By Brook Gotberg, J. Reuben Clark Law School, Brigham Young University
The law of preferential transfers permits the trustee of a bankruptcy estate to avoid transfers made by the debtor to a creditor on account of a prior debt in the 90 days leading up to the bankruptcy proceeding. The standard for avoiding these preferential transfers is one of strict liability, on the rationale that preference actions exist to ensure that all general creditors of the bankruptcy estate recover the same proportional amount, regardless of the debtor’s intent to favor any one creditor or the creditor’s intent to be so favored. But preference law also permits certain exceptions to strict preference liability and gives the estate trustee discretion in pursuing preference actions. This undermines the policy of equal distribution by permitting some creditors to fare better than others in the bankruptcy distribution. However, these practices are arguably necessary to promote the conflicting bankruptcy policies that seek to maximize the value of the estate for the benefit of creditors and also encourage the survival of struggling businesses.
As a result, the law of preferences is internally inconsistent and controversial, attempting unsuccessfully to serve multiple policy masters simultaneously. Much of the analysis on preferences up to now has proposed amending preference law generally in an attempt to satisfy these often conflicting demands. This article recommends a more dramatic approach; returning preference law to a mechanism of equal distribution in liquidation proceedings (Chapter 7) by eliminating true exceptions to the rule, and doing away with preference law in the context of bankruptcy reorganization (Chapter 11).
For the full article see here.
Next week we will be featuring another article on this topic, Professor Daniel J. Bussel’s The Problem with Preferences.