What must a party asserting a preference claim prove?
A party seeking to avoid and recover a preferential transfer must demonstrate the following elements: a) a transfer; b) of any interest of the debtor in property; c) made to or for the benefit of a creditor; d) for or on account of an antecedent debt owed by the debtor prior to the transfer; e) made while the debtor was insolvent; f) on or within 90 days before the date of filing or between 90 days and one year of the filing date if the creditor was an insider at the time of the transfer; and g) enabling the creditor to receive more than it would receive if the case were brought under Chapter 7 of the Bankruptcy Code and the transfer had not been made. See 11 U.S.C. § 547(b).
What is the presumption of insolvency?
Under Section 547(f) of the Bankruptcy Code, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition, meaning that the party seeking to set aside a preferential made within 90 days of the filing date is presumed to have met this element of his/her/it's proof.
Does the presumption of insolvency apply to preferential transfers made more than 90 days before the bankruptcy filing?
No.
How do I rebut the presumption of insolvency during the 90 days?
A party may rebut the presumption of insolvency during the 90 day period prior to a bankruptcy filing by submitting competent evidence of a debtor's solvency. The courts have generally recognized two main tests of solvency, namely the "equity test" and the "balance sheet" test. In re Centennial Textiles, 220 B.R. 165, 173 (Bankr.S.D.N.Y. 1998). The former test concerns a debtor’s inability to pay his debts in the ordinary course of business as they mature. The latter test “focuses on the balance sheet of a company at discrete intervals of time in order to determine whether the company’s liabilities exceeds its assets.” Id (quoting United States v. 48th St. Plaza Theatre, Inc., 287 F.Supp. 475, 497 (S.D.N.Y. 1968) (internal citations omitted)). Note, however, that "book", tax or GAAP valuations of assets are merely starting points for a solvency analysis and the fair value of the assets should be assessed.
