Bankruptcy laws are not set in stone, making it important to keep up with precedents established by the latest bankruptcy cases. The outcomes may influence changes to formal regulations, affecting millions of Americans. One of the latest notable decisions took place in a Delaware court that was dealing with a Chapter 7 case.
United States Bankruptcy Code section 547 allows a trustee to avoid and recover particular debt payments made pre-petition. The trustee is then entitled to provide creditors with amounts that exceed what they are entitled to under a Chapter 7 case. What courts cannot agree on is whether the Chapter 7 petition date or the transfer date should be used as the determining date when assessing whether the creditor was secured.
The District of Delaware court made its preference known in Forman v. IPFS Corp. of the South (In re Alabama Aircraft Industries). The debtors made four preferential transfers to the creditor defendant within a 90-day period before the petition date. The court considered decisions made by the Northern District of Illinois and Southern District of New York, which determined that secured status was determined as of date of transfers.
At the request of the trustee, the court also reviewed Palmer Clay Products Co. v. Brown. In this case, the court considered whether prepetition payments by the debtor to the creditor defendant provided the defendant with a greater percentage of debt than would be received by other creditors in the same class. The court in this case focused on the petition date when determining whether a creditor receives a preference.
In the end, the Delaware court did not apply the Palmer Clay decision. It held in favor of the defendant, stating that the date of the transfer should be the consideration date for the secured status of a defendant. It distinguished the case from Palmer Clay by noting that Alabama Aircraft involved a fully secured corporation, whereas the Palmer Clay case involved an unsecured defendant. The court noted that the holding in Palmer Clay did not apply explicitly to unsecured creditors only.
Court opinion in Alabama Aircraft reflects a moderate approach. It considers the uniqueness of a premium financing agreement and its holding is limited to these contracts. This indicates that in a different case, the court could find that the Palmer Clay holding applicable despite the secured creditor status of a defendant. Bankruptcy lawyers and other legal professionals are focusing on this issue to see how other courts handle it.
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