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Ninth Circuit Ruling on Preference Avoidance Power
Last month, we discussed Sherwood Partners, Inc., Assignee for the Benefit of Creditors of International Thinklink Corporation v. Lycos, Inc., 394 Fed11198 (9th Cir. 2005). In that case, the Ninth Circuit Court of Appeals, by a divided court, held that a state statute authorizing an assignee for the benefit of creditors to void a preferential transfer is preempted by the federal Bankruptcy Code. This month, we discuss the ruling in depth.
The Ninth Circuit's Decision
The Ninth Circuit majority based its ruling that Cal. Civ. Proc. Code ' 1800 (C.C.P. ' 1800) is preempted by federal bankruptcy law on the holding that “statutes that give state assignees or trustees avoidance powers beyond those that may be exercised by individual creditors trench too close upon the exercise of the federal bankruptcy power.” Sherwood, 394 F.3d at 1205. The Ninth Circuit majority's opinion is also based on its holding that, like state discharge laws that intrude upon federal bankruptcy law, “state statutes that implicate the federal bankruptcy law's other major goal, namely equitable distribution,” are preempted. See Sherwood, 394 F.3d at 1203. The Ninth Circuit majority's theory is that any state law that advances a goal of the federal bankruptcy law is necessarily preempted. The majority reasoned that because the federal bankruptcy law preempts state statutes that discharge the debtor from debt in furtherance of the bankruptcy fresh start goal, a state statute for voiding preferential transfers must also be preempted by the federal law because both further the goal of equitable distribution to creditors. See Sherwood, 394 F.3d at 1203-05.
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