Voidable Transfers

The trustee in bankruptcy is a lien creditor and a successor to certain creditors and purchasers. As of the commencement of a bankruptcy case, the trustee or the debtor in possession has the rights and powers of the debtor and may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by certain creditors and bona fide purchasers. This is known as “avoiding” powers. Such powers may be used to undo a transfer of money or property made during a certain period of time prior to the filing of the bankruptcy petition. Avoiding powers are used to prevent unfair prepetition payments to one creditor at the expense of all other creditors.

The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under the Bankruptcy Code. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or “disgorgement” of the payments or property, which then are available to pay all creditors. Generally, the power to avoid transfers is effective against transfers made within 90 days prior to the filing of the petition. For preference purposes, a security interest in property is transferred when it takes effect between the transferor and the transferee as long as it is perfected within 30 days thereafter. Otherwise, such transfer is made on the date of perfection.

The trustee may avoid any transfer of the debtor’s property that was made within 10 years before the commencement of the case if the transfer was made by the debtor to a self-settled trust or similar device, the debtor is the beneficiary of the trust or device, and the debtor made the transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became indebted on or after the date of the transfer.

Non-insider transferees have no liability for preferential transfers made for the benefit of insiders during the period between 90 days and one year prior to the filing of the bankruptcy petition. Non-insider transferees should not be subject to the preference provisions of the Bankruptcy Code beyond the 90-day statutory period. If the trustee avoids a preference made between 90 days and one year before the commencement of the case to an entity that is not an insider, but for the benefit of a creditor that is an insider, the transfer shall be avoided only with respect to the creditor that is an insider.

Transfers to “insiders,” which includes relatives, general partners, and directors or officers of the debtor, made up to one year prior to the filing of a bankruptcy, may be avoided or undone. In addition, the trustee may be able to avoid transfers under applicable state law, which may provide longer time periods. However, a preference cannot be avoided to the extent the transfer was in payment of a domestic support obligation.