A Hierarchical Recovery Approach: An Alternative Theory of Recovery Under Section 550 of the Bankruptcy Code

Monday, January 1st, 1990 at 12:00 am by Anders K. Torning
Anders K. Torning, A Hierarchical Recovery Approach: An Alternative Theory of Recovery Under Section 550 of the Bankruptcy Code, 1990 Colum. Bus. L. Rev. 213

Lenders making unsecured or partially secured loans frequently require one or more guarantees of their debtor’s obligations. Today, receiving such a guarantee may actually disadvantage these lenders. A recent line of cases, including two circuit court cases (in the Seventh and Tenth Circuits), hold that when a debt is guaranteed by an insider of the debtor (the “Insider Guarantor”), the outside creditor holding the guarantee (the “Outside Creditor”) is, at the option of the trustee, subject to preference liability with respect to payments made as much as a year before a bankruptcy case is commenced against the debtor. This Note argues that these courts’ interpretation of section 550(a) of the Bankruptcy Code (the “Code”) is inconsistent with the general congressional purpose underlying the Code, and is socially inefficient. Further, it argues that section 550(a) should be interpreted to require the trustee first to seek recovery of the avoidable transfers from the Insider Guarantor, and to allow the trustee to proceed against the Outside Creditor only if the Insider Guarantor is judgment proof.

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