Legal Alert - California Bankruptcy Court Holds Junior Lienholder Liable for Payments Debtors Made to Senior Lienholder as Preferential Transfers


By Bob L. Olson and Charles E. Gianelloni

Section 547 of the Bankruptcy Code allows a bankruptcy trustee to recover transfers from creditors that are labeled “preferences.” To avoid a transfer as a preference, the trustee must generally demonstrate that the transfer: (1) was of an interest of the debtor in property, (2) was made to or for the benefit of a creditor, (3) was made on account of an antecedent debt owed by the debtor, (4) was made while the debtor was insolvent, (5) was made within 90 days before the petition date (within a year if the creditor was an insider) and (6) enabled the creditor to receive more than the creditor would receive if the case were a case under chapter 7 and the transfer had not been made. Section 550 of the Bankruptcy Code then allows a trustee to recover the preferential transfer from the initial transferee, the immediate or mediate transferee of the initial transferee or the person for whose benefit the transfer was made.

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