Calculating the Preference Period:
Effective Date of the Trasfer and the Inapplicability of
Federal Rule of Bankruptcy Procedure 9006(a) to the Trustee's
By Richard Ruszat
A threshold issue to preference litigation is the determination
of whether a transfer occurred within the applicable preference
period. The Bankruptcy Code empowers a trustee to avoid any transfer
in interest made on or within 90 days of the filing of the bankruptcy
petition, or alternatively, within one-year if the transfer is
made to an insider. See Title 11 U.S. C. § 547(b)(4)(the "Bankruptcy
Code"). Accordingly, determining the effective date of the transfer
and calculation of the preference period is essential in preference
Trustee's Avoidance Powers
Pursuant to § 547(b), a trustee may avoid any transfer of
interest of the debtor if the transfer meets certain requirements
enumerated in the Bankruptcy Code. Generally, a transfer is preferential
if made to a creditor on account of antecedent debt while the debtor
was insolvent. See 11 U.S. C. § 547(b)(1-3). In addition,
the transfer must occur during the applicable preference period
and permit a creditor to receive more than it is entitled to under
a hypothetical liquidation. See 11 U.S.C. § 547(b)(4-5). The
Bankruptcy Code's definition of a transfer is expansive and encompasses "every
mode, direct or indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with property or with an
interest in property." See Barnhill v. Johnson, 503 U.S. 393, 400
(1992); 11 U. S.C. § 101(54).
Method of the Transfer and the Effective Date
The method of transfer determines the effective date of the transfer.
Generally, the effective date occurs when the transferee receives
an interest in the property through possession or control. For
example, the effective date of a transfer by cashier's check or
wire transfer is the date that the transferee receives the property.
See In re Lee, 179 B.R. 149, 159 (9th Cir. 1995)(reasoning that
a cashier's check is accepted upon issuance and that a transferee
may still enforce its rights if the cashier's check is lost or
destroyed); In re Barefoot, 952 F.2d 795 (4th Cir. 1991)(concluding
that the receipt of the wire transfer was the effective date).
However, for the limited purpose of § 547(b), if the transfer
occurs through an ordinary check, then the date of honor is the
effective date of the transfer. See Barnhill, 503 U.S. at 400.
The Barnhill Court reasoned that a myriad of events can intervene
between the delivery and presentment of a check including the closing
of an account, acquisition of liens and garnishments, or mistaken
refusal to honor a check. See Id. at 399. However, the Barnhill
decision may not apply to defenses applicable under § 547(c),
and therefore, the decision dubiously creates different meanings
to the prosecution and defenses in preference litigation. See Barnhill,
503 U.S. at 401 (discussing legislative history suggesting that
the date of delivery rule, and not the date of honor rule, is controlling
for the purpose of preference defenses).
Calculating the Preference Period: Counting Backwards from the
Date of the Petition or Forward from the Date of the Transfer
There is a jurisdictional split regarding the correct computation
of the preference period. The split arises from the applicability
of § 547 to Federal Rule of Bankruptcy Procedure 9006(a)("Rule
9006 (a)"). See Fed. R. Bankr. P. 9006(a). A majority of courts
conclude that Rule 9006 (a) is not applicable to § 547(b).
See e.g., Greene v. MBNA America, 223 F.3d 1064 (9th Cir. 1999).
The majority cites to the plain meaning of § 547(b)(4), which
empowers the trustee to avoid any transfer of interest "on or within
90 days [or one-year if made to an insider] before the filing date
of the petition." See 11 U.S.C. § 547(b)(4) (emphasis added).
The majority computes the applicable preference period backwards
90-days, or one year if the transfer was to an insider, beginning
with the day immediately preceding the bankruptcy filing. Moreover,
the majority contends that the counting forward approach is absurd
since the filing of the petition gives rise to the trustee's avoidance
powers and that counting backwards is logical since the trustee
counts only once instead of counting from each alleged transfer.
See e.g., Nelson Co. v. Counsel for the Official Committee of Unsecured
Creditors (In re Nelson Co.), 959 F.2d 1260, 1265 (3d. Cir. 1992).
Alternatively, a minority of jurisdictions count forward from
the date immediately following the transfer to determine whether
a transfer constitutes a preference. See Wilmington Nursery Co.,
Inc. v. Burkert (In re Wilmington), 36 B.R. 813 (Bankr.E. D.N.Y.).
In doing so, the minority applies Bankruptcy Rule 9006(a), which
excludes the "date of the act" (i.e., transfer), and counts forward
90-days, or one year if the transfer was to an insider.
Rule 9006(a) Is Not Applicable to § 547(b)
Although these differing methods usually produce the same preference
period, application of Bankruptcy Rule 9006(a) may serve to impermissibly
extend the preference period beyond 90-days. See Levinson v. Security
Sav. Bank SLA (In re Levinson), 128 B.R. 365, 368 (Bankr.S.D.N.Y.
1991)(concluding that 9006(a) is only relevant if the terminal
date falls on a weekend or holiday). The minority's use of Rule
9006(a) to determine the first day of the computation also serves
to extend the preference period beyond the 90th day, if the 90th
day falls on a weekend or holiday. Rule 9006(a) provides in pertinent
[i]n computing any period of time prescribed or allowed by these
rules ... or by any applicable statute, the day of the act, event,
or default from which the designated period of time begins to
run shall not be included [and] the last day of the period so
computed shall be included, unless it is a Saturday, a Sunday,
or a legal holiday ... in which event the period runs until the
end of the next day which is not one of the aforementioned days.
For example, if counting forward from the date of the transfer,
and the 90th day falls on a Sunday, then pursuant to Rule 9006(a),
the effective date of the Transfer would be on the following Monday.
This effectively expands the time period provided by § 547
by one day, or two-days if the 90th day falls on a Saturday, or
three-days if the 90th days falls on a Saturday of a three-day
weekend. Noticeably, the counting forward approach does not benefit
The majority's reasoning is sound and based in the Bankruptcy
Code. The majority concludes that § 547 is not an "applicable
statute" within the meaning Bankruptcy Rule 9006(a). See Greene,
223 F.3d at 1069. In support, the majority cites to the Advisory
Committee's comments that Bankruptcy Rule 9006(a) only governs
the time for "acts to be done and proceedings to be had [in cases
under the Code] and any litigation commenced therein." The majority
concludes that the occurrence and timing of pre-petition transfers
do not constitute a "procedure" in chapter 11 case since the transfer
is made independently of any judicial action and there is no "act
to be done or proceeding to be had." See Id. Most important, the
majority contends that a transfer can take place on any day of
the week, including a weekend or holiday, and therefore does not
require the bankruptcy court to be open for business for the purpose
of determining the preference period. See Id. Accordingly, the
90th day controls and may not be extended.
The majority also concludes that Rule 9006(a) is not applicable
to § 547 on substantive grounds. Pursuant to the Rules Enabling
Act, the Bankruptcy Rules may not "abridge, enlarge, or modify
any substantive right." See Title 28 U.S.C. § 2075. The Rules
Enabling Act only applies to substantive rights. To determine whether
a rule is substantive or procedural, the inquiry is whether the
rule regulates procedure (i.e., the judicial process to enforce
substantive rights and duties) or is substantive in nature (i.e.,
rules of decision that a court determines a party's rights). See
Hanna v. Plumer, 380 U.S. 460, 464 (1985). The majority concludes
that § 547 is a substantive right because the power to avoid
a preferential transfer within the applicable period is a substantive
element of a cause of action requiring no action by the trustee.
Accordingly, § 547 creates a statutory period, and an extension
of this period, would be an impermissible enlargement of the trustee's
avoidance powers permitted by statute.
The determination of the effective date of a transfer and the
applicable preference period may be the key to a litigant's success
in a preference action. The plain meaning and logic of the Bankruptcy
Code illustrates that the backwards approach should control the
computation of the preference period. It follows, that since 9006(a)
is not applicable to § 547, then the counting forward approach
should not be used as an earmark to begin the computation period,
or likewise, to extend the preference period beyond the time permitted
by the Bankruptcy Code. Moreover, it is imperative that the litigant
determine the effective date of the transfer to conclude whether
it falls within the applicable preference period.
Blakeley & Blakeley LLP Reprinted
by permission from Trade Vendor Quarterly Winter 02