bankruptcy law—determining property interests in strongfundsstrong.pdfVIP

BANKRUPTCY LAW-DETERMINING PROPERTY INTERESTS IN FUNDS RECOVERED PURSUANT TO THE SETTLEMENT OF A SECTION 547 PREFERENCE ACTION INTRODUCTION A debtor in financial distress often makes transfers of its property that have the effect of preferring some creditors over others. If the debtor subsequently enters bankruptcy, section 547(b) of the Bank­ ruptcy Code! authorizes the trustee2 of the bankruptcy estate3 to avoid certain of these prepetition transfers, thereby recovering property for the benefit of the estate.4 The property recovered for the benefit of the estate becomes available either for general distribution to the debtors creditors in a liquidation proceeding or for use by the estate in a reorganization. S However, the trustees section 547(b) preference avoidance pow­ ers only apply to transfers of an interest of the debtor in property.6 Often, a debtor will be in possession of property in which others also have an interest. Such situations include escrow and trust arrange­ ments. The language of section 547(b) seems to indicate that property held in this fashion would not be subject to a preference action.7 In this regard, courts have ruled that property held in trust by the debtor and money held in escrow by the debtor do not become part of the bankruptcy estate. 8 1. 11 U.S.C. § 547(b) (1988). The Bankruptcy Code is the name commonly used when referring to the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (codified as amended at 11 U.S.C. §§ 101-1330 (1988». 2. See infra note 12 for an explanation of the term bankruptcy trustee. 3. See infra notes 11-13 and accompanying text for an explanation of t