Mom’s Pre-petition Payoff of Debt Considered Preferential Transfer Says 10th Circuit BAP

Mom’s Pre-petition Payoff of Debt Considered Preferential Transfer Says 10th Circuit BAP

On June 4, 2019 the Bankruptcy Appellate Panel for the 10th Circuit Court of Appeals (BAP) affirmed the decision of the bankruptcy court.

Prior to filing bankruptcy, the Debtor owed over $20,000.00 to his attorneys, Stevens, Littman, Biddison, Tharp and Weinberg, LLC (Law Firm). The Debtor signed a promissory note with his mother in which he promised to pay his mother $21,672.65. Three days later Debtor’s mother paid $21,672.65 to the Law Firm. The terms of the loan indicated the money was to be used exclusively to pay the debt to the Law Firm and was not a general loan to be used for any other purpose. The payment was made directly by Debtor’s mother to the Law Firm from an account owned solely by her. Of importance, the Debtor, in his Statement of Financial Affairs indicated that his mother paid the Law Firm on his behalf.

Several weeks later, the Debtor then filed a chapter 13 bankruptcy which was later converted to a chapter 7. The chapter 7 trustee filed an adversary proceeding against the Law Firm seeking to avoid and recover the $21,672.65 paid to the Law Firm. The trustee and the Law Firm filed motions for summary judgment. The bankruptcy court held the payment was a preferential transfer and granted the trustee’s motion. The Law Firm appealed.

The main issue on appeal was whether the bankruptcy court erred when granting summary judgment to the trustee on his claim to avoid and recover as preferential the payment by Debtor’s mother to the Law Firm.[i]

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