Survivor in a Merger Can’t Sue for a Preference Made by a Dissolved Entity

Focusing on the language of Section 547 rather than the purpose of preference law, Bankruptcy Judge David M. Warren of Raleigh, N.C., ruled that the surviving company in a merger cannot set aside a preference committed by a merged company that was dissolved.

Sister limited liability companies were merged on the eve of a chapter 11 filing. The debtor was the surviving entity, while the merged company was dissolved.

About one year before bankruptcy, the company that was later dissolved had taken down a line of credit and granted a security interest in its property. However, the lender did not perfect the security interest until two months before the surviving entity’s bankruptcy.

As the debtor, the surviving entity sued to set aside the perfection of the security interest as a preference under Section 547. In his May 20 opinion, Judge Warren granted the defendant’s motion to dismiss the preference claim.

Had the dissolved company filed its own bankruptcy petition, Judge Warren said that the perfection of the security interest “likely would qualify as an avoidable transfer.” But the dissolved company had not filed bankruptcy, allowing the defendant to argue that perfection of the security interest did not meet the statutory definition of a “transfer of an interest of the debtor in property.”

When the merger occurred, the dissolved company had not filed bankruptcy and therefore had no preference claim at that time. Under the notion that the survivor in a merger succeeds to the rights of a merged company, the survivor did not inherit a preference claim, Judge Warren said.

After the merger, the debtor had possession of the collateral, but it had not effected the prepetition transfer and did not have any interest in the collateral at the time of the transfer, according to Judge Warren.

Judge Warren acknowledged that the statutory phrase, “an interest of the debtor in property,” is expansive and does not require that the debtor be the transferor. Still, he said, “allowing avoidance of a transfer that in no way involved the debtor or the debtor’s property at the time of the transfer is illogical.”

However, Judge Warren rested his decision on another provision in Section 547(b)(2): the requirement that the transfer be “on account of an antecedent debt owed by the debtor before such transfer was made.” He said, “There is no escaping the plain language . . . that the antecedent debt must have been incurred by the debtor before the transfer.”

Because the complaint did not allege that the debt was owed by the surviving debtor when the security interest was perfected, Judge Warren dismissed the preference claim.

Observation: The debtor could have avoided dismissal by also filing a petition for the merged entity that had been dissolved. However, a filing now would put the preference outside the 90-day window. So, we would love to hear from readers who have theories that would allow the preference to stand.