Robert Kugler 2013-12-04 10:59:38
Minnesota’s Insider Preference Statute – How Many Arrows Are In Your Quiver? Most practitioners are familiar with the concept of a preferential transfer in bankruptcy. The general concept under the bankruptcy code is that if an insolvent bankruptcy debtor made a payment to a creditor on account of antecedent debt within 90 days prior to the bankruptcy filing, that transfer can be recovered by the bankruptcy trustee. The 90-day period is extended to one year if the transfer was made to an insider. The Uniform Fraudulent Transfer Act contains a similar cause of action that allows a creditor to avoid certain transfers between a debtor and its insiders for antecedent debt. This “Insider Preference” statute has been adopted in Minnesota and has been codified at Minnesota Statues section 513.45(b). It provides: A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at the time, and the insider had reasonable cause to believe that the debtor was insolvent. “This provision attempts to diminish the unfair advantage insiders sometimes possess when they are familiar with the debtor’s financial substance.” See First Res. Bank v. Rehbein, Civ. No. 12-206, 2013 WL 618164, at *1 (D. Minn. Feb. 19, 2013). The existence of an independent state law remedy can be important not just to creditors if the debtor has not filed bankruptcy but also to a bankruptcy trustee if the debtor does file bankruptcy. That is because section 544(a) of the bankruptcy code confers on a bankruptcy trustee the status of a hypothetical lien creditor. Section 544(a) creates a “legal fiction that permits [a] trustee to assume the guise of a creditor with a judgment against the debtor.” Picard v. JPMorgan Chase & Co., 460 B.R. 84, 93 (S.D.N.Y. 2011) (quoting Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1523 (10th Cir. 1990)). “Under that guise, the Trustee may invoke whatever remedies [are] provided by state law to judgment lien creditors to satisfy judgments against the debtor.” Id. So far so good. Creditors appear to have one arrow in the quiver and a bankruptcy trustee two. An additional consideration arises, however, when the reach-back period is considered under Minnesota law. Under the UFTA, the Insider Preference cause of action is generally subject to a one year statute of limitations. Thus there is seldom any reason to bring a state law claim under the UFTA in a bankruptcy case. That is because section 547 of the bankruptcy code provides an identical one-year reach-back and does not require proof that the insider-transferee “had reasonable cause to believe the debtor was insolvent.” See Minn. Stat. § 513.45(b). In Minnesota, however, that is not the case. The Minnesota version of the UFTA does not contain its own statute of limitations. Rather, courts considering the Insider Preference reach-back period have been required to turn to the general statute of limitation in Minnesota which provides: [T]he following actions shall be commenced within six years: … (2) upon a liability created by statute, other than those arising upon a penalty or forfeiture or where a shorter period is provided by section 541.07 … (6) for relief on the ground of fraud, in which case the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting fraud. Minn. Stat. § 541.05, subd. 1 (emphasis added). Minnesota law thus provides, at a minimum, a six year statute of limitations for causes of action under the Minnesota UFTA, including claims to avoid Insider Preferences. See, e.g., In re Curry, 160 B.R. 813, 819 n.5 (Bankr. D. Minn. 1993); Georgen-Running v. Grimlie, 439 B.R. 710, 720 n.25 (B.A.P. 8th Cir. 2010); See also Finn v. Alliance Bank, Nos. A12-1930, A12-2092, 2013 WL 4711157, at *6 (Minn. Ct. App. Sept. 3, 2013) (holding that constructive-fraud claims under the Minnesota UFTA are governed by the six year statute of limitations in Minn. Stat. § 541.05 subd. 1(2) (2012)). As a result, there is every reason for a creditor or bankruptcy trustee to scrutinize transactions between an insolvent debtor in Minnesota and their insiders and not simply rely on the preferential transfer powers under the bankruptcy code. The six year reach-back period is a significant expansion of the one year reach-back period provided by the bankruptcy code. Knowledge of this Minnesota variation to the UFTA thus adds another level to strategy considerations when attempting to collect from an insolvent debtor. Rob Kugler, deputy chair of the bankruptcy and creditors’ rights practice at the new Stinson Leonard Street, focuses his practice on maximizing value and minimizing exposure for creditors, shareholders, governance boards, trustees and committees in bankruptcy proceedings. Rob represents clients in bankruptcy recovery, protection and litigation matters, serves as trustee and represents post-bankruptcy creditor trusts and litigates complex commercial litigation disputes on behalf of lenders, lessors, developers, manufacturers and retailers across the country. Rob can be reached at email@example.com.
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