J OURNAL AMERICAN BANKRUPTCY INSTITUTE Issues and Information for the Insolvency Professional unperfected security interests, as well as file a petition for certiorari with the U.S. Last avoid and recover preferential transfers. Supreme Court to seek reversal of the California’s preference statute is decision. Unless overruled, the Ninth in Line contained in CCCP §1800, which grants an Circuit’s Sherwood holding threatens the NEXT WINDOW assignee the exclusive right to recover viability of state law preference claims in preference claims. CCCP §1800, like California, other states in the Ninth Circuit Sherwood Partners §547(b) of the Code, requires that the and possibly other states in other circuits. assignee prove all of the following to recover Threatens Viability An Overview of ABCs a transfer as a preference: (1) a transfer of ABCs are governed by either common property of the debtor (2) to or for the benefit law or statute. Each state has different ABC of State Law of a creditor (3) made on account of an procedures. Some states, like California, antecedent debt owed by the debtor to the have modern, widely used ABC statutes, creditor before the transfer (4) made when Preference while others, like New York, have more the debtor was insolvent, which is based on a antiquated, less-used statutes. balance-sheet test (liabilities exceed assets) Contributing Editor: An ABC typically arises by contract and affords the assignee a rebuttable Bruce S. Nathan where a debtor (the assignor), transfers all of presumption of insolvency within the 90-day Lowenstein Sandler PC; New York its property to an assignee to be held in trust. preference period, like §547(f); (5) made bnathan@lowenstein.com An ABC is designed to be a more expe- within the 90 days of the ABC (and between ditious, less-expensive type of liquidation T 90 days and one year of the ABC if the rade creditors think of preference proceeding than a chapter 7 bankruptcy case. transferee was an insider and had reasonable claims as part and parcel of a debtor’s The debtor/assignor could be an individual, cause to believe the debtor was insolvent at bankruptcy case. However, pre- partnership, corporation or limited liability the time of the transfer); and (6) that enabled ference claims can also be asserted outside company. The debtor selects the assignee, in the creditor to receive more than another of bankruptcy. Numerous state statutes contrast to a chapter 7 case, where the U.S. creditor of the same class. CCCP §1800, like permit the recovery of preferences as part of Trustee selects, or in rare cases creditors §547(b), allows a preference defendant to state law insolvency proceedings, and it is elect, the bankruptcy trustee. An assignee, assert ordinary-course-of-business, not infrequent for a creditor to have to like a bankruptcy trustee, is responsible for contemporaneous exchange, new value and defend a state law preference claim. liquidating the debtor’s property and other preference defenses to reduce or An assignment for the distributing the proceeds to the debtor’s eliminate preference liability. California benefit of creditors creditors according to state law priorities. assignors commence preference actions by (ABC) is one such Creditors participate in any distribution by filing a complaint in a California state or state law insolvency filing a proof of claim, and the assignee federal court of competent jurisdiction. proceeding. An ABC reconciles and, if necessary, objects to resembles a liquidation Sherwood Partners v. Lycos Inc. claims. case under chapter 7 of Background the Bankruptcy Code. The California ABC Statute The plaintiff, International Thinklink California has an ABC Section 1800 and other provisions of the Corp., was a unified messaging service statute that includes a California Code of Civil Procedure (CCCP), Bruce S. Nathan provider, while the defendant, Lycos, preference statute sim- the California Civil Code and the California operated a network of web sites. Lycos ilar to §547 of the Code. California’s Commercial Code govern ABCs in agreed to exclusively promote Thinklink’s preference statute enables an “assignee” for California. As part of most ABCs, (1) the messaging service on Lycos’s web sites for the benefit of creditors, the fiduciary assignee must send notice of the assignment two years. Thinklink’s financial problems responsible for collecting assets and to creditors; (2) a deadline is set for creditors eventually forced it to make an assignment adjudicating claims, to recover preferences. to submit claims against the debtor; (3) for the benefit of creditors to Sherwood Recently, the Ninth Circuit Court of certain categories of claims, such as wages, Partners in California. Two months earlier, Appeals in Sherwood Partners Inc. v. Lycos salaries, commissions, employee benefit Thinklink had paid $1 million to Lycos. Inc., 394 F.3d 1198 (9th Cir. 2005), ruled contributions and consumer deposit claims, Sherwood sued Lycos in a California state that the Code preempts California’s have a right to payment ahead of the claims court, relying on CCCP §1800 to recover preference statute and directed dismissal of of general unsecured creditors; (4) the Thinklink’s $1 million payment to Lycos as the assignee’s pending preference action. assignee can occupy the debtor’s business a preference. The Ninth Circuit refused to grant rehearing, premises; and (5) the assignee is considered Lycos removed the lawsuit to federal and the assignee has stated its intention to a “lien creditor” with the power to avoid court, then moved for dismissal because the The American Bankruptcy Institute 44 Canal Center Plaza, Suite 404, Alexandria, VA 22314-1592 • 703 739 0800
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