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Insolvency on the Date of Preference is Critical to Prove the Essential Element of a Preference

Mazel v. Varela (In re Kelly), Nos. 15-10164-j7, 15-1049 J,2016 Bankr. LEXIS 1679 (U.S. Bankr. D.N.M. Apr. 14, 2016)
Edward A. Mazel, Chapter 7 Trustee of the bankruptcy estate of Debtor Darla Kelly sought summary judgment on his claims to recover certain transfers of property as preferential transfers under 11 U.S.C. § 547; as constructively fraudulent transfers and as actual fraudulent transfers under 11 U.S.C. § 548. Defendant Clare Varela, was the cousin of the Debtor. Pre-petition, the Debtor transferred Dodge Truck, a Navajo Lane Property, and a Vacant Land (Properties) to the Defendant. Previously, the Debtor had borrowed money from the Defendant for several years, and agreement was made to take the Properties in payment of debts owed to the Defendant.

The Court found that although the Defendant, who was the Debtor’s cousin, was an insider for purposes of 11 U.S.C. § 547(b)(4)(B), the Trustee failed to establish that the transfer of the Dodge Truck was made at a time that the Debtor was insolvent. The Debtor transferred the Dodge Truck to the Defendant on August 8, 2014, less than a year, but more than 90 days before the date of the filing of the petition on January 28, 2015. The Court said that the Trustee cannot, therefore, rely on the presumption of insolvency under 11 U.S.C. § 547(f) to establish the insolvency element with respect to this transfer. The Court stated that insolvency on the date of preference is the critical issue, and insolvency on any other date is insufficient standing alone to prove this essential element of a preference. The Court held in favor of the Defendant and ruled that the facts are insufficient to satisfy the insolvency requirement with respect to the Debtor’s transfer of the Dodge Truck.

The Trustee next argued that the rest of two Properties were avoidable as they enabled the Defendant to receive more than she otherwise would have received in a Chapter 7 liquidation had the transfers not occurred. The Court found that there was neither an evidence of the value of the Navajo Lane Property and the Vacant Lot, nor for the amount of the Defendant’s unsecured claim. Thus, without these amounts, it was difficult for the Court to conclude that the transfer of these two Properties to the Defendant enabled the Defendant to receive more than she otherwise would have been entitled to receive had the transfer not occurred and the bankruptcy estate.

The Trustee was not entitled to summary judgment on fraudulent transfer claim under 11 U.S.C.S. § 548 either because, without knowing the value of the property transferred, the Court was unable to determine whether the Debtor received reasonably equivalent value. Also, the circumstantial evidence to establish the Debtor’s actual intent to hinder, delay, or defraud was not so overwhelming as to conclusively establish, by summary judgment, the requisite actual intent necessary to recover the transfers. Thus, the Court declined to grant summary judgment on the Trustee’s claims to recover the transfers based on actual fraud also.


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