## Facts

- Susan Lee Denochick (the debtor) obtained a debt-consolidation loan from NBOC.
- The debtor’s sister, Sandra Krasinski, and Sandra’s husband, Brian Krasinski, agreed to guarantee the loan.
- In the year before the bankruptcy filing, the debtor made loan payments to NBOC totaling $1,713.35.
- The Krasinskis did not receive the money directly, but the payments reduced their potential liability to NBOC on the guaranty.
- The bankruptcy trustee, James R. Walsh, filed an adversary proceeding to avoid the payments as preferential transfers under 11 U.S.C. § 547 and to recover the amount from the Krasinskis as parties who benefited from the transfers.
- After a trial at which the Krasinskis did not testify, the bankruptcy court held that the Krasinskis were “creditors,” avoided the transfers, and rejected the § 547(c)(2) ordinary-course-of-business defense.
- The Krasinskis appealed to the U.S. District Court for the Western District of Pennsylvania.

## Issues

1. Whether guarantors whose contingent liability is reduced by a debtor’s payments to the primary lender are “creditors” for purposes of preference avoidance and recovery under 11 U.S.C. § 547.
2. Whether the guarantors proved the § 547(c)(2) ordinary-course-of-business defense to prevent avoidance of the payments.

## Decision

- The district court affirmed the bankruptcy court’s order and judgment allowing the trustee to avoid the $1,713.35 in payments and recover that amount from the guarantors.
- The court agreed that the Bankruptcy Code’s broad definition of “creditor” reaches guarantors, even when the guarantors’ claim against the debtor is contingent and dependent on the debtor’s default.
- The court held that the payments to NBOC were transfers “to or for the benefit of” the guarantors because the payments reduced the guarantors’ exposure on the guaranty.
- The court held that the guarantors, who bore the burden of proof under 11 U.S.C. § 547(g), did not establish that the payments fell within the § 547(c)(2) ordinary-course exception.
- Applying clear-error review to the bankruptcy court’s factual findings, the district court found support in the record for the conclusion that the debt and payment history were not shown to be ordinary.

## Legal Principles

- A guarantor can qualify as a “creditor” in bankruptcy because a guarantor holds a contingent right to reimbursement, indemnity, or subrogation that constitutes a “claim.”
- A debtor’s payment to a third-party lender may be an avoidable preference as to a creditor who receives an indirect economic benefit from the payment, including a reduction in guaranty exposure.
- Under 11 U.S.C. § 547(g), the party asserting a § 547(c) exception has the burden to prove the exception applies, including the ordinary-course defense in § 547(c)(2).
- On bankruptcy appeal, legal conclusions are reviewed de novo, while factual findings (including ordinary-course determinations) are reviewed for clear error under Fed. R. Bankr. P. 8013.

## Conclusion

In In re Denochick, the district court affirmed a judgment avoiding and recovering $1,713.35 in prepetition loan payments made by Susan Lee Denochick to NBOC because those payments benefited her guarantors, Sandra and Brian Krasinski, by reducing their contingent liability. The court held the guarantors were “creditors” under the Bankruptcy Code despite the contingent nature of their claim and ruled that they failed to carry their burden to prove the payments qualified for the § 547(c)(2) ordinary-course-of-business exception.


In re Denochick, 287 B.R. 632 (2003)