Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

Invalidating improperly perfected security interests frees up assets for liquidation anddistribution to general unsecured creditors.Section 544(b) allows the Chapter 7 trustee to pursue, against a transferee of the Debtor'sproperty, remedies that any unsecured creditor could have pursued if bankruptcy had notintervened. The practical consequence is that it incorporates state fraudulent transfer law,under which the "reach back" period may be greater than the two-year "reach back" of Section548 (for example, under Illinois state fraudulent transfer law, the reach-back period is generally4 years). Applicable state limitations periods govern, in addition to a separate limitation periodset forth in Section 546.In furtherance of the Code's goal of equality of treatment among similarly-situated creditors,Section 547 empowers a Chapter 7 trustee to avoid a "preferential" prepetition transfer of theDebtor's property, and the property or interest transferred may be recovered for the benefit ofthe estate. In order to prove that a transfer was an avoidable preference, the Debtor or trusteemust demonstrate that: (i) a transfer of the Debtor's property occurred; (ii) the transfer was to orfor the benefit of a creditor; (iii) the transfer was for, or on account of, an antecedent (i.e., preexisting)debt; (iv) the transfer occurred while the Debtor was insolvent; (v) the transferoccurred: (1) within 90 days prior to the date of the filing of the bankruptcy petition, or, (2) if thetransferee is an "insider" (as defined at Section 101(31)), the transfer was made within 1 yearprior to the filing of the petition; and (vi) the transfer resulted in the creditor's receiving morethan it would have received in a Chapter 7 liquidation had the transfer not been made. Therequirement that the Debtor be insolvent when the transfer occurred is simplified by applicationof a statutory presumption. Section 547(f) provides for a rebuttable presumption that theDebtor was insolvent for the 90 days immediately preceding the filing of the bankruptcypetition.To illustrate this point, imagine a nonprofit business that operates a telephone hotline as part ofits charitable services. Because fund raising has substantially decreased in the past year, thebusiness is in financial distress, and cannot pay all of its bills. In the 90-day period before thebusiness filed bankruptcy, the business paid its telephone bills because maintaining itstelephone hotline was vital to its charitable mission. The nonprofit business did not pay any ofits other creditors during that same time period. Once the nonprofit business files for Chapter 7bankruptcy, the trustee would seek to recover the amount of the payments made to thetelephone company within the 90-day period before the bankruptcy case was filed.Within the 90-day period, the telephone company (i) received transfers of the Debtor's property(payment on the telephone bills); (ii) the transfers were to or for the benefit of a creditor (the billpayments benefitted the telephone company); (iii) the transfers were for, or on account of, anantecedent debt (the transfers paid the telephone bills, which were pre-existing debts); and (iv)the transfers resulted in the creditor receiving more than it would have received in a Chapter 7liquidation had the transfers not been made (telephone company received 100% of the moneyowed to it in the 90 days before the bankruptcy case was filed, it is extremely unlikely thattelephone company would have received 100% of its claim during the Chapter 7 bankruptcycase). The trustee will receive the benefit of the presumption that the Debtor was insolvent forthe 90 days immediately preceding the filing of the bankruptcy petition. Consequently, the30