Preferential payments and papertrails in chapter 7

In chapter 7 bankruptcy cases the trustee assigned the case lives for finding preferential payments paid to creditors on antecendent (old) debt; especially if they are payments to friends or family members or even debts that the debtor paid for someone else on their behalf. Also they search for transfers to other parties of any asset for which the debtor received less than fair consideration or value (such as selling your car to your brother for a dollar). The reason they are so into this is because while he or she is recovering the funds for the benefit of the bankruptcy estate and ultimately for a distribution of a dividend to any of the bankrupt's creditors the trustee is entitled to keep 25% of whatever they recover plus any costs, fees or disbursements.

I had a hearing in front of a trustee this morning where my client had a somewhat unusual situation. Prior to filing his bankruptcy case he sold his house. At the closing the buyers mentioned some minor hail/storm damage to the property. One of the parties also had some experience in insurance matters. He suggested that my client put in a claim for the damage...which he agreed to do. He also agreed to pay any funds that the insurance company might disburse on the claim to the new buyers when the funds came in. The claim was paid and the debtor--my client--remitted the funds to the buyers. The funds actually came in about 6 months after the property was sold due to delays in processing the claim. The trustee asserts this is a preferential and avoidable payment or a transfer for less than fair consideration just prior to the bankruptcy filing.

As the debtor's attorney in this matter I do not represent the creditor or person that the funds were transferred to by my client and could not due to a potential conflict of interest. However, there are arguments that the creditor may voice to contest the trustee's claim that it was an avoidable preferential payment under the bankruptcy code.

The argument if that this payment was part and parcel of the agreement and was paid in the ordinary course of business once the funds were actually paid to my client by the insurance company on the claim. That, I would believe defeat the trustee's threatened action to avoid the transaction. However, it appears that the whole arrangement was something that came up spur of the moment at the time of the closing and it was not memorialized in writing. Therefore, at this point all that is apparent and that can be documented is that the debtor paid out a check in excess of $6,000.00 to someone who may or may not have been a creditor or, alternatively, was given something for nothing. The transfer for less than fair consideration is a bit of a problem if the tranferee would ultimately be considered not to be a creditor. However all that could or will pan out the point is that my assessment would lead me to the conclusion that any claim the trustee may have on those funds could have been avoided if the reason for the payment had been memorialized in writing at the time of closing rather than just a verbal agreement. My client today thought that he would go back and write something up. No can do. Can't create an agreement after the fact. Perhaps an affidavit to show the intentions of the parties would help. Most likely the trustee will make the demand and the parties will settle the matter rather than litigate considering the lack of a writing showing what the terms of the agreement were at the time it was made.