Trustee Cannot Avoid Transfer of Property that Was Not the Debtor’s

The following is a summary of a Minnesota bankruptcy case or a case relevant to Minnesota bankruptcy law.

Minnesota Bankruptcy Case:

Kanuit v. IRS (In re Lien), 415 B.R. 715 (Bankr. D. Minn. 9/11/09) (Kishel, J.).

Case Summary:

Trustee Cannot Avoid Transfer of Property that Was Not the Debtor’s

The debtors were the sole shareholders of a Minnesota corporation, ESII. ESII had been in the business of providing spray foam insulation for houses. The company ceased operations in November of 2006. In March of 2007, the debtors sold two pieces of business equipment, put the proceeds in their personal bank account that had a negative balance, and then issued a check to the IRS to satisfy their payroll taxes. The debtors filed a voluntary chapter 7 petition on April 2, 2007. The trustee sued the IRS to avoid the transfer as a preference under 11 U.S.C. § 547(b). The trustee moved for summary judgment. In order to prevail under 11 U.S.C. § 547(b), the trustee must prove: 1) there was a transfer of an interest of the debtor in property, 2) on account of an antecedent debt, 3) to or for the benefit of a creditor 4) made while the debtor was insolvent, 5) within 90 days prior to the commencement of the bankruptcy case, 6) that left the creditor better off than it would have been if the transfer had not been made and the creditor had asserted its claim in a chapter 7 liquidation. In re Interior Wood Prods. Co., 986 F.2d 228, 230 (8th Cir. 1993); Brown v. First Nat’l Bank of Little Rock, 748 F.2d 490, 491 (8th Cir. 1984). The court found that the plaintiff could not prove the first element, a transfer of an interest of the debtor in property, because the payment to the IRS was funded solely by the sale of the business’s equipment and was never the personal property of the debtors, even though it passed through their personal bank account. The court denied the trustee’s summary judgment motion, and held that the trustee was not entitled to avoid the transfer.

Credit: The preceding was a summary of a case relevant to Minnesota bankruptcy law. The case summary was prepared by the U.S. Bankruptcy Court through Judge Robert J. Kressel & attorney Faye Knowles.