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Defendant Successfully Rebuts the Presumption of Insolvency During the Preference Period

Lanik v. Smith (In re Cox Motor Express of Greensboro, Inc.), Nos. 14-10468, 15-02023, 2016 Bankr. LEXIS 2913 (U.S. Bankr M.D.N.C. Aug. 9, 2016)

Debtor, Cox Motor Express of Greensboro, Inc., is a trucking company. Defendant, James W. Smith Jr. was the Debtor’s President. During its tenure with the Debtor, the Defendant made series of loans to the Debtor and the Debtor made certain repayments. The Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on April 30, 2014. Subsequently, the Trustee initiated the adversary proceeding to avoid the alleged preferential transfers made to the Defendant within the one year prior to the petition date, contending that the said transfers satisfied all the conditions under §547(b). The Defendant argued that the Trustee did not establish the Debtor’s insolvency at the time of the transfers as required by §547(b)(3) and hence the alleged transfers cannot be determined preferential.

The Court found that the Defendant attempted to rebut the presumption of insolvency under §547(f) by referring to the Debtor’s bankruptcy schedules filed with the petition. These schedules showed total assets of $2,089,014.75 and total liabilities of $1,925,882.54. Since the schedules indicated that assets exceed liabilities, the Court ruled that the Defendant sufficiently rebutted the presumption of insolvency during the preference period. The Court added that once the presumption is rebutted, the burden of proving insolvency gets shifted on to the Trustee. In the case at bar, the Trustee submitted the tax returns of the Debtor for the years preceding the petition date which showed that the Debtor was in financial difficulty. The Court determined that although the returns showed that the Debtor was in financial difficulty, it did not conclusively establish either insolvency or that the Debtor was wholly inoperative, defunct, or dead on its feet. Thus, the Court held that without any additional substantial evidence, the record offered by the Trustee was insufficient to establish that the Debtor was on its deathbed at the time of the transfers for purposes of summary judgment.


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