Bankruptcy Preferences: They Haven't Gone Away

For generations, federal bankruptcy law has given trustees and debtors-in-possession (collectively, for simplicity, trustees) in Chapter 7 liquidation and Chapter 11 reorganization cases the power to “avoid,” or invalidate, certain pre-bankruptcy preferential transfers and to add the recovered proceeds to the bankruptcy estate. Since the trustee's avoidance powers extend to transfers intended as security, not just absolute transfers, even secured claims are vulnerable to avoidance when the necessary preference elements can be established. Secured creditors have been comforted by several decisions over the past two decades that have made it easier to defeat preference attacks. A recent case, O&G Leasing, LLC v. First Security Bank (In re O&G Leasing, LLC), 456 B.R. 652 (Bankr. S.D. Miss. 2011), nevertheless provides a timely reminder to lenders that the power to avoid preferences remains a potent and oft-used weapon in the trustee's arsenal.