Lawrence P. King and Elizabeth I. Holland: Minimum threshold
requirement; Venue; and, Amending the Ordinary Course of Business
Exception. |
CLLA supports the minimum threshold requirement for
recovery of preferences; does not support the shifting of venue in such
actions to the district where the creditor has its principal place of
business; and, generally supports the disjunctive test to determine
whether a payment is made in the ordinary course of the debtor's
business, although it believes that an error was made in that the
disjunctive appears to be intended to connect subdivisions (B) and (C),
not (A). |
| NBRC-1034 |
Harry W. Greenfield and Alan Gordon |
Chair, Bankruptcy & Insolvency Section, and
Chair, Chapter 11 Subcommittee, respectively, Commercial Law League of
America (CLLA) |
Comments and suggestions regarding reforms to
preference recovery; Comments and suggestions regarding Employee
Participation in Bankruptcy Cases; Proposal on Section 547(c)(2)
Ordinary Course of Business |
|
|
"Despite the noble intentions of Congress, the
ordinary course exception, in its present form, has woefully failed to
achieve its legislative objectives. Section 547(c)(2) has not left
normal financial relations undistrubed but, rather, has produced a
tremendous amount of legal uncertainty." |
Section 547(c)(2) of the Bankruptcy Code should be
amended with the language given in this recommendation. |
| NBRC-1069 |
T.C. Walthour |
Director, Corporate Credit, Dean Foods |
|
547 |
|
The requirements of the ordinary course of business
exception of §547(c)(2) lead to results that are contrary to the
overreaching purpose of §547. "The law can harm trade creditors
with no concomitant benefit for debtors or their estates." |
"To solve these problems, the ordianry course
exception of §547(c)(2) could be revised. First, the requirement
that the purchase by the debtor be in the ordinary course of its
business is unnecessary if the purchase was proper and in the ordinary
course of the vendor's business. this requirement could, therefore, be
deleted. Second, absent coercion or overreaching, there is no reason why
vendors who allow a debtor extra time to pay, therby helping the debtor
and its other creditors, should have a preference problem. Subsection
(b) could be rewritten to include in the exception any payments within
the ordinary course of the vendor's and debtor's business or later than
such terms provide. Next,subsection (C)...could be deleted." |
| NBRC-1147 |
Carolyn O'Connor |
Credit Manager, Beeswax Designs |
|
|
|
Author feels that the preference rule is not fair
because "the creditor must return the payment for goods that were
shipped in good faith and have probably been sold by the debtor."
Further, the creditor also incurs the expense of an attorney to defend
the action. |
"We would suggest that if a creditor receives money
priior to the filing of a bankruptcy that he get to keep [sic] as in
most cases it is in exchange for new product." |