Are State Preference Laws Preempted by the United States Bankruptcy Code?
Not Necessarily! By: Bruce S. Nathan & Scott Cargill For decades, there has been scant legal discussion about the coexistence of the federal bankruptcy and state insolvency systems as independent options for a financially distressed debtor to liquidate its assets. Chapter 7 of the Bankruptcy Code provides a very developed framework for the liquidation of a debtor’s assets, the priority rules governing the payment of creditors’ claims, and a bankruptcy trustee’s right to recover avoidable transfers, such as preferences. However, for most of this country’s history, long before passage of the Bankruptcy Code nearly 30 years ago, the states have recognized the common law right of a debtor to make an assignment for the benefit of creditors (an “ABC”). States have varying laws that govern the operation of abcs, including the right of an ABC fiduciary to recover preferential transfers. Until January 2005, the prevailing view was that, with limited exceptions, the state law ABC process and the
