Payments Made by Debtor’s Dad Not Recoverable Preferences

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By Daniel Gill

Payments a bankrupt debtor’s father paid to a creditor weren’t recoverable ‘preferential transfers’ under the bankruptcy code, a Mississippi bankruptcy judge ruled.

The money paid by the father was never the debtor’s property wrote Judge Jason D. Woodard of the U.S. Bankruptcy Court for the District of Mississippi.

Wendi Dow Litton owed “significant” legal bills to a law firm that represented her in her divorce. She petitioned for Chapter 13 bankruptcy, but it was converted to Chapter 11. Chapter 11 protects companies or individuals from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.

Litton’s father, Bill Allen, made two payments to the firm totaling $75,000 within 90 days prior to the initial bankruptcy filing.

In bankruptcy, a trustee or a Chapter 11 debtor—when no trustee has been appointed—can sue to recover payments to a creditor made by the debtor during the 90 day period before the filing. The idea is to prevent debtors from “preferring” one creditor over others in anticipation of filing a bankruptcy.

Litton sued the law firm to recover the $75,000 her father paid on account of her debt. She wrote promissory notes to Allen for the same amounts.

But the payment was never Litton’s property; it didn’t deplete Litton’s estate. She never had possession or control of the money, and even if she did, it was earmarked for the law firm in the promissory notes, the court said. Litton therefore had no interest in the money, as required to recover it under Section 547 of the Bankruptcy Code.

The debtor merely substituted one creditor—the law firm—for another—her father. Substituting one creditor for another doesn’t create a preference, the court said.

Craig M. Geno, Ridgeland, Miss., represented Litton. Toni Campbell Parker, Memphis, Tenn., represented the law firm.

The case is Litton v. Apperson Crump, PLC (In re Litton) , 2018 BL 31290, Bankr. N.D. Miss., 15-12871-JDW, 1/30/18 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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