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Home / Case News / A Creditor Who Receives Payment on an Unsecured Claim Is Preferred Because He Does Not Release Any Collateral to the Debtor

A Creditor Who Receives Payment on an Unsecured Claim Is Preferred Because He Does Not Release Any Collateral to the Debtor

April 23, 2018, ArkansasTrustee M. Randy Rice, for the Debtor Turner Grain Merchandising, Inc. brought an adversary proceeding to avoid a transfer made by the Debtor to a Defendant M-Real Estate LLC as preferential under Sec. 547 and as a constructively fraudulent transfer under Sec. 548. The Defendant denied that the transfer was avoidable as a preferential transfer and asserted the affirmative defenses of contemporaneous exchange for new value and the ordinary course of business between the parties. The Court found that the Trustee met his burden of showing that a check in the amount of $18,545,00 that the Debtor wrote to the Defendant was a preferential transfer that could be avoided under Sec.547 because the payment occurred less than 90 days before the Debtor declared bankruptcy and the Defendant received an advantage over other unsecured creditors.

The Court found that the Defendant entered into contracts to sell wheat to the Debtor and, after the wheat was delivered, the Debtor paid the Defendant for the wheat. The settlement documents showed that the Debtor paid its debt in full by tendering check 4474. The transactions did not involve a security interest, and there was no lien on the proceeds represented by check tendered by the Debtor to the Defendant. Thus, the Court held that the payment to the Defendant could be found to be payment in full of an unsecured antecedent debt. The Court added that since the Defendant was paid in full on its unsecured claim and that unsecured creditor in the Debtor’s bankruptcy proceeding will receive less than 100% of their claims if any distribution at all. Therefore, the transfer to the Defendant represented by check 4474 enabled it to receive more than it would receive if the case were a case under Chapter 7 and thus, the alleged transfers were preferential under Sec. 547 of the Bankruptcy Code.

The Court added that although the Defendant’s president testified about the business relationship that the company had with the Debtor, his testimony was not sufficient to show that the Trustee was prohibited under Sec. 547 (c) from avoiding the transfer because it was made in the ordinary course of business between the parties or was a contemporaneous exchange for new value. Moreover, the Defendant also failed to prove its affirmative defenses successfully. The Court dismissed the Trustee’s action under Sec. 548(a)(1)(B) as the Trustee abandoned it. The Court ruled in favor of the Trustee.

Rice v. M-Real Estate LLC (In re Turner Grain Merch., Inc.), Nos. 2:14-bk-15687 (Chapter 7), 2:16-ap-1113, 2018 Bankr. LEXIS 1212 (Bankr. E.D. Ark. Apr. 23, 2018)