The 90-Day Preference and the Friendly Lender
Northline Fabrication Inc. was assigned into bankruptcy on March 14. In the 90 days before the assignment, the company paid $340,000 to a lender owned by the president's brother. The payments reduced a $500,000 revolving loan that had been secured by a general security agreement registered in 2019; however, the PPSA registration lapsed for five months in 2023 and was re-registered before the payments. At the time of the payments, Northline was behind on payroll and on CRA source deductions, and its payables were stretching beyond 90 days. The lender's remaining claim is $210,000. The lender says it was pressing because its own credit line had been called, and that the payments were ordinary-course. Unsecured creditors are owed $1.8 million. The estate has about $95,000 of realizations after the secured creditor and trustee's fees. The lender's counsel has sent a demand letter threatening costs if the trustee sues. The president has offered to provide a statement but has not been examined.
1. What legal tests should the trustee apply to the $340,000 of payments, and how do the non-arm's-length relationship and the lapsed PPSA registration affect the analysis? Identify the facts that cut both ways.
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The trustee should start with BIA s. 95. A preference requires a payment to a creditor, made within the statutory period, while the debtor was insolvent, that has the effect of giving that creditor a preference over other creditors. Because the lender is owned by the president's brother, it is a related person under BIA s. 4, so the look-back period is 12 months, not 3 months. The trustee does not need to prove intent; the effect is what matters. The lender will likely invoke the ordinary-course defence, good faith, and new value. The trustee should test whether the payments were truly ordinary course for a company already stretching payables and behind on payroll and CRA source deductions; a lender pressing because its own credit line was called is not the debtor's ordinary course. The lapsed PPSA registration matters in two ways. First, during the gap the lender was unperfected, so the trustee should determine whether the lender was actually a secured creditor when the payments were made. If it was undersecured or unperfected, the payments reduced an unsecured claim and are more vulnerable. Second, re-registration before the payments may have re-perfected the security, but it does not necessarily cure the gap against third parties. The trustee should obtain a PPSA search, the loan agreement, and the president's statement under oath. Facts cutting against recovery: the payments reduced a real debt, the lender may have been fully secured, and the president's statement may be self-serving. Facts favouring recovery: related-party status, insolvency symptoms, and the 12-month window.
2. Should the trustee commence an action or negotiate a settlement? Provide a reasoned recommendation, including the practical and cost considerations and the trustee's duties.
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Recommendation: do not rush to litigation. The estate has only $95,000; a contested preference action could consume $75,000–$125,000 in fees and take a year or more. The trustee's duty is to maximize the estate, not to pursue every theoretical claim. The trustee should first send a detailed demand, obtain the lender's records, and explore a settlement. A realistic settlement range is $75,000–$150,000, depending on the strength of the ordinary-course evidence and the lender's ability to pay. If the lender refuses, the trustee should assess collectability: a related-party lender may have limited assets, and a judgment may be worthless. The trustee can also consider assigning the claim to a litigation funder or to the estate's largest creditor, but only with court approval and after disclosure. Before suing, the trustee should examine the president under s. 163, obtain the PPSA search, and quantify the secured position. If the evidence shows the lender was fully secured, the preference claim is weak; if the lender was unperfected or undersecured, the claim is stronger. The trustee should also consider s. 96 if the loan was not a bona fide debt or the payments were disguised. A demand letter threatening costs is not a reason to abandon a valid claim, but it is a reason to be cost-conscious. The trustee should document the analysis and, if settling, obtain court approval.