Doctrine that imposed preference liability on a creditor in a most ingenious and unexpected way, by combining provisions of Sections 547 and 550.
In a 1989 United States Supreme Court case, a crafty trustee successfully argued that a debtor’s payment of a debt guaranteed by the debtor’s insider was made for the benefit of the guarantor/insider because it eliminated a portion of the guarantor’s exposure on the guaranty. Accordingly, payments made within one year (the statutory reach-back period applicable to preferences to insiders) of the commencement of the case, and not just within 90 days prior to the case (the period applicable to non-insiders) were avoidable by the trustee under Section 547.
The hook: under Section 550, the preference could be recovered from either the party for whose benefit it was made (i.e., the guarantor) or the party to whom it was made (the lender). This two step approach rendered non-insider lenders liable for payments received by them during the extended reach-back period.
This anomalous result (from the creditor’s standpoint, if not from the trustee’s) has been cured by Congress, after more than one attempt, but the doctrine nevertheless lurks as a ghost, roaming the corridors of financial institutions, bankruptcy courts and lenders’ lawyers alike. One haunted place is the guaranty agreement where complete waivers of all claims against the debtor, developed initially in response to Deprizio in an attempt to prevent the guarantor from being a creditor at all, still sometimes terrorize the living.
Bankruptcy Code §§ 547, 550. See also Preference.