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Avoiding Powers of Debtor in Possession - YouTube
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So what are the avoiding powers of a
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debtor-in-possession in a chapter 11
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bankruptcy? Well this is a really
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important concept because it allows for
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the effective administration of the
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estate and particularly bringing assets
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back into the state that otherwise would
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not be included in the estate. So what it
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allows them to do is to recover what is
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called preferential or fraudulent
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payments. So let's begin with
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preferential payments and what that
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means. So basically if the debtor
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transfers a payment or any interest that
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is recording a lien or recording a
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security interest on any of its property
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within the 90-day window prior to
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bankruptcy then that can be considered a
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preferential payment, if the payment or
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the recording of the security interest
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earlene allows that creditor to receive
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more than they would have received if at
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that point the debtor had filed in
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chapter 7 liquidation bankruptcy. Well
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this is always going to be something
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that affects just unsecured creditors
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right because secured creditors get paid
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generally in for the property is
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surrendered to them. But an unsecured
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creditor if they're getting paid us
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particularly if you're perfecting a
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security interest for the full value of
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of the debt owed you're going to receive
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more than you would have received in a
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chapter 7 because generally unsecured
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creditors are in some way burdened or
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receive less than their claim or pennies
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on the dollar sometimes for their claim
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against the estate in a liquidation
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bankruptcy. Okay. So basically creditors
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are going to receive have to receive
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more from the preferential payment than
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they would have received in chapter 7.
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Okay. And if it meets this characteristic
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it could be deemed a preferential
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payment the debtor-in-possession could
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recover that could go back to those
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creditors who receive those preferential
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payments and bring the money back into
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the estate. Okay. Now there are some
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extensions of this as well where it can
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make it it can extend the period back
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past 90 days. If a payment is made or a
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security interest or lien recorded in
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favor of an insider. And an insider is an
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officer director
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major shareholder or something (inaudible)
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such as a guarantor of the business
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itself. So any of these types of payments
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or a recording of liens and security
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interest could be preferential and
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they'll look all the way back for a year
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so any payment that happened to these
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accounts within that year could be
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brought back into this state, that is
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those creditors have to pay that money
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or the representative value back into
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the estate. Okay. Now there are a number
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of defenses against against preferential
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payments. Okay. And this is where the
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secured party would have to contest to
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the court and say this was not a
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preferential payment because this
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justification of this reason. So there's
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a laundry list of these and I'll go
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through them one by one. Contemporaneous
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exchange of value so this is going to
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cover situations where the debtor all
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right pace money to a creditor and
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receives value back almost all your cell
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of assets scenario is going to follow
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this. So I make a payment to you and I
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receive value back such as a piece of
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equipment that's a contemporaneous
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exchange of value there's no preference
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there even if it happened within the
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90-day window. Okay. Payment in the order
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in aerie course of business there any
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recurring routine payments that have
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been paid for an extended period of time
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or are just of the nature the type that
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are occurring or ordinary such as your
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power bill your water being electrically
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your mortgage payments on your property
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etc. All of these could be in the
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ordinary course of business right so
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there's always that argument that their
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routine and ordinary that no payment
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during that time constitutes anything
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preferential. Okay. And then purchase money
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for collateral, so I provide money for
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you to purchase some amount of
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collateral. Now in lots of times you
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might make a down payment on that
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collateral or I might record a security
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interest in that collateral. But either
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those situations could be deemed
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preferential but generally when I'm the
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I provide the purchase money for you to
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purchase that collateral I can record my
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security interest to establish a secured
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claim to the property or receiving any
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sort of down payment
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as the property etc. It's going to be
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fine. Okay. Enabling loans this is very
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similar to purchase money scenario but
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any loan that goes towards the continued
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operation of the business all right if I
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establish any security interest pursuant
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to that or you make any payment on such
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a loan even if it's an initial ripening
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payment again while it may look
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preferential there's a defense against
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it being considered preferential.
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Extending new value okay extending the
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value on existing debt or rotating the
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line of credit or something like that.
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If I do that right and it's pursuant to an
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already perfected security interest or
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lending agreement then any payment
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towards that or any security interest
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claimed in the advanced made during that
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period of time is going to be fine. Okay.
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Just for the simple fact that it was met
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the arrangement was made way earlier in
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lots of times these are the type of
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last-minute loans that are needed for
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continued operation anyway, so it
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wouldn't be fair to subject somebody to
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unsecured creditor status when there was
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already an existing financing agreement
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or something like that in place that
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would have covered these type of
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advances. Okay. And then floating liens
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flooding lanes are when you have a lien
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already in place and it covers
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after-acquired collateral such as
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inventory or new newly acquired property.
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Well again if you have that security
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agreement already in place and it's
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expected that the security interest will
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attach this collateral there's an
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argument that that is not preferential
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as well. Okay. So these are some of the
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general defenses against a claim of
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preferential payment. And then fraudulent
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payments. Now a fraudulent payment,
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definition wise is used to intent to
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hinder the lair defraud creditors are
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made without reasonably equivalent value
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provided. Okay. So any payment to
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individuals where you're intentionally
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trying to defraud the other creditors so
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that they receive less money or I don't
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receive any value back or excuse me I
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don't receive the value back
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that I put out. So basically I transfer
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to you a really expensive piece of
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equipment for ten percent of the value.
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All right. This is not an equivalent
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value it's going to look like a
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fraudulent transfer so the
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debtor-in-possession can look back two
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years on these types of payments to see
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if any fraudulent payments are made.
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