Kentucky Law: Preference Actions
Kentucky’s law on preferences provides as follows:
Any sale, mortgage or assignment made by a debtor and any judgment suffered by a defendant, or any act or device done or resorted to by a debtor, in contemplation of an insolvency and with the design to prefer one or more creditors to the exclusion, in whole or in part, of others, shall operate as an assignment and transfer of all the property of the debtor, and shall inure to the benefit of all his creditors, … in proportion to the amount of their respective demands including those which are future and contingent….
The Kentucky statute establishes a six month preference period, in comparison to the Bankruptcy Code’s 90-day preference period. Due to the longer preference period under state law, preference claims are frequently brought by Kentucky bankruptcy trustees under 11 U.S.C. § 544(b) which provides for recovery for transfers voidable under applicable state law. The Kentucky statute provides that a transfer or conveyance may be set aside as a preference if two conditions are met: (1) the conveyance was made “in contemplation of insolvency,” and (2) “with the design to prefer one or more creditors to the exclusion, in whole or in part, of others.” To assist in the application of this statute, Kentucky law presumes the elements have been met where it is demonstrated that the debtor made the conveyance or transfer in issue while insolvent. In re Rexplore Drilling, Inc., 971 F.2d 1219, 1223 (6th Cir.1992); Grimes v. Grimes, 86 Ky. 511, 6 S.W. 333 (1888); See also, Bomanzi v. Tafel, 415 S.W.2d 627 (Ky.1967). If it can be demonstrated by the trustee that the transfer was made while the debtor was insolvent, a presumption arises that the transfer was preferential in nature; i.e., that (1) it was made in contemplation of insolvency, and (2) it was made with the design to prefer one creditor over another. Rexplore Drilling, 971 F.2d at 1223. Once this presumption arises, the burden of proof then shifts to the defendant to rebut the presumption. Rexplore Drilling, 971 F.2d at 1223; Grimes, 6 S.W. at 334. KRS 378.060 requires that both elements of the test be met in order for the transfer to be deemed a preference. Thus, the defendant need only rebut one of the two prongs. For example, if the defendant is able to demonstrate that “there was no motive or thought of giving an advantage or preference … the presumption is rebutted.” Rexplore Drilling, 971 F.2d at 1223 (citing Grimes, 6 S.W. at 334). In re Damron Const. Co., Inc. 218 B.R. 371, 375 (Bankr.W.D.Ky.1997).