CHAPTER 5CREDITORS, THE DEBTOR, AND THE ESTATE
Sub Chapter III The Estate
Sec. 547. Preferences
(a) In this section--
(1) ``inventory'' means personal property leased or furnished,
held for sale or lease, or to be furnished under a contract for
service, raw materials, work in process, or materials used or
consumed in a business, including farm products such as crops or
livestock, held for sale or lease;
(2) ``new value'' means money or money's worth in goods,
services, or new credit, or release by a transferee of property
previously transferred to such transferee in a transaction that is
neither void nor voidable by the debtor or the trustee under any
applicable law, including proceeds of such property, but does not
include an obligation substituted for an existing obligation;
(3) ``receivable'' means right to payment, whether or not such
right has been earned by performance; and
(4) a debt for a tax is incurred on the day when such tax is
last payable without penalty, including any extension.
(b) Except as provided in subsection (c) of this section, the
trustee may avoid any transfer of an interest of the debtor in
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor
before such transfer was made;
(3) made while the debtor was insolvent;
(A) on or within 90 days before the date of the filing of
the petition; or
(B) between ninety days and one year before the date of the
filing of the petition, if such creditor at the time of such
transfer was an insider; and
(5) that enables such creditor to receive more than such
creditor would receive if--
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the
extent provided by the provisions of this title.
(c) The trustee may not avoid under this section a transfer--
(1) to the extent that such transfer was--
(A) intended by the debtor and the creditor to or for whose
benefit such transfer was made to be a contemporaneous exchange
for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;
(2) to the extent that such transfer was--
(A) in payment of a debt incurred by the debtor in the
ordinary course of business or financial affairs of the debtor
and the transferee;
(B) made in the ordinary course of business or financial
affairs of the debtor and the transferee; and
(C) made according to ordinary business terms;
(3) that creates a security interest in property acquired by the
(A) to the extent such security interest secures new value
(i) given at or after the signing of a security
agreement that contains a description of such property as
(ii) given by or on behalf of the secured party under
(iii) given to enable the debtor to acquire such
(iv) in fact used by the debtor to acquire such
(B) that is perfected on or before 20 days after the debtor
receives possession of such property;
(4) to or for the benefit of a creditor, to the extent that,
after such transfer, such creditor gave new value to or for the
benefit of the debtor--
(A) not secured by an otherwise unavoidable security
(B) on account of which new value the debtor did not make an
otherwise unavoidable transfer to or for the benefit of such
(5) that creates a perfected security interest in inventory or a
receivable or the proceeds of either, except to the extent that the
aggregate of all such transfers to the transferee caused a
reduction, as of the date of the filing of the petition and to the
prejudice of other creditors holding unsecured claims, of any amount
by which the debt secured by such security interest exceeded the
value of all security interests for such debt on the later of--
(A)(i) with respect to a transfer to which subsection
(b)(4)(A) of this section applies, 90 days before the date of
the filing of the petition; or
(ii) with respect to a transfer to which subsection
(b)(4)(B) of this section applies, one year before the date of
the filing of the petition; or
(B) the date on which new value was first given under the
security agreement creating such security interest;
(6) that is the fixing of a statutory lien that is not avoidable
under section 545 of this title;
(7) to the extent such transfer was a bona fide payment of a
debt to a spouse, former spouse, or child of the debtor, for alimony
to, maintenance for, or support of such spouse or child, in
connection with a separation agreement, divorce decree or other
order of a court of record, determination made in accordance with
State or territorial law by a governmental unit, or property
settlement agreement, but not to the extent that such debt--
(A) is assigned to another entity, voluntarily, by operation
of law, or otherwise; or
(B) includes a liability designated as alimony, maintenance,
or support, unless such liability is actually in the nature of
alimony, maintenance or support; or
(8) if, in a case filed by an individual debtor whose debts are
primarily consumer debts, the aggregate value of all property that
constitutes or is affected by such transfer is less than $600.
(d) The trustee may avoid a transfer of an interest in property of
the debtor transferred to or for the benefit of a surety to secure
reimbursement of such a surety that furnished a bond or other obligation
to dissolve a judicial lien that would have been avoidable by the
trustee under subsection (b) of this section. The liability of such
surety under such bond or obligation shall be discharged to the extent
of the value of such property recovered by the trustee or the amount
paid to the trustee.
(e)(1) For the purposes of this section--
(A) a transfer of real property other than fixtures, but
including the interest of a seller or purchaser under a contract for
the sale of real property, is perfected when a bona fide purchaser
of such property from the debtor against whom applicable law permits
such transfer to be perfected cannot acquire an interest that is
superior to the interest of the transferee; and
(B) a transfer of a fixture or property other than real property
is perfected when a creditor on a simple contract cannot acquire a
judicial lien that is superior to the interest of the transferee.
(2) For the purposes of this section, except as provided in
paragraph (3) of this subsection, a transfer is made--
(A) at the time such transfer takes effect between the
transferor and the transferee, if such transfer is perfected at, or
within 10 days after, such time, except as provided in subsection
(B) at the time such transfer is perfected, if such transfer is
perfected after such 10 days; or
(C) immediately before the date of the filing of the petition,
if such transfer is not perfected at the later of--
(i) the commencement of the case; or
(ii) 10 days after such transfer takes effect between the
transferor and the transferee.
(3) For the purposes of this section, a transfer is not made until
the debtor has acquired rights in the property transferred.
(f) For the purposes of this section, the debtor is presumed to have
been insolvent on and during the 90 days immediately preceding the date
of the filing of the petition.
(g) For the purposes of this section, the trustee has the burden of
proving the avoidability of a transfer under subsection (b) of this
section, and the creditor or party in interest against whom recovery or
avoidance is sought has the burden of proving the nonavoidability of a
transfer under subsection (c) of this section.
(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2597; Pub. L. 98-353, title III,
Secs. 310, 462, July 10, 1984, 98 Stat. 355, 377; Pub. L. 99-554, title
II, Sec. 283(m), Oct. 27, 1986, 100 Stat. 3117; Pub. L. 103-394, title
II, Sec. 203, title III, Sec. 304(f), Oct. 22, 1994, 108 Stat. 4121,
Historical and Revision Notes
No limitation is provided for payments to commodity brokers as in
section 766 of the Senate amendment other than the amendment to section
548 of title 11. Section 547(c)(2) protects most payments.
Section 547(b)(2) of the House amendment adopts a provision
contained in the House bill and rejects an alternative contained in the
Senate amendment relating to the avoidance of a preferential transfer
that is payment of a tax claim owing to a governmental unit. As
provided, section 106(c) of the House amendment overrules contrary
language in the House report with the result that the Government is
subject to avoidance of preferential transfers.
Contrary to language contained in the House report, payment of a
debt by means of a check is equivalent to a cash payment, unless the
check is dishonored. Payment is considered to be made when the check is
delivered for purposes of sections 547(c)(1) and (2).
Section 547(c)(6) of the House bill is deleted and is treated in a
different fashion in section 553 of the House amendment.
Section 547(c)(6) represents a modification of a similar provision
contained in the House bill and Senate amendment. The exception relating
to satisfaction of a statutory lien is deleted. The exception for a lien
created under title 11 is deleted since such a lien is a statutory lien
that will not be avoidable in a subsequent bankruptcy.
Section 547(e)(1)(B) is adopted from the House bill and Senate
amendment without change. It is intended that the simple contract test
used in this section will be applied as under section 544(a)(1) not to
require a creditor to perfect against a creditor on a simple contract in
the event applicable law makes such perfection impossible. For example,
a purchaser from a debtor at an improperly noticed bulk sale may take
subject to the rights of a creditor on a simple contract of the debtor
for 1 year after the bulk sale. Since the purchaser cannot perfect
against such a creditor on a simple contract, he should not be held
responsible for failing to do the impossible. In the event the debtor
goes into bankruptcy within a short time after the bulk sale, the
trustee should not be able to use the avoiding powers under section
544(a)(1) or 547 merely because State law has made some transfers of
personal property subject to the rights of a creditor on a simple
contract to acquire a judicial lien with no opportunity to perfect
against such a creditor.
Preferences: The House amendment deletes from the category of
transfers on account of antecedent debts which may be avoided under the
preference rules, section 547(b)(2), the exception in the Senate
amendment for taxes owed to governmental authorities. However, for
purposes of the ``ordinary course'' exception to the preference rules
contained in section 547(c)(2), the House amendment specifies that the
45-day period referred to in section 547(c)(2)(B) is to begin running,
in the case of taxes from the last due date, including extensions, of
the return with respect to which the tax payment was made.
senate report no. 95-989
This section is a substantial modification of present law. It
modernizes the preference provisions and brings them more into
conformity with commercial practice and the Uniform Commercial Code.
Subsection (a) contains three definitions. Inventory, new value, and
receivable are defined in their ordinary senses, but are defined to
avoid any confusion or uncertainty surrounding the terms.
Subsection (b) is the operative provision of the section. It
authorizes the trustee to avoid a transfer if five conditions are met.
These are the five elements of a preference action. First, the transfer
must be to or for the benefit of a creditor. Second, the transfer must
be for or on account of an antecedent debt owed by the debtor before the
transfer was made. Third, the transfer must have been made when the
debtor was insolvent. Fourth, the transfer must have been made during
the 90 days immediately preceding the commencement of the case. If the
transfer was to an insider, the trustee may avoid the transfer if it was
made during the period that begins one year before the filing of the
petition and ends 90 days before the filing, if the insider to whom the
transfer was made had reasonable cause to believe the debtor was
insolvent at the time the transfer was made.
Finally, the transfer must enable the creditor to whom or for whose
benefit it was made to receive a greater percentage of his claim than he
would receive under the distributive provisions of the bankruptcy code.
Specifically, the creditor must receive more than he would if the case
were a liquidation case, if the transfer had not been made, and if the
creditor received payment of the debt to the extent provided by the
provisions of the code.
The phrasing of the final element changes the application of the
greater percentage test from that employed under current law. Under this
language, the court must focus on the relative distribution between
classes as well as the amount that will be received by the members of
the class of which the creditor is a member. The language also requires
the court to focus on the allowability of the claim for which the
preference was made. If the claim would have been entirely disallowed,
for example, then the test of paragraph (5) will be met, because the
creditor would have received nothing under the distributive provisions
of the bankruptcy code.
The trustee may avoid a transfer of a lien under this section even
if the lien has been enforced by sale before the commencement of the
Subsection (b)(2) of this section in effect exempts from the
preference rules payments by the debtor of tax liabilities, regardless
of their priority status.
Subsection (c) contains exceptions to the trustee's avoiding power.
If a creditor can qualify under any one of the exceptions, then he is
protected to that extent. If he can qualify under several, he is
protected by each to the extent that he can qualify under each.
The first exception is for a transfer that was intended by all
parties to be a contemporaneous exchange for new value, and was in fact
substantially contemporaneous. Normally, a check is a credit
transaction. However, for the purposes of this paragraph, a transfer
involving a check is considered to be ``intended to be
contemporaneous'', and if the check is presented for payment in the
normal course of affairs, which the Uniform Commercial Code specifies as
30 days, U.C.C. Sec. 3-503(2)(a), that will amount to a transfer that is
``in fact substantially contemporaneous.''
The second exception protects transfers in the ordinary course of
business (or of financial affairs, where a business is not involved)
transfers. For the case of a consumer, the paragraph uses the phrase
``financial affairs'' to include such nonbusiness activities as payment
of monthly utility bills. If the debt on account of which the transfer
was made was incurred in the ordinary course of both the debtor and the
transferee, if the transfer was made not later than 45 days after the
debt was incurred, if the transfer itself was made in the ordinary
course of both the debtor and the transferee, and if the transfer was
made according to ordinary business terms, then the transfer is
protected. The purpose of this exception is to leave undisturbed normal
financial relations, because it does not detract from the general policy
of the preference section to discourage unusual action by either the
debtor or his creditors during the debtor's slide into bankruptcy.
The third exception is for enabling loans in connection with which
the debtor acquires the property that the loan enabled him to purchase
after the loan is actually made.
The fourth exception codifies the net result rule in section 60c of
current law [section 96(c) of former title 11]. If the creditor and the
debtor have more than one exchange during the 90-day period, the
exchanges are netted out according to the formula in paragraph (4). Any
new value that the creditor advances must be unsecured in order for it
to qualify under this exception.
Paragraph (5) codifies the improvement in position test, and thereby
overrules such cases as DuBay v. Williams, 417 F.2d 1277 (C.A.9, 1966),
and Grain Merchants of Indiana, Inc. v. Union Bank and Savings Co., 408
F.2d 209 (C.A.7, 1969). A creditor with a security interest in a
floating mass, such as inventory or accounts receivable, is subject to
preference attack to the extent he improves his position during the 90-
day period before bankruptcy. The test is a two-point test, and requires
determination of the secured creditor's position 90 days before the
petition and on the date of the petition. If new value was first given
after 90 days before the case, the date on which it was first given
substitutes for the 90-day point.
Paragraph (6) excepts statutory liens validated under section 545
from preference attack. It also protects transfers in satisfaction of
such liens, and the fixing of a lien under section 365(j), which
protects a vendee whose contract to purchase real property from the
debtor is rejected.
Subsection (d), derived from section 67a of the Bankruptcy Act
[section 107(a) of former title 11], permits the trustee to avoid a
transfer to reimburse a surety that posts a bond to dissolve a judicial
lien that would have been avoidable under this section. The second
sentence protects the surety from double liability.
Subsection (e) determines when a transfer is made for the purposes
of the preference section. Paragraph (1) defines when a transfer is
perfected. For real property, a transfer is perfected when it is valid
against a bona fide purchaser. For personal property and fixtures, a
transfer is perfected when it is valid against a creditor on a simple
contract that obtains a judicial lien after the transfer is perfected.
``Simple contract'' as used here is derived from Bankruptcy Act
Sec. 60a(4) [section 96(a)(4) of former title 11]. Paragraph (2)
specifies that a transfer is made when it takes effect between the
transferor and the transferee if it is perfected at or within 10 days
after that time. Otherwise, it is made when the transfer is perfected.
If it is not perfected before the commencement of the case, it is made
immediately before the commencement of the case. Paragraph (3) specifies
that a transfer is not made until the debtor has acquired rights in the
property transferred. This provision, more than any other in the
section, overrules DuBay and Grain Merchants, and in combination with
subsection (b)(2), overrules In re King-Porter Co., 446 F.2d 722 (5th
Subsection (e) is designed to reach the different results under the
1962 version of Article 9 of the U.C.C. and under the 1972 version
because different actions are required under each version in order to
make a security agreement effective between the parties.
Subsection (f) creates a presumption of insolvency for the 90 days
preceding the bankruptcy case. The presumption is as defined in Rule 301
of the Federal Rules of Evidence, made applicable in bankruptcy cases by
sections 224 and 225 of the bill. The presumption requires the party
against whom the presumption exists to come forward with some evidence
to rebut the presumption, but the burden of proof remains on the party
in whose favor the presumption exists.
1994--Subsec. (c)(3)(B). Pub. L. 103-394, Sec. 203(1), substituted
``20'' for ``10''.
Subsec. (c)(7), (8). Pub. L. 103-394, Sec. 304(f), added par. (7)
and redesignated former par. (7) as (8).
Subsec. (e)(2)(A). Pub. L. 103-394, Sec. 203(2), inserted before
semicolon at end ``, except as provided in subsection (c)(3)(B)''.
1986--Subsec. (b)(4)(B). Pub. L. 99-554 inserted ``and'' after the
1984--Subsec. (a)(2). Pub. L. 98-353, Sec. 462(a)(1), inserted
``including proceeds of such property,'' after ``law,''.
Subsec. (a)(4). Pub. L. 98-353, Sec. 462(a)(2), struck out ``,
without penalty'' after ``any extension'', and inserted ``without
penalty'' after ``payable''.
Subsec. (b). Pub. L. 98-353, Sec. 462(b)(1), substituted ``of an
interest of the debtor in property'' for ``of property of the debtor''
in provisions preceding par. (1).
Subsec. (b)(4)(B). Pub. L. 98-353, Sec. 462(b)(2), amended subpar.
(B) generally. Prior to amendment, subpar. (B) read as follows:
``between 90 days and one year before the date of the filing of the
petition, if such creditor, at the time of such transfer--
``(i) was an insider; and
``(ii) had reasonable cause to believe the debtor was insolvent
at the time of such transfer; and''.
Subsec. (c)(2)(A). Pub. L. 98-353, Sec. 462(d)(1), inserted ``by the
debtor'' after ``incurred''.
Subsec. (c)(2)(B) to (D). Pub. L. 98-353, Sec. 462(c), struck out
subpar. (B) which read as follows: ``made not later than 45 days after
such debt was incurred;'' and redesignated subpars. (C) and (D) as (B)
and (C), respectively.
Subsec. (c)(3). Pub. L. 98-353, Sec. 462(d)(2), substituted ``that
creates'' for ``of''.
Subsec. (c)(3)(B). Pub. L. 98-353, Sec. 462(d)(3), inserted ``on
or'' after ``perfected'', and substituted ``the debtor receives
possession of such property'' for ``such security interest attaches''.
Subsec. (c)(5). Pub. L. 98-353, Sec. 462(d)(4), substituted ``that
creates'' for ``of'', and ``all security interests'' for ``all security
Subsec. (c)(5)(A)(ii). Pub. L. 98-353, Sec. 462(d)(5), substituted
``or'' for ``and''.
Subsec. (c)(7). Pub. L. 98-353, Sec. 310(3), added par. (7).
Subsec. (d). Pub. L. 98-353, Sec. 462(e), substituted ``The'' for
``A'' before ``trustee may avoid'', inserted ``an interest in'' after
``transfer of'', inserted ``to or for the benefit of a surety'' after
``transferred'', and inserted ``such'' after ``reimbursement of''.
Subsec. (e)(2)(C)(i). Pub. L. 98-353, Sec. 462(f), substituted
``or'' for ``and''.
Subsec. (g). Pub. L. 98-353, Sec. 462(g), added subsec. (g).
Effective Date of 1994 Amendment
Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not
applicable with respect to cases commenced under this title before Oct.
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under
section 101 of this title.
Effective Date of 1986 Amendment
Amendment by Pub. L. 99-554 effective 30 days after Oct. 27, 1986,
see section 302(a) of Pub. L. 99-554, set out as a note under section
581 of Title 28, Judiciary and Judicial Procedure.
Effective Date of 1984 Amendment
Amendment by Pub. L. 98-353 effective with respect to cases filed 90
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out
as a note under section 101 of this title.
Section Referred to in Other Sections
This section is referred to in sections 106, 109, 303, 349, 362,
502, 522, 546, 548, 550, 551, 552, 749, 764, 901, 926 of this title.