Although the trustee is permitted to avoid transfers that prefer certain creditors, there are some fairly common exceptions. However, before consulting the exceptions in section 547(c), the elements of 547(b) must first be fulfilled. If the elements of a preferential transfer are met then the burden shifts to the transferee to show one of the exceptions apply.
Avoiding Transactions That Circumvent Priority System
The whole idea behind preferential transfers is to avoid transactions that circumvent the bankruptcy’s priority system. Thus, the exceptions are provided to prevent the trustee from avoiding ordinary business transactions and to distinguish them from last minute preferences. Although the code describes a number of exceptions, there are some that are much more common than others.
PMSI 90 Days Before Bankruptcy
The first major exception is the purchase money security interest. If a debtor grants a creditor a PMSI in the 90 days before the bankruptcy filing then the creditor has 30 days to perfect the security interest to put other creditors on notice. While normally the granting of a security interest would be considered an avoidable preferential transfer this exception will allow the transaction if the creditor files within the time period.
The second major exception is the so called “new value” exception. If a debtor makes a payment to a creditor based on antecedent debt and this induces the creditor to provide another loan then the transfer fits the exception. The additional funds the creditor grants the debtor will offset the total amount of the preferential transfer. This is based on the theory that the only reason the creditor is giving new value is because he or she received a payment on a past debt.
Lastly, the third major exception involves inventory or accounts receivable. This exception recognizes the rapid turnover of these types of collateral and allows a voidable preference only to the extent of the benefit that the creditor receives during the 90 days pre-bankruptcy. So, if the creditor goes from $20,000 undersecured to $15,000 undersecured within the time period, the creditor comes out in a better position and the transfer is voidable only to the extent of $5000.
Because the trustee is trying to maximize the value of the estate, he or she will attempt to avoid any transfer that fits the elements during the 90 days before bankruptcy. However, these exceptions are incredibly important for debtors and creditors who have long term business relationships because they allow transactions to go forward. If you have any questions about preferential transfers or its exceptions, contact Lanigan and Lanigan P.L., in Winter Park, Florida. Attorneys Eric and Roddy Lanigan want to make sure your company can continue its ordinary course of business without the trustee interfering.